President Obama's plan to impose a fee on big banks to recoup money used to rescue them during the financial crisis is "the sensible, fair thing to do," Treasury Secretary Timothy Geithner says.
Obama said on Thursday that the administration plans to impose a fee on the debt of some of the largest financial firms until taxpayers are fully compensated for the assistance the government provided to Wall Street. The fee would be subject to approval by Congress.
Only banks with more than $50 billion in assets will have to pay the fee, the president said, adding that 60 percent of the revenue from the program will come from the 10 largest financial institutions.
The program, which would go into effect June 30, is expected to raise $90 billion over 10 years. It may extend beyond the next decade if costs have not been recouped by that time.
Geithner spoke with host Robert Siegel about the fee and the assistance provided to insurance giant AIG during the height of the financial crisis.
A 'Fair' Fee To Recoup TARP Funds
Geithner defended the fee against criticism from some bank officials, who say it is about politics and not economics. Those critics note that some institutions that paid back Troubled Asset Relief Program money — or never took any — will be taxed along with other banks.
"We're doing what is fair, and what is just, and what is economically sensible and what we have a legal obligation to do, which is to make sure that we hold the American people harmless from the cost of the financial crisis and that we collect back from the financial industry that benefited from the financial rescue the ultimate costs of what it took to solve this crisis," Geithner says. "That's the sensible, fair thing to do."
Geithner says the program was designed to apply to the largest financial institutions that benefited the most from the rescue.
A Tax On Leverage
"We're doing it in a way that effectively puts a tax on leverage," Geithner says, adding that it will help to curb some of the risky practices that caused the crisis.
Some people see the levy as an effort to blunt the impression that the administration is too close and too soft on Wall Street. But Geithner says that's not the case: "The law that was passed to authorize the financial rescue put an obligation on the president to recoup the cost of the crisis, and that's what we're doing."
Big banks are expected to spend almost $50 billion on bonuses this year alone, and Obama on Thursday called the bonuses "obscene."
Geithner says the proposed levy is a "very substantial fee," adding that its size is determined by a conservative projection of total losses to the government.
The new fee, he says, is not designed to address the issue of bonuses.
The Case For Financial Reform
Geithner said financial reform legislation is needed to put in place "much stronger constraints on banks taking risks" to protect consumers and investors from behavior that caused the financial crisis. Describing the path toward financial reform as "a necessary war for the American people," Geithner says there's a very good chance that it will be approved by the Senate. It has already been passed by the House.
"I think what's happening on the bonus front is deeply troubling, and I think it is causing enormous damage to basic trust and confidence in the people running our financial institutions," Geithner says. "I think it is very important as part of financial reform — creating a more stable system — that these institutions are forced to change those practices. And we're going to work very hard to do that, but our basic obligation is to make sure we pass strong reforms — put cops back on the street — enforcing those rules so that we never again put the country in a position of facing something this damaging."
AIG And The New York Fed
Geithner previously served as president of the Federal Reserve Bank of New York. Questions have arisen regarding whether the New York Fed helped rescue American International Group to spare large investment banks like Deutsche Bank or Goldman Sachs from the consequences of risky investments.
Geithner says this was not the case. "If the government had not stepped in to act to prevent the failure of AIG, this crisis would have been much more damaging," he says. "And I believe we did it in a way that ultimately will cost the government much less money than the alternatives."
Regarding the New York Fed's involvement in assisting AIG, Geithner says: "It's almost certain the Fed will make money in the transaction."
But details of the transactions to assist AIG were perceived to be less than transparent.
"I was recused from dealing with AIG," Geithner says. "I had no involvement in the decision about what to disclose when. But the Fed has disclosed all the information about what counterparties get, I think appropriately. And of course I will work very closely with the Congress to make sure they have the information necessary so people can look and evaluate the judgments we made with the benefit of hindsight." Overall, he adds, the path the Fed chose was one that would "least cost the taxpayer."
Comparing AIG with the auto industry, Geithner says the insurance giant was "more imprudent" with risk than General Motors was bad at making and selling cars. The failure of our system, he says, is that for a financial institution like AIG, "bankruptcy was untenable."
Later this month, Geithner will testify before the House Committee on Oversight and Government Reform, which is investigating his role in deals that sent billions of dollars in bailout money to big banks including Goldman Sachs.
The committee is also looking into why the New York Fed paid banks to cancel their contracts with AIG and didn't demand concessions. Such deals may have cost taxpayers millions more than necessary. A watchdog report said Geithner approved such decisions.
With additional reporting by The Associated Press