AnnotatedOpinions.com

The White House is talking about levying a tax or fee on large banks to recover the $120 billion it spent to bail out the financial system. That is a good place to start, but it shouldn’t stop there. President Obama and Congress should also impose a windfall tax on the huge bonuses that bailed-out bankers plan to pay themselves over the next few weeks.  

This is an issue of fairness and sound public policy. The Treasury needs the money. A fee may also get banks and bankers to rethink the way they do business — something the much-promised, far-too-delayed and increasingly watered-down financial regulatory reform effort is unlikely to do. A permanent tax or fee imposed on the nation’s largest banks could reduce future risks by discouraging big banks from getting even bigger. . .  

A levy on these financial giants would help by putting a brake on this consolidation — making the largest banks somewhat less profitable and steering investment and other resources into smaller banks, which, if they failed, wouldn’t take the rest of us with them. . .  

[AO: The New York Times is correct. The Treasury needs the $120 billion spent bailing out the financial system. The Times is also correct to support taxing large banks because they were the beneficiaries of the $120 billion. However, the remedy offered by the Times, bank fees coupled with taxes on bonuses, go beyond what is necessary to recoup the $120 billion. For one, the tax on bonuses is totally unnecessary if the government’s only goal is to recover spent money. By adjusting the fee amount, the government can recover the entire $120 billion without having to resort to taxing bonuses. This is a desirable approach because the bailout funds supported the banks, not individuals who work there specifically. If bonuses are taxed, the pain will be distributed unfairly so that individuals who earned the highest bonus will pay more to refund the $120 billion though there is no reason to suggest why they should be disproportionately affected.  

The Times notes with approval that a tax on big banks could help make those banks less profitable. However, any such tax must be carefully designed. If the tax is too high, it could push some of the struggling banks back into the position they were in immediately prior to the bailout.   

The government does not need to tax employee bonuses to recoup the bailout funds. If the government taxes banks only, the banks can decide how to shift those costs to employees rather than the government doing so through a tax on bonuses. ]

. . . But with plummeting housing prices, many [homeowners] have faced a new reality: their home’s value is worth less than the mortgage. Maybe these owners are still employed; maybe they can still make the payments. But why should they? Financial gurus on cable TV are advising them to walk away, leave the keys in the mailbox, bid adieu to the lender – in short, to default. [AO: The reason financial guru’s advise home owners to walk away is not because these gurus have discovered a new way to dispose of a “troubled” home, it is because this is exactly the contract the homeowner and the his lender entered into. When a lender makes a loan, the lender prices into the loan the possibility that the home value will decrease and the lender will be left holding the bag when the homeowner strategically defaults. This is a risk the lender takes on and the lender is paid handsomely for this risk in terms of interest rates that it spreads across all of its borrowers.  

When homeowners choose not to strategically default, they are unilaterally agreeing to a higher interest rate above and beyond the rate the homeowner and lender agreed to. This higher interest rate goes directly into the pockets of bankers who can then pay record setting bonuses.   

Now, I’m not suggesting that every homeowner who can should strategically default. Instead, I am suggesting that homeowners should not allow ethical intimidation, fear or other forms of pressure to be the goad that is used to keep them in a lending contract when there is an out.]  

Strategic defaulters, though, threaten the larger economy. In 2001, 3.9 percent of owners of single-family homes had “negative equity.’’ In 2009, almost 25 percent had negative equity. If even half of those owners defaulted, there would be more depressed neighborhoods, more troubled banks – and, looking not too far into the future, stringent lending standards that would shut the doors of homeownership to the next generation. Lenders calculate risk: adding the risk of “strategic defaults’’ to their calculus would lead to higher down payments and higher borrowing rates. . . [AO: Strategic defaulters who default on their homes still have to live somewhere. They will rent in the same or another community. Think about it this way: if 25 percent of owners of single-family homes strategically defaulted, we’d need that many more rental homes. In other words, the economics is sifted from owning to renting.   

