Endgame, Redux: Bank Tax Out, Higher FDIC Premiums In

WASHINGTON — In an emergency session to salvage wayward votes and put regulatory reform legislation back on track, House and Senate conferees agreed late Tuesday to strip a proposed bank tax from the bill and add other budget offsetting mechanisms in its place.

The final reform bill would immediately terminate the Troubled Asset Relief Program fund and require large banks to pay higher deposit insurance premiums.

The modified conference report was approved again on party lines by conferees from both chambers, but it remained doubtful that the Senate would be able to consider the bill before adjourning for recess early this week for memorial services for the late Sen. Robert Byrd.

Banking Committee Chairman Chris Dodd told reporters after the conference concluded for the second time that he had vetted the changes with dubious senators and believed he now had the 60 votes needed to move the bill to final enactment in the Senate.

"This is again trying to find the votes," said the Connecticut Democrat. "This pay for is something that I vetted with my colleagues to determine that they were going to be for it. Obviously, until they actually cast the vote you never know."

Dodd said that he would "leave it up to the leadership whether or not there is going to be a vote by the end of the week. My own conclusion is probably doubtful in light of the services for Sen. Byrd… I had hoped to complete it before the July 4th break but if that's not possible and people want a few more days to digest it the leader has certainly told me that this would be the first priority upon our return."

After weeks of fits and starts on the reform bill, all issues had appeared to be settled last week when the conference approved the final legislation. But Sen. Scott Brown, R-Mass, raised objections to the proposed bank tax, which would have required the Federal Deposit Insurance Corp. to collect $19 billion from financial companies with more than $50 billion of assets. Brown's vote was considered key since he was one of only four GOP lawmakers to vote for the Senate bill.

The death of Byrd on early Monday further obscured the fate of reform, with Democrats lacking the votes to push forward without keeping Brown's support or enticing two defectors to support the final legislation.

By late Tuesday, conferees appeared to solve the problem by removing the bank tax and adding another way to pay for the costs of the bill.

Under revised langauge, the reform bill would abruptly halt any Troubled Asset Relief Program programs and require the Federal Deposit Insurance Corp. to raise reserves.

Dodd said the Tarp provision, which effectively ends the Tarp three months early on June 25, would save approximately $11 billion, helping to defray the projected $19 billion cost of the bill over the next 10 years. To make up much of the rest, the committee also included a provision that would raise premiums on banks with more than $10 billion of assets.

Currently, the FDIC must maintain a ratio of reserves to insured deposits of 1.15%, but conferees agreed to raise that level by 20 basis points, to 1.35%. To protect smaller banks, the new proposal would say that institutions with assets of less than $10 billion should not bear the cost of increasing the reserve ratio.

"This will hold small banks harmless," Dodd said.

During the debate, Dodd tried to bolster his case for raising the reserve ratio by pointing to a letter sent Tuesday from FDIC Chairman Sheila Bair on the issue.

"The reserve ratio needs to be increased," she wrote in the letter to Frank and Dodd. "A further increase to 1.35% is consistent with our view that the fund should be built up in good economic times and be allowed to fall in poor economic times."

Although the intent of the proposal is clear — large banks should pay the cost of raising the reserve ratio — exactly how that would work in practice was left unknown.

"I'm not sure what that means," said Jim Chessen, the chief economist at the American Bankers Association. "This is some attempt — without any definition — to try and minimize the impact on small banks, but it's completely unclear how that will be accomplished, if at all."

John Douglas, a partner at Davis Polk & Wardwell and former general counsel at the FDIC, agreed that "it's really very hard to figure out how you might do that."

Bert Ely, an independent analyst in Alexandria, Va., said the provision would effectively force the FDIC to keep two sets of books for large and small banks.

"It's easy to figure out what the total size of the fund should be, but how do you determine what the rate should be for two different tiers of institutions?" he asked. "How do you determine how much the big guys pay relative to the small guys? The amendment as it now reads provides no guidance on that."

The final regulatory reform bill had already given the FDIC a freer hand to charge large banks more. It would require the agency to determine assessment rates based on asset size, rather than level of deposits, a move that would cost most large firms, which rely less on core funding, to pay higher premiums.

The bill also removed a statutory prohibition that said the FDIC could not charge a bank a higher assessment just because it was bigger.

Republican members of the conference committee were outraged by the new language and repeatedly hammered their argument that the budgeting mechanism made no sense.

"It appears to me that Chairman Dodd is proposing a budget gimmick to expand deposit insurance in order to get a better score from [the Congressional Budget Office] over a limited time frame," said Sen. Richard Shelby, R-Ala.

"Deposit insurance, if it truly is insurance, it does not create resources…. I do not believe we have adequate information about these budgetary numbers. This bill has become, I believe, all about politics and budgetary smoke and mirrors and not about sound financial regulatory policy or taxpayer protection."

Sen. Judd Gregg, R-N.H., said money in the DIF should be used to pay for bank failures and protect depositors, not fund the reform bill.

"I find this to be unconscionable, misleading and inappropriate," he said. "It's impossible to spend the money twice unless you are in the United States Congress. This is fraud on the American taxpayer."

Others were angry about using Tarp money for the reform bill rather than paying down the deficit, as originally required by the legislation that created the program.

Speaking during a break in the conference, Sen. Mike Crapo, R-Idaho, said the new provision was just as bad as the bank tax.

"This so-called pay for is pure smoke and mirrors and is incredibly disingenuous on a two-budget level in a way that the American people will see right through," Crapo said in an interview. "And so I don't see how this would help convince someone who did not support the previous pay for that this is better... I don't see how going into this kind of maneuvering could cause someone to want to change their vote in comparison to the previous pay for."

House Financial Services Committee Chairman Barney Frank said that he preferred the special assessment on large banks, but supported the new provision in order to enact the bill.

"I preferred it our way," he said. "I continue to be surprised. Frankly I'm being caught in the middle of an intra-Republican debate here because the proposal was worked out with Sens. [Olympia] Snowe, [Susan] Collins and Brown. So the criticism by the Republican senators was at a provision aimed at satisfying Sens. Snowe, Collins and Brown."

He said ending Tarp early made sense.

"There is money to spend on the Tarp that is not yet spent -- this takes that away," he said. "What CBO is apparently saying is that if the federal government spent that money on the Tarp, this is the percentage of it that we think would not be repaid - that's how they got to $11 billion. Now it is true theoretically under our bill, Tarp money not repaid has to be recovered by the financial industry, but it looks like the Republicans have sided with Goldman Sachs and Citicorp - that they shouldn't have to do that."

Community bank representatives also appeared supportive of the deal.

"ICBA believes the conferees have come up with a constructive solution to the need to increase revenues under the Dodd-Frank bill," said Steve Verdier, chief lobbyist for the Independent Community Bankers of America. "The largest institutions will still be responsible for the funding and — under this plan — the additional money will go directly in the Deposit Insurance Fund, where it can do the most good."

The ABA remained staunchly opposed, arguing the Deposit Insurance Fund had been hijacked for political purposes. "This is a tax by another name, plain and simple," Chessen said. "This is going to be an avenue for the government to fund any programs in the future. It's an absolutely horrible precedent."

Other analysts agreed the higher reserve ratio was essentially the same as charging a bank tax.

"If bigger banks have to pay higher premiums for deposit insurance, that's a tax," said James Barth, a Lowder eminent scholar in Finance at Auburn University and a senior fellow at the Milken Institute. "You can do it indirectly through the Deposit Insurance Fund or you can do it directly and call it a tax, but you've heard the old analogy: If it walks like a duck and quacks like a duck, it's probably a duck."