Banking Law

I was going to write about the FDIC's controversial proposal to base deposit insurance fees in part on executive compensation plans, but Jr. Deputy Accountant beat me to it. By the time I stopped laughing, I'd moved on to greener pastures.

Now that the TARP program has appeared to have made the American taxpayer a nifty 14% return on capital invested and repaid, it's only natural that the biggest banks that have repaid their TARP investments be hit with an additional fee so that the Treasury can at least break even on TARP money given to the automobile companies and financial death star AIG. After all, wasn't TARP intended to bail out Detroit and insurance companies? No? Oh, my mistake.

Barney Frank defended the fee on the basis that TARP benefited all financial institutions, and that it was "always part of the deal." The latter part of that justification is a flat falsehood, but then Barney is the kind of guy who rams an executive compensation restriction on TARP recipients through Congress after the TARP deals had been signed by the big banks, so I suppose to him all truths are relative. According to the rationale that all big financial institutions benefited from the effects of TARP, all other financial institutions, and all Americans for that matter, should pay the fee, because we all benefited from the fact that the entire US financial system didn't turn into a flaming heap of toxic waste. That goes double for the geniuses in D.C. They ought to pay twice as much as any other payer, because if the system had gone down, guys like Frank, et al. would have been tarred, feathered, and run out of town on a rail, just like the boat-load of Republicans who were shown the door in 2008.

From the narrow view of personal self-interest, socking it to big banks is no big deal. Frank and his cohorts will exempt all but the top 20 banks, so my clients won't suffer directly. On the other hand, as a consumer of financial services, I know what will occur: the banks will pass the fee along to the man and woman in the street. That's what business do when costs are increased and they have the sufficient market share. They increases prices.

In addition, as Texas Rep. Jeb Hensarling pointed out, the administration and Congress have been all over the big banks to lend more. More fees paid to the Treasury mean less money to lend. That's a basic banking principle. Hensarling was a bit more blunt about it.

"How you are going to tax banks and expect them to lend more is frankly lunacy," said Rep. Jeb Hensarling (R., Texas).

Let's be generous, and say that the administration is operating more out of ignorance than cynicism or lunacy. Politics, academia, and large bureaucracies give one the kind of hands-on experience that leads to the type of omniscient insight that...oh...say...Sheila Bair has about the business of commercial banking. Her resume is bereft of actual banking experience, other than a "brief stint" as a bank teller before she graduated from law school, and yet she knows more about the business of banking than just about anybody. Just ask any community banker. They'll tell you.