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Banks are big. Banks are ugly and mean. We’ve all heard the spiel by now after roughly two years of financial crisis. Banks lend you money then ask you to repay it with interest on top. Yes, they’re terrible people.

But you know what’s even worse? President Obama. When banks lend you money, they’re upfront about a few things – we want the money back eventually, and we want it back with interest. We’ll tell you the interest rate up front too (unless you choose the variable rate instead of the fixed rate). By the way, there are certain conditions on this loan- but we’ve written them down on this contract here. But don’t worry – once you repay the principal and the interest, we’ll leave you alone and ask no more of you.

President Obama, on the other hand, leant the investment banks money under the TARP program. Actually, let’s not mince words – he didn’t lend money, what he did was invest in the investment banks and the banks. In exchange for about $200bn, he bought shares in Goldman Sachs, JP Morgan and all the others. There were conditions on those ‘loans’ – for example, there were limits on executive compensation whilst the government still owned shares in those companies.

Time moved on, the stock market recovered. As widely reported, the share price of Goldman Sachs skyrocketed along with those of the other investment banks as profits recovered. The banks repaid the money. They paid it with interest on top – a lot of interest in fact – a 50% return on investment since the ‘loan’ was actually shares in the investment banks. The government made $100bn on the portion of the bailout that focussed on the investment banks.

More time moves on. The health care bill flounders in the Senate and it looks like the Democrats may lose Massachusetts. The Democrats need to pull a rabbit from a hat to win the race – and here we go, let’s blame the investment banks. Let’s put more hidden conditions on top of the ones we already placed on your loan. The $100 bn interest repayment isn’t enough – we want even more.

If the US government was a bank, what would happen. If a bank lent you money for your house and did this to you, what would you be saying?  ‘We paid back our loan, we paid our interest, we stuck to all the conditions in the contract.” If any investment bank had made a $100bn dollar profit from the financial crisis, the People would be going crazy. By comparison, JP Morgan’s $3.3 bn profit earlier this week was greeted with large shouts of anger.

Plus, this financial responsibility fee paints a broad brush. It’s targetted squarely at big investment banks, ignoring the commercial banks which originated the subprime loans in the first place – and whose poor accounting practices caused the information asymmetries that lead to their price collapse. Whilst the Big 3 auto makers and the insurer AIG who benefited under TARP cost the taxpayer $30bn and $40bn respectively, they are exempt from this attempt to repay the TARP program unlike the investment banks which paid $300bn to the government – $100bn of which was profit. Now the government wants an extra $90bn from this responsibility fee which falls only on the investment banks.

The tax does not distinguish between those banks which are still engaging in risk-seeking activity. It is a flat tax on how many liabilities owns. Whether those are highly risky liabilities (like options) or not is irrelevant to the tax. Morgan Stanley, for instance, has decided to scale back its riskier operations. Goldman Sachs has not and is making huge profits by comparison. Both are taxed equally.

Some of the smallest banks are in fact the riskiest. Most of them have collapsed – 190 last year alone. They are the reason securitisation is necessary in America. They weren’t large enough to fund their own mortgages so they asked the investment banks to do it for them. They created subprime loans then sold them on without adequate documentation. They are exempt from this tax.

Furthermore, this general hatred completely confuses the word ‘investment bank’ with financial institution. There’s endless hatred of AIG who issued credit derivatives. It is not an investment bank (and until 2009 wasn’t even a financial institution). There’s endless hatred of funds managers like Bernie Madoff. He is not an investment bank either, nor would he be taxed were he still around.

The justification for this tax is nil. It doesn’t reduce risk. It doesn’t target those who caused the deficit in the first place. It’s just to raise revenue. Just because a group isn’t sympathetic doesn’t mean it deserves to be whacked with huge fees. Think about speeding tickets – huge revenue raisers targetting an unpopular group without any increase in road safety.

This tax won’t prevent future financial crises, its just a jealousy tax. It must not be passed.


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