As for troubled banks, homeowners who contracted with banks cannot be expected to unilaterally increase their interest rate so that so-called troubled banks can continue to pay record bonuses. It’s unfair and unethical. Worse, it’s not part of the agreement between the homeowner and lender.  

Again, lenders were well aware that homeowners had the right to strategically default. Indeed, in many tax and finance classes across the country (mine included) professors have been explaining this to students for decades. Moreover, a number of states, including California and Colorado, are non-recourse states meaning lenders were on notice that they couldn’t even come after borrowers who walk away from their homes.   

Think about it this way: If Bank of America owed Citibank and discovered that the loan was underwater, would it continue to pay Citibank because of a concern for depressed neighborhoods, Citiban’s liquidity, or future lending to businesses? Of course not. Why then should John, who has a home loan with Bank of America, or Sue, who has one with Citibank, continue to pay that loan?  

Lenders already add the risk of strategic defaulters into loans. However, they miscalculated during the last housing boom just like they miscalculated the appropriate interest rates and the loan terms more generally. In the future, lenders won’t miscalculate or at a minimum they will try to be less wrong. Lenders will do this no matter what.]

IN A BLATANTLY political move this month, the Labor government of British Prime Minister Gordon Brown imposed a one-time, 50 percent tax on bankers’ bonuses. Yet even though it may spring from Brown’s fear of losing an election next year, the tax is justified on economic grounds and as a matter of social justice. And after France followed suit with its own 50 percent tax on banker bonuses, arguments against a similar tax in the United States lost a key rationale.  

In the past, US banking executives warned that any such taxes would make them less competitive than London or Paris in attracting and keeping “talent.’’  

The profits of US banks during the past year are exceptional because they owe so much to taxpayer bailouts and the government’s interest rate policy. . .  

So a tax on bonuses at US banks would simply give back to taxpayers some of the money they have donated to the banks. . .  

[AO: Taxpayers are rightly concerned by high bonuses paid to bankers. However, levying a 50 percent tax on bankers’ bonuses is unworkable and may be largely ineffective.  

For one, though London and Paris have instituted 50 percent taxes on bankers’ bonus, there really still are other places bankers can move to. The article suggests Zurich, Hong Kong and Singapore. These are viable options. There are others too.  

Moreover, a 50 percent tax on bankers’ bonuses is not advisable because the goal the editorial articulates, giving taxpayers back some of the money they have donated to banks, can be achieved in a better way—by retrieving the funds from the bank.   

A one time 50 percent tax leave room for companies to evade the tax by postponing bonuses or making other arrangements that delay payments or convert those payments to other types of compensation. Such a tax, if not evaded, would also disproportionately affect those who, presumably, contributed most to the economy.  

A better approach may be a one-time tax on banks themselves. Banks would be unable to avoid paying the tax. Moreover, the tax would not disproportionately affect individual employees. Instead, since the American taxpayer lent money directly to the banks, the taxpayer would be getting a refund, directly from the bank, of her donated money.]

If the goal is to reduce the number of huge banks that taxpayers must rescue at any cost, the nation is moving in the wrong direction. The growth of the biggest banks ensures that the next bailout will have to be even bigger. These banks will be more likely to take on excessive
risk because they have the implicit assurance of rescue.  

The White House’s proposal to overhaul financial regulation has ideas for banks that are too big to fail. The House passed a bill last week that would require big banks to have bigger capital cushions to absorb losses. . .  

These provisions still seem vulnerable to being gamed. The Senate, which is unlikely to pass its version of the deal until next year, should explore more direct measures, like banning banks beyond a certain size, measured by their liabilities.  

[AO: America has a problem with banks that are too big to fail. We cannot afford them. On the other hand, there are benefits to large banks. These benefits have been enumerated elsewhere. Yet, we cannot allow pursuit of these benefits to blind us to the significant systemic problem that big failing banks can cause.  

The solution, however, is not hard limits like banning banks larger than a certain size. What we need is a system that allows banks of any size, provided they are not too big to fail. For example, a bank twice the size of our biggest current too-big-to-fail bank may not be too big to fail if it has sufficient reserves to prevent catastrophic results when it fails. That is to say, rather than limiting the size of banks, Congress may pass legislation such as capital reserve requirements tailored to the size of banks so that they are never too big to fail.]

