Alert January 19, 2010

Obama Administration Announces Financial Crisis Responsibility Fee Levied on Large Financial Institutions to Recoup Projected TARP Losses

President Obama has announced that he will propose a Financial Crisis Responsibility Fee (the “Fee”) in his fiscal 2011 budget proposal, which will be released in February 2010.  The Fee is designed to repay taxpayers for the “extraordinary assistance” provided to financial and other companies under the Troubled Asset Relief Program (the “TARP”) by instituting a levy on the liabilities of the largest financial firms.  The President asserted that many of the largest financial firms contributed to the causes of the financial crisis and benefited from the extraordinary governmental actions taken to stabilize the financial system.  “We need our money back, and we’re going to get it,” President Obama said at a White House press conference. 

The Fee would only apply to financial firms with more than $50 billion in consolidated assets.  Covered firms would include insured depository institutions, bank holding companies, thrift holding companies, insurance or other companies that own depository institutions or securities broker-dealers as of January 14, 2010 or firms that become one of those types of firms after January 14, 2010.  The Fee would cover the liabilities of such financial firms organized in the United States, including U.S. subsidiaries of foreign firms.  The operations of U.S. subsidiaries of foreign firms in such covered areas would be consolidated for purposes of the $50 billion threshold and the administration of the Fee.  For U.S. firms, the Fee would apply to all liabilities globally.  The Administration expects that approximately 50 firms would be subject to the Fee, including 35 U.S. firms and 10-15 foreign firms.  The Administration hopes to work through the G-20 and the Financial Stability Board to encourage other major financial centers to adopt comparable approaches, though no other country has yet signaled a desire to do so.

The Fee would be assessed at 15 basis points of covered liabilities per year.  Liabilities subject to the Fee would be calculated by subtracting Tier 1 capital, FDIC-assessed deposits and insurance policy reserves, as applicable, from the covered firm’s total assets.  The Administration stated that FDIC-assessed deposits were excluded from covered liabilities because they are a stable source of funding already subject to assessment.  The covered liabilities would be reported by a firm’s regulators, but the Fee would be collected by the Internal Revenue Service and contributed to the government’s general fund to reduce the deficit.  The Administration stated that it would work with Congress and the regulatory agencies to design protections against the avoidance of the Fee by covered firms.

The Fee would go into effect on June 30, 2010 and would last at least ten years.  If the costs of the TARP had not been recouped after ten years, the Fee would continue to be assessed until such costs are recouped in full.  After five years, the U.S. Treasury Department (the “Treasury”) would report on the effectiveness of the Fee as well as its progress in repaying projected losses from the TARP.   The Administration projects that the Fee would raise approximately $90 billion over the next ten years, which corresponds with the estimated losses from the TARP projected by the Treasury and the Office of Management and Budget.  The Obama Administration, using a more conservative approach, currently projects that the estimated cost of the TARP will be $117 billion, which would be raised by the Fee after approximately 12 years.  If instituted, over sixty percent of the revenues raised by the Fee are expected to be paid by the 10 largest financial firms.

The Fee is being proposed pursuant to section 134 of the Emergency Economic Stabilization Act of 2008, which requires that by 2013 the President propose a plan “that recoups from the financial industry an amount equal to the shortfall in order to ensure that the [TARP] does not add to the deficit or national debt.”  The financial services industry has noted that many of the institutions that will be subject to the Fee either never participated in the TARP or have already repaid their TARP funds, with interest, and that the vast majority of losses under the TARP will result from the assistance granted to American International Group Inc., the automotive industry and mortgage modification programs.  The financial services industry asserts that it is being unfairly targeted to shoulder the burden of other’s losses.  This argument does not appear to carry much weight in the current political climate, in which politicians are responding to the persistent public outcry over the TARP which has been renewed by reports that the largest financial firms plan to pay record-setting bonuses to their employees this year.  “If these companies are in good enough shape to afford massive bonuses, they are surely in good enough shape to afford paying back every penny to taxpayers,” President Obama said.  The President also stated that the firms subject to the Fee were recipients or indirect beneficiaries of the assistance provided by the TARP, the Temporary Liquidity Guarantee Program and other programs that provided emergency assistance to limit the impact of the financial crisis.  The Fee would also further the Administration’s financial regulatory reform goal to encourage financial institutions to become smaller.  House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd both support the Fee, as does House Ways and Means Committee Chairman Charles Rangel, whose committee is responsible for drafting the legislation to implement the proposal.  Both the financial services industry and congressional Republicans questioned the wisdom of instituting the Fee before the economy has fully recovered, stating that it will prevent large financial firms from increasing their capital.  Congressional Republicans also expressed concerns that the Fee would reduce covered institutions’ ability to lend and that the costs of the Fee would ultimately rest with the consumer.  The Administration believes that by only subjecting large institutions to the Fee, competition with community institutions may prevent costs from being passed on to consumers.