Why Financial Institutions Should Pay a Fee as President Obama Proposes

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On Tuesday, the Senate Finance Committee completed a series of hearings on the President's proposal to raise $90 billion with a fee on risky assets held by the 50 biggest financial institutions to ensure repayment of bailout funds. One of the best explanations of why Congress should impose such a fee was provided by Douglas Elliott, a Brookings Institution scholar and a former investment banker.

Some opponents of the fee have argued that it will be ultimately paid by all taxpayers because banks will pass it on to customers. Elliott responds that even if the fee is partially passed on, the taxpayers who pay the most (those who do the most business with banks) would be the taxpayers who benefit the most from the bailout. (The cost of borrowing for these taxpayers would be much greater if the government had allowed the financial system to collapse.) Elliott also points out that the fee would be equal to just two percent of the banks' income plus compensation, and would equal just 0.1 percent of assets.

Other opponents have questioned why such a fee should be imposed on some banks that have already paid back their bailout funds or those who received no funds. As for those who have paid back their funds, Elliott points out that the benefits they received are much greater than the exact dollar amount that was given to them directly.

"The aid that was provided was generally priced well below what the private market would have charged for the same risk," he explained, adding that "merely paying off the aid under the terms required does not come close to fully compensating taxpayers for the risks they successfully took to restore the economy."

And really all financial institutions benefited regardless of what they received directly. "[T]rillions of dollars of value had been destroyed on securities and loans, much of it in the hands of the institutions which would be paying this fee," Elliott explained.

"Failure of the government to act in the extraordinary manner that it did would have allowed a further meltdown that would have destroyed trillions of dollars more in value. The industry should be extremely grateful for this aid, instead of minimizing the nature of the help in order to avoid a relatively trivial fee."

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