Saturday, January 16, 2010

“We Want Our Money Back, and We’re Going to Get It”

From the Desk of Joe Rollins

With the above proclamation, President Obama proposed a new $90 billion bank tax on January 14th , called the “Financial Crisis Responsibility Fee.” It’s unfortunate that President Obama’s memory is hazy on the facts; perhaps it’s time that’s he’s reminded. It’s obvious that President Obama doesn’t heed my advice, as he continues to propose more and more taxes. At the very least, the information he relays to the public needs to be accurate. In the meantime, I will provide you with the facts so you can judge for yourself if his newest proposal is appropriate.

Originally, the TARP disbursed approximately $245 billion in connection with the Emergency Economic Stabilization Act of 2008 (“EESA”). It was estimated at the time that the TARP would lose $76 billion in connection with these investments. As of December 31, 2009, the TARP has been repaid $164 billion of the original amount plus interest, leaving approximately $78 billion unpaid. Even though the plan was projected to lose $76 billion, it has actually generated a profit of over $16 billion for the Department of Treasury as of the end of the year.

The bulk of the money that hasn’t been repaid comes from General Motors, Chrysler, GMAC and AIG. None of the major banks have any unpaid TARP money at the current time. Therefore, President Obama’s assertion that the Treasury needs the money back from the major banks that they want to tax is not supported by the facts.

I had been wondering what companies supposedly have not repaid their TARP funds and if there were any major banks on that list. My analysis of the proposed tax revealed some interesting information. This new tax will hit the largest major banks first, like J.P. Morgan Chase & Company. Without question, J.P. Morgan Chase is one of the best-managed banks in the entire world. They never requested TARP money, nor did they ever lose money during the financial crisis of 2007, 2008 and 2009. J.P. Morgan Chase is so well-run that arguably, they could loan the Treasury money.

The only reason that J.P. Morgan Chase took the TARP money in the first place is because they were required to do so by the government and to be a good citizen. They have stated publicly on numerous occasions that they didn’t want the TARP money and wanted to pay it back immediately. It was only at the government’s insistence that they participated in the transaction. However, based on President Obama’s proposed tax, J.P. Morgan Chase would be assessed the largest tax -- $2.46 billion. Why on earth would the government punish one of the best-run companies in the world?

Here’s exactly what I think is going on: The U.S. government loaned General Motors and Chrysler approximately $50 billion. Neither of these loans fell under the original TARP plan; they were extended solely for political reasons and there’s a highly likelihood the loans will never be repaid. Therefore, in order to repay the taxpayers the money the government thinks they’ll lose, they will instead tax the banks that have already repaid their TARP money (including interest and the purchase of warrants). Does this seem logical to you?

The government has yet to mention the $200 billion and growing amounts that were loaned to Freddie and Fannie. The government’s funding of these quasi-governmental agencies that too often loans money to people who do not have the ability to repay the loans is quickly becoming a black hole. As has been clearly documented in numerous articles, many of Freddie and Fannie’s losses are directly attributable to Congress’ meddling and forcing these agencies to loan money to people who couldn’t afford to repay it. However, it wasn’t mentioned anywhere in President Obama’s announcement on Thursday how these agencies will be taxed to repay their loans. Only the banks that have repaid their loans plus interest will have to pay the new tax. Duh?!?!

I’ve become a little cynical in regards to the President’s outrage concerning bonuses being paid to the major banks. First, I don’t think it’s the government’s place to define what companies should pay in salaries and bonuses. Furthermore, if you’re a shareholder in one of those banks and you don’t agree with what the executives are being paid, then you should sell the stock.

For instance, I don’t see any public outrage concerning how much Jay-Z and Beyonce earned last year – a cool $75 million – many times what Jamie Dimon of J.P. Morgan Chase earns. Are people outraged at the $50 million Oprah Winfrey made in 2009? What about Tiger Woods’ income of $50 million? Tom Cruise’s $50 million? Alex Rodriguez’s $25 million? Is there some argument that the people running the major banks in America are not as deserving as these celebrities? I’m not concerned with the amount of money these people make. Likewise, I don’t think it’s the government’s place to be intervening into private businesses and dictating guidelines; that’s for the marketplace to decide. When we get to the point where our government decides what is appropriate for people to be paid, then there will be no more private industry in America.

On Thursday, the Obama administration made a deal with the labor unions that their health insurance programs would not be taxed at the 40% level on Cadillac-type health plans. Everyone else in America, however, will be taxed. Therefore, not only will we have to pay additional taxes to pay for all the people in the U.S. who elect not to have health insurance, but we will also have to pay for Nebraska’s Medicaid taxes in perpetuity. We will also have to pay additional health insurance premiums in order to pay for the Cadillac plans that the unions receive. However, if you have such a plan, you will receive no exemptions and you will be forced to pay the 40% tax. This means that the government has cut a deal with Nebraska to buy their vote, they’ve cut a deal with the unions to buy their votes, and they’ve also cut a deal with all of the municipal and state employees to buy their votes.

Just so you understand the magnitude of the issue, I’m going to give you the number of Americans who’ll receive exemptions under this supposed new health care proposal. At the current time, only 12% of U.S. workers are covered under labor union agreements. This means that 12% of Americans receive a special exemption under this new health care proposal and 88% of the U.S. population does not. Remember that there’s nothing currently in this new proposal that does anything to reduce health care costs. The only health care reduction proposal was the tax on the 40% Cadillac plans. Now, 12% of the population is even exempted from those restrictions.

Of the 50 states in the United States, only one receives a Medicaid exemption forever – Nebraska. That means the other 49 states must pay for Nebraska’s Medicaid bill for eternity. I have no idea how this isn’t a Constitutional violation. If you voted for President Obama and do not have a special deal under the bill, you must really feel left out!

It’s a shame the average voter is not being represented in Washington today. However, we can all be assured by Nancy Pelosi’s recent exclamation that we “have the most transparent government ever.” That’s an interesting comment considering the entire health care bill was negotiated behind closed doors and the agreement was reached by paying off Nebraska, the unions, government employees and who knows who else. I guess we will never know until after the bill becomes law. I suppose Representative Pelosi and I have a different understanding of the word “transparent.”

The Financial Crisis Responsibility Fee can be summarized as follows: First, the government forced GM into bankruptcy and violated the basic bankruptcy law from day one – the government awarded one-third of the company’s stock to the labor unions for their support of President Obama. Political payback? Let me be clear that the company’s stock is going to the labor unions, not to the employees of GM. The creditors of GM are basically told, “tough luck,” which is in violation of the U.S. bankruptcy code. The taxpayers then loaned additional money to General Motors, GMAC and Chrysler, none of which are banks. Since General Motors is historically poorly run with costs that are way too high, there is little chance that they will ever be able to repay these loans.

In order to ensure that the taxpayers are repaid these loans, the government plans on taxing the best-run financial institutions in America. It’s the government’s sorry version of the “circle of life,” where they give money to an incompetent, bankrupt auto company, turn over one-third of the stock to the labor unions and then get the largest banks in the country to repay the auto company’s debt. As Treasury Secretary Geithner said yesterday, “this tax makes economic sense to me.” Duh?!?! What am I missing here?

As always, the foregoing are my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

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