Last updated: January 14, 2010 5:34 pm

US banking levy expected to raise $90bn

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Barack Obama announced a sweeping levy on about 50 financial institutions that will raise an estimated $90bn to reduce the federal debt.

The president said the bail-out aid had been “distasteful, but necessary”, and it is now time for repayment.

He said that the new levy was not a punishment, but rather a preventative measure, and banks could well afford the fee, citing “massive profits and obscene bonuses”. Mr Obama urged Wall Street to roll back executive bonuses to cover the cost. “We want our money back, and we’re going to get it”, he said.

The “financial crisis responsibility fee" will hit investment banks such as Goldman Sachs particularly hard because insured deposits, the main funding mechanism of retail and commercial banks, are exempt from the charge that is levied on other liabilities.

Congress is likely to weigh in on the administration’s proposal, which officials said was designed to recoup taxpayers’ money used in the rescue of the financial system.

“The president feels strongly that we must honour both his personal commitment and the legal commitment under Tarp [the troubled asset relief programme] to ensure that all the costs are born by the financial industry and not by the American taxpayer,” said a senior administration official.

Although the Tarp law does include a provision mandating an unspecified mechanism for the financial industry to repay the government for losses incurred under the programme, the administration is accelerating its implementation by three years. It is planned to come into force this June instead of 2013.

The timing – in the week that banks are set to announce billions of dollars in bonus pay-outs – is widely seen as an attempt to assuage public anger at the industry whose compensation is frequently held up in stark contrast to the high unemployment rate in the rest of the economy.

“Of course we have already heard from those expressing resistance,” said the senior official. “It is in many ways offensive for those at our major financial institutions [to say] that they can today afford excessive, often outlandish, bonuses for their top executives but cannot afford to make whole the taxpayers.”

It comes a day after four top Wall Street chief executives appeared before a Financial Crisis Inquiry Commission to offer a mixture of contrition and defence of their actions in the run-up to the crisis that began in 2008.

The levy targets banks with more than $50bn in assets, and levies a fee of about 15 basis points on covered liabilities; insured deposits are subtracted because banks are already charged by the Federal Deposit Insurance Corporation. It will target some insurance companies as well as – potentially controversially – US subsidiaries of foreign banks.

“We expect around 35 will be US companies and 10-15 will be the US subsidiaries of foreign companies,” said the official. “Somewhere between 20 and 27 will be US banking institutions.”

The charge would raise an estimated $90bn over 10 years, sufficient, according to internal Treasury estimates, to cover any losses suffered by the government in the main Tarp programme, which was used to provide capital injections to banks and carmakers.

Even though the bail-out of General Motors and Chrysler is expected to be one of the main losses when the final accounting is complete, the Detroit pair are exempt from the fees.

Banks and insurance companies that received no Tarp money or have repaid it with interest will be caught up in the new levy.

“The banks that are in question were significantly responsible for an enormous degree of the reckless risk taking that was borne throughout the broader economy,” said the official.

The Treasury has so far resisted attempts to introduce a bonus tax or a financial transactions tax but officials hope Thursday’s announcement will draw a line under the issue of bonuses, which has seen liberal Democrats in Congress criticising the administration for not being strong enough.

Executives at some of the major European banks that would be hit by the new US levy said they did not think it would lead them to pull out of the US.

”It’s still the biggest capital market in the world. If you want to be a global player, you have to have a presence there,” one said. US regulations make it all but impossible to tap US investors and markets without a US presence.

Most were cautious about estimating the impact of the tax. They said the final tally would depend on how US authorities calculate the size of each bank’s US-based balance sheet for tax purposes.

Additional reporting by Brooke Masters in London

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