Born form the Emergency Economic Stabilization Act
By Robert Giese
bob.giese@chsfl.org
During the financial crisis, of October of 2008, Congress passed the Emergency Economic Stabilization Act. Part of that Act created the Troubled Asset Relief Program (TARP) with a $700 billion fund for loans to banks. As part of TARP, the banks borrowed $248 billion. Approximately $199 billion of that amount has been repaid.
Auto and Insurance Companies
However, TARP was also extended to auto companies and auto-financing entities. In addition, because of the fear of collapse of the entire system if securities insurance funds went under, the government funded a loan/guarantee of over $100 billion to financial giant AIG. The total distribution to General Motors, AIG, CIT and related entities was $244 billion. Most of this amount is still unpaid.
Treasury Requirement
Part of the Emergency Economic Stabilization Act was a requirement that Treasury eventually determined the best means for the government to be repaid the TARP funds. As a result, Treasury Secretary Timothy Geithner has proposed a 0.15% tax on the covered liabilities of banks with over $50 billion in assets. Secretary Geithner appeared on May 4, 2010 before the Senate Finance Committee to explain the administration proposal. He noted that it is appropriate for the banks to pay for TARP. The TARP Program put out “a financial fire” and the banks benefited from it. Sec. Geithner stated that the purpose of “the Financial Crisis Responsibility Fee proposed by President Obama in January is to make sure that the direct costs of TARP are paid for by the major financial institutions, not by the taxpayer.”
Small Business Unharmed
In response to concerns by senators that a TARP tax may cause lending to small businesses to be reduced, Sec. Geithner responded, “Small businesses would not be harmed by the tax for the simple reason that it leaves untouched 99% of American financial institutions.” The tax on large banks is estimated to raise approximately $90 billion over 10 years. The cost of TARP is currently estimated by the Congressional Budget Office to be approximately $110 billion.
Assessment
Sen. Max Baucus (D-MT) indicated that a TARP tax is “inevitable.” He stated, “We need to understand the best way to design the tax so that it’s fair and achieves its purpose. We need to understand who should pay the tax. And we need to understand what effect the tax would have on small businesses and the economy.”
Predictably, the American Bankers Association opposed the tax. Their representative James Chessen responded, “Had the TARP been limited to the banking industry, there would be no losses on that program.” The ABA maintained that it was not fair to tax the banks because government losses on TARP will be primarily related to the auto companies and other non-bank recipients of TARP loans.
Conclusion
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