In The Blogs

Paying for the Bailout

| Sat Oct. 17, 2009 9:47 PM PDT

Here's the reaction over in Britain to news about the banking sector's recent return to outsize profitability:

Ministers are drawing up plans for a tax raid on Britain’s banks worth hundreds of millions of pounds, The Sunday Telegraph has learned.

The radical move, being considered as a way of forcing banks to pay a price for the taxpayer-funded bail-out of the financial system, could include a one-off “windfall” tax on profits.

....Last night, in his weekly podcast , Gordon Brown, the Prime Minister, said his government would be “taking extensive action to reform the whole culture of the financial sector”. Any action is likely to hit all UK banks — even those which have not been part-nationalised, or given access to hundreds of billions of pounds worth of taxpayer-funded collateral.

There is understood to be “considerable anger”, both inside No 10 and among Cabinet ministers, over recent signs that banks are once again ready to unveil huge profits and bonus payments.

I don't know if a one-off windfall profits tax is the right approach to this, and I don't think it should be motivated by anger in any case. The rescue plan put in place last year was bound to make the banking sector pretty profitable in the short run, so it's hardly a surprise that that's what happened. Nonetheless, there's no reason the industry as a whole shouldn't be expected to help pay for its own rescue one way or another. There's certainly no reason the taxpayers should do it all.

Advertisement

Kevin Drum is a political blogger for Mother Jones. For more of his stories, click here.

Comments

UK Response To Crisis

Submitted by Don the libertarian Democrat (not verified) on Sat Oct. 17, 2009 10:28 PM PDT.

It's also interesting to me that the majority of people taking Narrow/Limited Banking seriously on blogs are in the UK. I'm referring to Martin Wolf, Buiter, John Kay, and Peston. They seem much more interested in major changes to the Financial Sector.

Oh fuck them. The various

Submitted by Anonymous (not verified) on Sat Oct. 17, 2009 11:31 PM PDT.

Oh fuck them. The various managers and executives and CFO and CEOs and directors, each and everyone of them broke their fiduciary responsibilities.

Fire them, jail them, and send them to PMITA prison.

These people and their skills are not rare. And sending them to jail would do a great deal for corporate integrity. Especially the CFO, CEO, and directors.

taxes

Submitted by rbe1 (not verified) on Sat Oct. 17, 2009 11:32 PM PDT.

The American taxpayers deserve as much of their investment back as soon as practicable, and if this means a windfall tax, then so be it. I don't think it's proper that the recent growth in profits should be kept by the bankers. They don't deserve it, at least not this round.

I'm not sure about the

Submitted by Darryl (not verified) on Sun Oct. 18, 2009 4:23 AM PDT.

tagged as:

I'm not sure about the backstory in Britain, but the logic doesn't really hold here. Here in America, I'm not aware of any banks where somebody who voted for the Community Reinvestment Act sits on the board (that's the one where banks were forced by law to make risky home loans, and kept things afloat as best they could by securitizing them-- worked for a while, but eventually the bottom fell out simply because there were too many legally-required risky loans out there). I guess we could do a straw poll and fire any executive who doesn't support its immediate repeal, but that would be unhelpful unless we actually repeal the bill.

So the liars and idiots have come to play

Submitted by leafsong1 (not verified) on Sun Oct. 18, 2009 7:15 AM PDT.

Apparently, you are so computer illiterate that you can't do your own research and must rely on professional liars to tell you what to think. CRA was passed 25 years before the makings of this crisis in the first years of this century. Very few current members of Congress had an opportunity to vote on it; most of the people who voted for it are dead. The idea that this law worked fine for 25 years and then suddenly became the cause of a crisis shortly after the Bush regime took over through no fqault of the Bush regime is idiotic. CRA applied to regulated banks and restricted them from making the harmful loans. All of the worst lending activity came from banks that were not covered by it. CRA actually never required lending to poor people, only to people buying in poor neighborhoods, which means that much of CRA activity was really just a subsidy for slum lords and other poor neighborhood property owners.

You're wrong Darryl

Submitted by markg8 on Sun Oct. 18, 2009 7:31 AM PDT.

It was unregulated private mortgage companies like Countrywide and Ameriquest that drove the market on the bottom end and once the big investment banks on Wall St. discovered chopping those lousy loans up into various tranches and repackaging them was the next big bubble they sent the world's financial system right over the cliff. CRA regulated banks never wrote more than 4% of those loans. Fannie Mae and Freddie Mac were made an offer they couldn't refuse by Anthony Mozilo of Countrywide: by his garbage mortgages or he'd make them "irrelevant" by giving all his business to Wall St investment banks.

With the loss of their commercial brokerage business to the net in the 1990s Wall St. has relied on deregulation and one bubble after another to earn profits. The financialization of America, predatory capitalism that demands a cut for big banks off every transaction is a cancer on the entire economic system. It's killing prosperity, business, and jobs in every other sector.

