Tuesday, January 19, 2010

Implications of the Proposed Bank Tax or Financial Crisis Responsibility Fee

■ President Obama introduced a new “fee”/tax on financial institutions. The “Financial Crisis Responsibility Fee” will apply to more than 50 bank holding companies, thrifts, brokers and insurance companies with more than $50Bn in assets. The fee is designed to recoup the costs of TARP by penalizing larger institutions who have benefitted the most from government
assistance (and who rely upon borrowed money). The fee is not yet enacted and could be modified or watered-down as it goes through the legislative process. However, the populist nature of this fee may make it hard to vote against it.

■ On a median basis, we estimate that the proposed fee would negatively impact ‘11 EPS estimates by approx. 4% for the group (less on normalized EPS). We are updating the EPS impact of the bank fee proposal as it appears that the fee will be tax-deductible (refer to Exhibit 1). We project that large cap banks and brokers are most negatively impacted, with a more muted impact on insurers (other than AIG) and regional banks. In general, its our view that this proposal is most punitive to the newlyminted bank holding companies. In the wake of the crisis, certain companies applied for bank holding company status and are now under the oversight of
the Federal Reserve and subject to the fee. There is a more significant impact on the broker-dealers given their relatively smaller deposit bases, but we see more potential offsets (i.e., variable comp, capital/liquidity levels, pricing). Specifically, given our current understanding of the proposal and based on ‘11 consensus expectations, we expect the tax to reduce EPS by
about 6% for GS and 13% for MS. Of the large banks, Citi (due the size of its balance sheet and depressed earnings levels) is the most negatively impacted (est. 14% of ‘11 EPS). In general, we est. that the top 10 financial firms represent approx. 70% of the ’10 annual proposed fee.

From the perspective of Washington, this bank fee proposal fulfills several purposes. Firstly, the fee serves to further “charge” the financial industry for the extraordinary actions taken by the government to stabilize the financial system. Secondly, the fee will help the government recoup
expected losses related to the TARP program. The fee will generate an estimated $90bn over the next 10 years which will offset the Administration’s est. cost of the TARP program of $117bn. Although, we note that the bulk of the loss is expected from the AIG and auto companies, not the banks. Thirdly, the proposed fee will be applied to the debt of the largest institutions
(financial firms with over $50bn of assets) which is aimed to be a deterrent to excessive leverage and consequently burden those companies with outsized debt positions.

Continued on next page

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