. . . No doubt Michael Kelly, sole owner of the holding company that controlled Park National and several other community-type banks, made some ill-advised loans in recent years. In this economy show me a bank that hasn’t.   

But it turns out his worst investment — the one that pushed his FBOP Corp. over the edge — was in the preferred stock of Fannie Mae and Freddie Mac. . .  

None of which made any difference at closing time Sept. 30, when agents of the Federal Deposit Insurance Corp. descended on FBOP’s headquarters, declared it insolvent and announced its assets were being transferred to a mega-bank out of Minneapolis called U.S. Bancorp.  

. . . “The smaller banks like Park National, the banks we depend on here in the neighborhoods, aren’t being helped. They’re being fed to the big banks. Meanwhile the big banks are being bailed out by the taxpayers. What’s going on here?”   

[AO: Bob Vondrasek, quoted in the paragraph immediately above, asks an important question. What is going on when the government seizes small banks and “feeds” them to big banks that are only surviving because of taxpayer handouts? What’s going on when the small banks seized were denied the same handouts that enabled the big banks to survive and take over the smaller ones?  

These are the actions of a government under tremendous internal and external pressure to limit interventions in the economy by using taxpayer funds to keep struggling banks open. As a result of this pressure, the government tries to stay out of the banking system unless it is absolutely necessary. Here, necessity is defined by too big to fail. This approach creates to systems of regulation for banks. Banks that are not too big to fail get the traditional treatment. Pursuant to the traditional treatment, when a bank becomes insolvent, it is taken over by FDIC. Under the non-traditional system, reserved for banks that are too big to fails, the government will step in to keep a bank open after it becomes insolvent. As a result, small bank are being feed to big banks that are too big to fail.  

But what is the solution? Should small banks also be given handouts? Should too big to fail be redefined to include any bank that needs assistance? But can we afford to have the government guarantee the solvency of all banks, big and small? Perhaps too big to fails should be redefined to consider banks that are making loans to individuals in communities. Perhaps. But until too big to fail is redefined, it seems seizing small banks to feed them to big banks will continue.]

Weighing the benefits of a mammography: Although we all would like to think that public health pronouncements are the unmitigated truth about any issue, rarely is that the case. [LA Times]

Giving thanks in secular, holy ways: At Thanksgiving, the secular and religious impulses, usually taken to be antagonists, salute each other respect. [Boston Globe]

Ft. Hood and the bugaboo of ‘political correctness’: Look deeper at a killer and what do you usually find? An angry, crazy person. [LA Times]

The Church and the Capital: Washington lawmakers should negotiate the language of a same-sex marriage bill with the Catholic archdiocese without selling out same-sex couples. [New York Times]

Free speech: It’s the ACLU’s deal: For Americans liberal and  conservative, the organization continues to support their right to speak. [LA Times]

For American savers, the mattress beckons: Banks pay microscopic interest even as they recover. [Philadelphia Inquirer]

The Phantom Menace: The scare stories from Wall Street seem to be intimidating Washington from doing more to rescue the economy. [New York Times]

What the Pilgrims really sought: Their trip to the New World wasn’t about tolerance or diversity. It was about purity. [USA Today]

Tim DeChristopher’s wild legal ride: He disrupted an oil and gas lease auction last year by posing as a buyer. Now a judge has rejected his last-ditch defense strategy. [LA Times]  

Crunching the numbers on bioenergy rules: The right rules will encourage the development of fast-growing grasses and trees that can greatly increase the amount of carbon absorbed by plants on marginal land. [Boston Globe]

Hot times: As a crucial climate change conference nears, more evidence of a warming globe [Houston Chronicle]

Obama needs to feel the heat: The melting arctic ice is unimpressed with his climate-change efforts. [Washington Post]

A green future for old buildings: Many existing buildings, especially those built before World War II, embody environmental and energy-conscious design. [Boston Globe]  

