Banking's Bigwigs Called to Carpet as Obama Prepares New Bank Tax

Four prominent Wall Street executives testified on Capitol Hill yesterday (Wednesday) about errors they committed during the financial crisis. But no amount of contrition or case making will be able to spare the financial services industry from the wrath of public opinion and a new tax to be imposed by President Barack Obama.

The bigwigs from Goldman Sachs Group Inc. (NYSE: GS), JP Morgan Chase & Co. (NYSE: JPM), Morgan Stanley (NYSE: MS), and Bank of America Corp. (NYSE: BAC) were called on yesterday (Wednesday) to explain themselves to the U.S. Congress' Financial Crisis Inquiry Commission (FCIC) - the ten-member commission appointed with goal of investigating the causes of the financial crisis.

"Over the course of this crisis, we as an industry caused a lot of damage," Brian Moynihan, chief executive of Bank of America, said before a standing-room only crowd in the House Ways and Means Committee room, The Wall Street Journal reported.

Morgan Stanley Chairman John Mack admitted "many firms were too highly leveraged, took on too much risk and did not have sufficient resources to manage those risks effectively in a rapidly changing environment."

However, the executives also defended their firms' actions. Goldman Sachs Chairman and CEO Lloyd Blankfein pointed to artificially low interest rates and the promotion of homeownership as "broad underlying factors" contributing to the financial crisis.

And BofA's Moynihan warned against limiting the size of banks and legislation to separate consumer and investment banking like the Glass-Steagall Act that was overturned in 1999.

"Those arguing for a return of Glass-Steagall are effectively arguing that Bear Stearns was a more stable entity than JPMorgan Chase," he said. "I don't see how that is tenable."

Still, no amount of posturing will be able to gird financial services against public outrage that is expected to come with the announcement of fourth-quarter and full year earnings, which are expected to yield record breaking profits and millions of dollars in year-end bonuses.

"People are angry. They have a right to be. Acts of God will happen. These were acts of men," said Phil Angelides, Chairman of the Financial Crisis Inquiry Commission.

It's that anger that President Barack Obama is using as justification for a new tax on financial institutions, which is meant to offset taxpayer losses stemming from the Troubled Asset Relief Program (TARP) and help reduce the deficit. The president is scheduled to announce the new tax today (Friday), with the full details appearing in the fiscal 2011 budget that will be submitted to Congress next month.

What banks will be charged, how much those banks will have to pay, and when will they be required to pay are all questions that have so far been left unanswered. But early reports indicate that 20 of the largest U.S. banks will be affected.

One option under consideration involves placing a fee on a bank's liabilities, a number that theoretically represents the amount of risk a bank takes on.

The only thing that's certain that Obama & Co. won't have a hard time selling the new tax to the American public.

"The politics on this is really quite easy," Doug Elliott, a fellow at the Brookings Institution in Washington and a former managing director at JPMorgan Chase & Co. told Bloomberg. "The public would be supportive of anything up to shooting and burning the bankers."

Analysts say earnings at financial companies rose 120% in the fourth quarter, accounting for all of the income increase in the Standard & Poor's 500 Index, according to a report by Bloomberg News. According to the report, analysts are more bullish on financials than any other sector, with earnings expected to triple by 2011 to $19.51.

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