The American Bankers Association (ABA) reacted negatively late Monday to a part of the President's FY 2013 Budget which was released earlier in the day.  The ABA issued a statement through its president and CEO Frank Keating that was strongly critical of a revenue raising measure that is aimed directly at the large financial institutions which ABA represents. 

The Financial Crisis Responsibility Fee, which is expected to raise $61 billion over its first ten years, is part of President Obama's $3.8 trillion budget which includes $350 billion for job creation and $476 billion for upgrades to the nation's transportation system.  The fee is presented as a mechanism to recover funds dispersed under the Toxic Asset Relief Program (TARP) of 2008, which "bailed out" many financial institutions viewed to be in danger of collapse in the wake the housing crash and as a way to discourage excessive risk-taking. 

TARP allocated $700 billion to banks to shore up their balance sheets and purchase some of the defaulted loans on their books, primarily residential mortgages and mortgage-backed securities.  Ultimately $413 billion was dispersed and as the banks recovered many have completely repaid the advances.  To date $318 billion has been recovered and the Treasury Department estimates that the program will finally cost $68 billion assuming that the $45.6 billion that has been set aside for housing initiatives is utilized. 

The budget document calls TARP an extraordinary step necessary to stem a deeper financial crisis.  "The cost associated with the excessive risk-taking by the largest financial institutions continues to ripple through the economy," it says, and even though many firms have repaid the Treasury, the entire financial system benefited enormously from TARP support, "shared responsibility requires that the largest financial firms pay back the taxpayer for the extraordinary support they received as well as to discourage excessive risk taking." 

The fee will be restricted to financial firms with assets over $50 billion and meets the statutory requirement that requires the President to propose a way for the financial sector to pay back taxpayers "so that not one penny of the Government's TARP-related debt is passed on to the next generation."  The tax is proposed to extend beyond 2022 as necessary to repay Treasury and to offset the cost of the President's new mortgage refinancing program. 

The fee was described in the budget documents only as "consistent with principles agreed to by the G-20 Leaders and similar to fees proposed by other countries."  However, earlier this month the President said the fee would be based on the size of the institution and the riskiness of its activities.

The ABA's Keating said in part, "The banking industry strongly opposes the $61 billion bank tax included in President Obama's budget proposal.  Despite claims to the contrary, the facts on TARP are very clear: Taxpayers have profited $13 billion from their investments in banks through the program and Treasury predicts they will see a lifetime positive return of more than $20 billion.  Given that non-bank programs are responsible for all of TARP's losses, this would simply be an arbitrary tax with no regard to where losses actually occurred. "

Keating said the plan made for a good political sound bite but would needlessly damage the economy by reducing credit availability and driving capital away.  "A 10-year tax of $61 billion means that up to $600 billion in loans would not be made over that same time period.  Millions of small business loans would be in danger of not being funded, borrowing costs would likely increase and consumers and businesses would have less credit availability as the economy struggles to find its way forward."

The President used the budget to restate the proposal made earlier this month for a broad program to refinance homeowners who are underwater on their mortgage but remain current on their payments.  The new program, similar to the HARP 2.0 program for homeowners with mortgages guaranteed by Freddie Mac or Fannie Mae, would be available to homeowners with non-GSE loans.

Congress has not passed a single one of President Obama's budgets and it is widely expected that the FY2013 budget will meet the same fate and that the government will continue to operate on short-term interim appropriations.