GPS and Privacy Rights: A federal appeals court in Washington, D.C., should rule that police need a warrant before putting a GPS device on a suspect’s car. [New York Times]

Heal thyself: The slow reaction by the Department of Veterans Affairs to a flawed cancer-treatment program in Philadelphia suggests an agency that would rather forget its mistakes than learn from them. [Philadelphia Inquirer]  

Afghanistan Plan C: Obama tries to think his way around the all-in-or-all-out dilemma. [Washington Post]

In El Salvador, a grim reflection, and a glimmer of hope: The president has bestowed the country’s highest honor on six Jesuit priests massacred 20 years ago, more evidence that peaceful change is possible, if slow to come. [LA Times]

India and us: South Asia is a tar pit filled with failed and dysfunctional states, save for one. [Washington Post]  

Slang from the mouths of babes [Chicago Tribune]

From vinyl to digital, my obsession lives on: Technology has made the pursuit of our pleasures much easier. But in so doing, I often wonder if it has made them less sacred. [Boston Globe]

A Luddite in the library: Search engines are all well and good, but sometimes the best place to find something is a library. [LA Times]  

Gov. races that teach: Lessons for Democrats and Republicans from Virginia and New Jersey. [Washington Post]  

Hillary Clinton: Corn tastes better in Karachi [Boston Globe]  

Michael Vick: a dog’s new best friend? The Humane Society’s arrangement with the convicted football player deserves the public’s support. [LA Times]  

Ongoing Agony of the Banks: If the federal government’s strategy to save the banks was meant to get them back into the business of lending, it has not worked yet. [New York Times]  

Suddenly, America digs farming: The Huffington Post’s ‘hot organic farmers’ and the Internet social game FarmVille may be signs of a growing interest in growing things. [LA Times]  

Democrats’ dodge on voting rights: D.C. representation in Congress isn’t being seen as the civil rights issue it is. [Washington Post]  

Block this music monopoly: Ticketmaster’s bid for a merger with Live Nation would hurt concert consumers. [Philadelphia Inquirer]  

Fitness: Marathon gripe session – Experienced runners are griping about how many slow pokes are signing up for marathons these days. [Boston Globe]  

Trust, Antitrust and Your Vote: If any one voting machine maker is allowed to dominate the market, there will be even greater reasons to worry about the vulnerability of future elections. [New York Times]  

Vaccine technology a recipe for disaster: Vaccine production relies on a time-consuming process that cannot be rushed, and therefore is completed too slowly to deal with new pandemics such as swine flu. [Boston Globe]  

A Watershed Decision: The Chesapeake Energy Corporation’s decision not to drill in New York City’s watershed is good news, but the threat has not disappeared. [New York Times]  

Food labels and unwise ‘Smart Choices’: Too many compromises — Froot Loops and Ritz Bits Peanut Butter Chocolatey Blast? — doomed a program to help consumers make nutritious selections in the grocery store. [LA Times]  

Israel must end provocative digs: The Netanyahu government should crack down on a group of extreme Israeli nationalists who are conducting provocative digs in East Jerusalem. [Boston Globe]  

The many meanings of a cross: The dispute over a cross in the Mojave points to how entangled religion and culture are. [LA Times]

The Banks Are Not Alright: While bank trading operations are highly profitable again, the part of banking that really matters —lending, which fuels investment and job creation — is not. [New York Times]

Flight of fancy [USA Today]

Switzerland’s example of universal healthcare: Its citizens receive very good medical care. Controlling costs, however, is difficult. [LA Times] 

Oh, That Account: To curb tax evasion by the wealthy, Congress must swiftly pass tax-related legislation wrapped into President Obama’s 2010 budget. [New York Times]

Antibiotic research: the kryptonite of superbugs: Drug manufacturers have abandoned antibiotic development in favor of more commercially reliable medications, particularly ones given for chronic (rather than acute) diseases. This needs to change. [Boston Globe]

Stimulus by $250 check: The government wants retirees and others to get another $250. Why? [LA Times]  