Increase capital requirements

Submitted by jhe (not verified) on Sun Oct. 18, 2009 5:56 AM PDT.

Before taxing the money away, I would increase capital requirements. Ideally the higher capital requirements would be tied to activities that got the banks into trouble like derivative trading. At a certain level, capital requirements have to reduce the money pool available for bonuses.

As are as acting out of anger goes, sometimes anger is the short-cut to a reasonable moral position.

CRA

Submitted by Anonymous (not verified) on Sun Oct. 18, 2009 6:29 AM PDT.

@Darryl

The vast majority of the "subprime" loans were made by either companies that CRA didn't apply to (50% of the loans made) or only partial applied to (30%). The large companies, think Countrywide, that were at the forefront of this mess were the ones in the "did not apply to category".

In addition, study after study showed that the institutions that CRA did apply to tended not to make these loans and the CRA loans they did make they held onto and didn't sell into securities.

Study after study showed that the CRA nonsense is just that nonsense. It didn't require anyone to do stupid things that sank the economy. They did that all on their own.

banks

Submitted by rbe1 (not verified) on Sun Oct. 18, 2009 6:45 AM PDT.

This is all very interesting and mind-expanding, but the salient fact is that the taxes which bailed these fools out should not contribute directly or indirectly to bonuses until the banks have paid it all back, not before. I don't give a shit how hard not having bonuses might be on these people. If they don't like it they can find something else to do.

progressive

Submitted by Anonymous (not verified) on Sun Oct. 18, 2009 6:54 AM PDT.

Let's use the anger to put in place a truly progressive tax code.

Real regulation is the best revenge.

Submitted by jrw on Sun Oct. 18, 2009 8:08 AM PDT.

Rather than a one-time blow to the pocketbook, we need to demand real regulation. A windfall tax will do little to guard against another cycle of gambling with other people's money. It's human nature to be greedy, it's in a corporation's charter to maximize profits; that's why we need oversight and regulation with teeth. We are allowed to make rules. The current state of financial regulation isn't some ordained, natural state of capitalism. It is a creation of ideology, lobbying, campaign contributions, obfuscation, inertia, public relations, and money, money, money. Oh, and lying, too. But, it can be changed. Outrage over bonuses, to my mind, misses the real point about the boring work needed to change the rules on a long-term basis.

If we can't get that, I'd settle for a new reality show that forces Larry Summers, Robert Rubin, Phil Gramm, Tom Donahue, and Alan Greenspan to live together for a year while working at $10-an-hour jobs.

Or this show, which finally may get a larger audience to see through the "gee, who could have known" excuse:

http://www.pbs.org/wgbh/pages/frontline/warning/?utm_campaign=Warning&ut...

I'm looking forward to it.

Windfall - not bug, feature

Submitted by Anonymous (not verified) on Sun Oct. 18, 2009 8:38 AM PDT.

There would be no need to talk of windfall profits or any other means of reining in outrageous compensation if we'd just implement several changes.

1) Crank the tax rates back up on the top brackets.

2) Ditto for the capital gains tax - and make it progressive.

There is a mind-boggling post over at Daily Kos that lays out with lots of graphs exactly how skewed income distribution has become. Take a look, and bookmark it.

http://www.dailykos.com/story/2009/10/17/794282/-Your-Work-Life-Revealed...

CRA or not, why Fannie and

Submitted by MacGruber on Sun Oct. 18, 2009 9:01 AM PDT.

CRA or not, why Fannie and Freddie were buying risky mortgages, and pumping good money over bad, into the market is beyond me. Even now, Barney Frank is calling for more relaxed regulations for Fannie and Freddie so they can make homeowning more "affordable" - this is a recipe for another real estate disaster.

Wny not in anger? Nothing

Submitted by MNPundit (not verified) on Sun Oct. 18, 2009 9:17 AM PDT.

Wny not in anger? Nothing will get done otherwise Kevin and you are too clinical for your own good.

*Threatens you with Shinobi*

"I don't know if a one-off

Submitted by The real a (not verified) on Sun Oct. 18, 2009 10:48 AM PDT.

"I don't know if a one-off windfall profits tax is the right approach to this, and I don't think it should be motivated by anger in any case."

I think anger is a pretty good fracking motive. It's our money, we want it back, and we'll take it back any way that we see fit.

transfer the finance industry's profits

Submitted by tpx on Sun Oct. 18, 2009 11:12 AM PDT.

Not only should banks have to pay for their own bailout, they should pay for the bailout of the recession too. A substantial portion of the finance industry's profits needs to be transferred to people, preferably to the bottom 25% of median income households.

Maybe a massive tax on any

Submitted by TW Andrews (not verified) on Sun Oct. 18, 2009 1:51 PM PDT.

Maybe a massive tax on any profits that aren't retained as capital. That would help achieve the goal of the bailout without returning to a culture of massive bonuses.