Wall Street Brings It On Itself

We seem to have come a long way from this time last year, when Wall Street was on its death bed in desperate need of a bailout. Storied brokerage houses such as Bear Stearns, Lehman Brothers and Merrill Lynch had disappeared altogether, while many other household-name titans of finance such as Citigroup (C - Analyst Report) and Bank of America (BAC - Analyst Report) were deemed "too big to fail" and had to be propped by the U.S. Treasury.

The turnaround in the market from its March ’09 lows and the subsequent economic rebound has done wonders for Wall Street’s bottom lines. As a result, there is talk of huge bonus payouts all over again. The top three firms -- Goldman Sachs (GS - Analyst Report), Morgan Stanley (MS - Analyst Report) and JP Morgan Chase (JPM - Analyst Report) are reportedly planning to dole out billions in bonus payments. These companies say that having paid back the TARP money already, they are no longer obliged to restrict their payouts.

President Obama’s announcement today of a new tax on banks, billed as the "Financial Crisis Responsibility Fee," was just a matter of time, in my view. I may be a tad cynical here, but the president’s choice to make this announcement today may be related to get ahead of JP Morgan’s fourth-quarter earnings release tomorrow.

Given Wall Street’s popularity level amid a backdrop of over 10% unemployment in the U.S., it makes perfect sense for the political leadership to beat up on them. Wall Street’s inability to judge the public mood accurately is the most surprising aspect of this whole episode, in my view.

Does It Make Sense?

While it makes political sense for the president, does it make economic sense? And the announcement aside, what are the odds of the tax actually getting enacted by Congress?

Yes, it makes economic sense. It targets large firms (with assets of over $50 billion) that are getting funding from the short-term capital markets, and excludes FDIC-insured deposits. Over 60% of the expected $90 billion to be raised by the levy over the next 10 years will come from the 10 largest financial institutions. In total, the levy would hit around 50 firms, of which about 15 are the U.S. subsidiaries of foreign firms.

And the levy is not onerous; it would amount to 15 basis points, or 0.15% of covered liabilities per year.

Chances of Enactment

Presidents make a lot of announcements that are mostly enacted for PR and image reasons. While we are fully cognizant of this announcement’s PR value, it appears to have a better than fair chance of being enacted into law by Congress. With a mid-term election on the horizon and an environment of economic distress, Congress may find it difficult to appear sympathetic or friendly to Wall Street.

But Wall Street is one of the largest donors to Congress, and it may be premature to discount their influence. With a major regulatory overhaul also in the cards, Wall Street may have to further beef up its Capitol presence.

Read the full analyst report on C

Read the full analyst report on BAC

Read the full analyst report on GS

Read the full analyst report on MS

Read the full analyst report on JPM