Obama weighs new levy on banks

WASHINGTON — The budget that President Obama submits next month is likely to include new fees on financial firms as the White House seeks to recover the full costs of its bailout of the banking industry, officials said Monday.

The idea of a fee on the nation's biggest banks could be politically popular, coming in a week when those companies begin to announce tens of billions of dollars in bonuses to executives for their work in 2009. Such a fee also would demonstrate the administration's eagerness to decrease the soaring federal deficit, according to administration aides familiar with the developing plan.

A senior White House official confirmed that a fee on financial firms is on a menu of ideas the president is considering as he prepares to submit his budget Feb. 2.

"While we have made great progress in recouping a large portion of the investment, consistent with the law," the official said, "the president will propose a way to recoup additional funds, and one of the options is a levy on financial institutions."

Key details remain unresolved, including how big the fees would be and how to ensure that they are not passed along to bank customers.

White House press secretary Robert Gibbs declined Monday to discuss specifics about the president's budget after the proposed fee was first reported on Politico's Web site. But Gibbs said Obama long has favored finding ways to make sure taxpayers are reimbursed.

Lobbyists for bankers, taken by surprise, immediately objected to such a levy. They said financial institutions had been repaying their portion of the bailout money in full, with interest. Losses to taxpayers from the $700 billion bailout fund — estimated to run as high as $120 billion — are expected to come from automakers, insurance giant American International Group and programs to avert home foreclosures.

"It is perplexing to us," said Edward Yingling, president and chief executive of the American Bankers Association. He said the move would be "a hit on banks that will decrease their ability to lend."

"The industry is starting to recover, the economy is starting to recover, and a tax would hinder both the industry and the economy — and for that matter, the American people," said Scott Talbott of the Financial Services Roundtable, a trade group that represents the largest financial companies.

Any new fee would require congressional approval.

Still, the Obama administration plans to try as Goldman Sachs, JPMorgan Chase and other recipients of bailout money are set to announce billions of dollars in bonuses this month after making huge profits last year.

The law creating the $700 billion Troubled Asset Relief Program (TARP) requires that the government come up with a plan to recoup losses from the industry so the fund doesn't increase the federal deficit or overall U.S. debt. But such a plan is not called for until October 2013 — five years after the fund was created — when the White House is to prepare a report for Congress about how much is left in the fund.

Most large recipients of TARP funds have repaid their money, with the federal government making a profit on sales of some of the stock warrants it received as part of those initial investments.

But with banks repaying their money quicker than anticipated, it is appropriate for Congress and the administration to look at recovering any TARP losses from the industry, said Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee.

In one approach, the government would collect a one-time fee determined by the size of each firm, similar to the fees collected by the Federal Deposit Insurance Corp. to cover the cost of bank failures.

Another possible approach levies a tax on financial transactions — a fee collected each time stocks, derivatives and other financial instruments change hands. The United States collected a 0.2 percent tax on selling stock from 1914 until 1966.

Rep. Peter DeFazio, D-Ore. introduced a bill in early December to impose a 0.25 percent tax on the sale of stocks and certain other financial instruments, potentially raising more than $100 billion a year. Sen. Tom Harkin, D-Iowa, backs a similar bill in the Senate.

Their plan is favored by many academics. Lawrence Summers, now the president's chief economic adviser, advocated such a tax in a 1989 academic paper.

But Treasury officials oppose the idea. They warn that banks would try to impose the fee on customers, shifting the cost partly to the broader economy. A range of legislators and economists share this view, arguing such a tax would punish small investors and increase the cost of financial services.

A third option is a tax on bonuses, such as Britain's new 50 percent levy on bank bonuses larger than about $40,000.

Administration officials view such a tax as largely cosmetic, saying it would not raise much money and would be easy for banks to subvert.

Yet, like a tax on transactions, it has an obvious political advantage.

"In 12.5 seconds, bankers would start to figure out a way around it, but the politics of a supertax would still be attractive in light of the generally growing ... well, animosity is the weakest word I can think of," said Karen Shaw Petrou, managing partner of Federal Financial Analytics, which tracks regulatory issues for clients in the financial industry.

The New York Times and McClatchy Newspapers contributed to this report.