A fiscal pacifier: Treating the elderly like spoiled brats [Chicago Tribune]  

Reawaken young voters: Will the young and hopeful abandon the political playing field to older voters who are angry? [Washington Post]  

Sudan’s state-sponsored pyromania: Militias burn rebellious villages in southern Sudan. What will the U.S. do? [LA Times]  

Europe’s angst over Afghanistan: Allies have a question: Will Obama walk away? [Washington Post]

Tackling a gruesome trade: A new report suggests some necessary steps for dealing with organ trafficking, a problem that has burst into the headlines in recent months. [Philadelphia Inquirer]

A new model for news reporting: American society must take some collective responsibility for fostering a new journalism ecosystem. [Washington Post]

THE NEW Consumer Financial Protection Agency proposed by the Obama administration is needed to correct obvious flaws in the financial system and to prevent a repeat of last year’s economic collapse. . .  

To prevent the megabanks from getting around any new rules, the legislation must preserve the ability of the states to impose consumer-finance protections of their own. State attorneys general usually do a good job defending the consumer’s interest, while international financial giants have a history of getting their way with the feds. . .  

[AO: The Globe makes a great argument, except it misses one point. The House Financial Services Committee will have to do more than just "preserve the ability of the states to impose consumer-finance protections of their own. See, in 2004, federal rules were issued that basically barred states from enforcing their laws over national banks and their subsidiaries. This federal rule must be reversed as part of the process. ]

Excesses of private equity put mattress firm on death bed: The government should adjust the federal dividend tax rate to give buyout firms an incentive to stay invested in companies longer, rather than quickly ducking out after paying their investors. [Boston Globe]

How many soldiers? Political opponents of President Obama are trying to convince the public that he is retreating from his stated goal to stop Afghanistan from again becoming a base for terrorists who target the United States. [Philadelphia Inquirer]

Making the case for a ‘public option’ [Chicago Tribune]

The Baucus Conundrum: The Baucus health care bill has weaknesses, but a version of it is likely to pass, so members of Congress should get engaged and fight to make it better. [New York Times]

Taxing ‘Cadillac’ plans [Chicago Tribune]

Waste Not, Want Not: The Key to Reducing Costs [Washington Post]

Another Kind of Foreclosure Crisis: The foreclosure crisis is exacerbated by a shortage of lawyers for at-risk homeowners. Lawmakers need to provide money and legislation to make legal options more accessible. [New York Times]

Same old, same old for women on the verge: Any day now, women are expected to overtake men in the American workforce. Sadly, the wage gap hasn’t closed. Women working full time now make 77 cents for every dollar men earn, which is just about where the ratio was in 1993. [Boston Globe]

The price of overdraft protection: Consumers may not realize they’re using the short-term loans, which can run up substantial fees. [LA Times]

The Texas two-step on gay divorce: One of the strange side effects of the patchwork of gay-straight laws governing marriage is their impact on ending marriage. And there is something charming about watching conservative politicians in Texas trying so ardently to preserve one same-sex marriage. [Boston Globe]

Why We March: Let’s no longer pretend that civil rights do not include rights for lesbian, gay, bisexual and transgender Americans. [Washington Post]

The Uneducated American: Education in America, suffering for years, is about to get much worse thanks to cuts caused by the financial crisis. [New York Times]

Distinguishing bad pictures from bad acts: By Craig Green This week, the Supreme Court heard oral arguments in what could be a landmark free-speech case, United States v. Stevens. Like most free-speech cases, Stevens involves expression that is easy to dislike. [Philadelphia Inquirer]

Protect the Atlantic bluefin tuna: Commercial overfishing has slashed the population of this ocean giant. [LA Times]

Benefits of swine flu vaccine greatly exceed the risks [USA Today]

The Law and Silvio Berlusconi: By overturning a law granting Prime Minister Silvio Berlusconi immunity from prosecution, Italy’s high court made a decision that is good for Italian democracy. [New York Times]

End the Honduras standoff: Prolonging the crisis does nothing but push the country closer to instability and economic problems. [LA Times]