The Bailout Tax

The latest reason to oppose Dodd-Frank.

A new tax on financial companies seemed like a good idea to Chris Dodd and Barney Frank at 3 a.m. last Friday, but now their $19 billion levy is threatening to blow up their 2,319-page financial bill. So they're scrambling to replace that cash, but the bigger news here is that Barney and Chris need to impose a bailout tax for what they claim is a bill that will end bailouts.

This is the real reason that the tax came out of nowhere in the middle of the night after having been rejected earlier by the Senate. And on Monday the Congressional Budget Office made it official when it released its cost estimate for the Dodd-Frank Wall Street Reform and Consumer Protection Act.

CBO estimates that the bill's vaunted "Orderly Liquidation Authority," which is being sold as tough medicine for failing banks and their creditors, will cost taxpayers $20.3 billion between now and 2020. CBO estimated how likely it is that one or more big financial firms will fail, how many tax dollars the Federal Deposit Insurance Corporation would likely pour into these losers to assist creditors, and how much taxpayers might recover as this "resolution process" proceeds.

Why $20.3 billion? CBO isn't releasing its assumptions, but it hardly matters because the number can't possibly be more than a guess. The failure of Citigroup alone could cost many times that, much as the failure of Fannie Mae and Freddie Mac has already cost taxpayers $145 billion and counting. That $20.3 billion is best understood to be the potential cost discounted to what you might call the net present political value.

The $19 billion Dodd-Frank bailout tax was especially pernicious because it essentially left it to regulators to decide who would pay. The sages at the new Financial Stability Council would make the call, guided by, among other factors, a particular company's "importance as a source of credit for households, businesses, and State and local governments" and "the company's importance as a source of credit for low-income, minority, or underserved communities and the impact the failure of such company would have on the availability of credit in such communities." Imagine the corruption and favoritism possibilities.

All of this caused a revolt in the Senate, where Massachusetts Senator Scott Brown was the first to declare his opposition because of the tax. This is far from a full apology for his earlier support for Dodd-Frank, but we assume he has learned something from the way he's been taken for a ride by the professionals. The other GOP supporters of Dodd-Frank—Maine's Olympia Snowe and Susan Collins, and Iowa's Chuck Grassley—should also be wary of standing with Senate liberals on tax hikes.

Last night, House and Senate negotiators rewrote Dodd-Frank into something they hope can earn 60 Senate votes. One Democratic proposal is to save money by limiting the Administration's ability to make new commitments under the Troubled Asset Relief Program. As New Hampshire Senator Judd Gregg pointed out, this is an excellent idea on its own, and should not be paired with a plan to spend the same dollars on a separate bailout program.

Democrats also voted to raise the fees banks pay for federal deposit insurance, which would be one more in a series of fee increases on banks struggling to rebuild capital and maintain lending. A $5.6 billion special levy early in the financial panic was followed by a December 2009 requirement that banks prepay $46 billion in assessments for future years. The fees will rise again in January under current rules, and a separate part of Dodd-Frank encourages future increases by permanently raising to $250,000 the insurance coverage for individual accounts.

This would also mean that commercial banks could essentially end up paying to bail out large hedge funds. The new Orderly Liquidation Authority was explicitly created for nonbanks, since the Federal Deposit Insurance Corporation already has a resolution process for commercial banks. Dodd-Frank would thus codify the mistakes of 2008, with bank deposit insurance supporting the rescue of all manner of uninsured adventures in the capital markets.

Most absurd is the claim that any of this money, however it is raised, will somehow be reserved for bank failures. Congress will spend it immediately. Taxpayers will pay for bailouts like they always do, when they happen, and this bill makes them more likely.