US Banks And Funds To Be Hit With New $19,000,000,000 Tax: Surprise Fee Emerges As “Wall Street Reform” Bill Finalized
Jun 25, 2010 Comments Off Pat Dollard
Progressive hatchetmen
Which means you’re going to pay it…
Banks and hedge funds will be hit with a $19bn fee to pay costs associated with financial reform, Barney Frank, chairman of the US House financial services committee, said late on Thursday.
The proposed levy emerged as an unwelcome surprise for the industry deep into a late-evening congressional session to finalise landmark Wall Street reform legislation. Banks with more than $50bn in assets and hedge funds with more than $10bn will be required to pay into the fund as a proportion of their assets.
Earlier in the marathon conference proceedings, congressional negotiators closed in on a financial reform compromise that would ban banks from proprietary trading but allow some investment in hedge funds and private equity firms.
After hours of wrangling in private, a Senate team finally published its new version of the “Volcker rule†including a strict ban on banks trading for their own account and a conflict of interest bar on sponsors of asset-backed securities designed to hit Goldman Sachs.
But there was some qualified celebration on Wall Street after language was published that would allow banks to invest up to 3 per cent of their tier one capital in hedge funds.
Tim Geithner, Treasury secretary, helped break the impasse between a faction of lawmakers pushing for punishing restrictions on banks and another urging moderation, according to people familiar with the negotiations.
Carl Levin, the Democratic senator from Michigan, argued for a pure rule with minimum exemptions while Scott Brown, the Republican senator from Massachusetts, demanded broad exemptions.
Mr Geithner and the bill’s two congressional leaders – Mr Frank and Chris Dodd, the Senate banking committee chairman – had preferred to maintain a lower limit on fund investment but reluctantly gave in as they scrambled for votes.
Votes due next week, including a tricky vote in the Senate that requires 60 senators to support it, should bring the reform effort to a close but talks stretched into the night.
Still to be decided in a session likely to extend into the early hours of Friday morning is the scope of a proposed rule to force banks to spin off their swaps desks into separately capitalised affiliates.
Democratic lawmakers were haggling over the details in private meetings, with Blanche Lincoln, the senator from Arkansas who authored the rule, and her more bank-friendly colleagues yet to bridge their divide.
As they waited to hear the fate of their swaps operations, bankers said the 3 per cent investment limit was a positive sign for the industry as it would allow financial institutions to keep ownership of their internal hedge funds and private equity funds, albeit with less proprietary investment.
“It is a victory for us because it gets away from this concept that we would have to spin off or sell most of these businesses,†said a senior Wall Street executive.
In practice, however, the rule could force banks to reduce the amount of money they invest in their internal asset management vehicles. The new rule would allow Citigroup, for example, to invest about $3.5bn of its own capital in its hedge funds and private equity funds, compared with the $5bn or so the company has invested.
The limit for JPMorgan Chase, which owns a hedge fund called Highbridge and a private equity group, would be about $2.8bn. People close to JPMorgan said the company had more than $1bn invested in Highbridge alone.
Limits for Morgan Stanley and Goldman Sachs, securities houses with smaller balance sheets, would be lower: about $900m for Morgan Stanley, which has already signalled its intention to sell its stakes in hedge funds, and about $1.78bn for Goldman, which has a large and very profitable fund business.
Bankers stressed that a lot of the in-house money poured into the funds was meant to be replaced by outside investments once the funds got off the ground, leading to a natural reduction in the levels of proprietary investments.
The fee, though, was an unwelcome surprise. One of the long technical arguments during the reform debate has been over whether to impose an upfront fee on large financial institutions to cover the costs associated by the government seizing and winding down a failing firm using new powers.
Lawmakers had resolved to recoup the costs after any use of the so-called “resolution†powers but aides said that the vagaries of congressional budgeting meant there had to be an upfront fee of some sort.
Congressional aides said that the independent Congressional Budget Office – which estimates the costs and revenue associated with all legislation – had calculated that the chances of the resolution authority being used and the government not being paid back equated to a $19bn hole that had to be filled with revenue.
The Federal Deposit Insurance Corporation would levy the fee over a number of years and hold the money.
Among other issues considered, lawmakers moved towards an agreement that should boost the coffers of the Securities and Exchange Commission and the Commodity Futures Trading Commission but retain some congressional oversight of their funding.
“Madoff, Stanford, Bear Stearns and Lehman may make a compelling case that the SEC needs more resources, but they also ought to make the case that the SEC ought not to go unmonitored,†said Richard Shelby, the senior Republican on the Senate banking committee.
