Banks’ windfall tax

Banks’ windfall tax

Governments have spent more than 12.5 trillion dollars trying to rescue the banks from themselves and the global economy from a 1930’s style depression.

They may have been a bit slow of the mark trying to get to grips with the issue, and there certainly have been some mistakes none bigger than former U.S. treasury secretary Henry Paulson’s decision to let Lehman Brothers collapse. But they did step in. And there certainly are signs the economy may have hit the bottom.

Investment banks in the first quarter certainly came up trumps, beating the markets best guess on their earnings.

Losses were not bad as many thought at Citigroup ($966 million) or Morgan Stanley ($578 million).

In the first three months of this year Goldman Sachs ($1.66 billion), JP Morgan Chase ($1.52 billion), Credit Suisse ($1.71 billion) made respectable profits.

Is it time to pay for the clear up? Should governments slap the banks with a windfall tax?

Not yet but the clarion call will rise as banks put the past firmly behind them. The profits in the first quarter benefited from volatile bond markets. That won’t last but perversely the banks that caused a tsunami of debt will benefit from fees as governments sell bonds as they print more money.

Governments are reaping some benefits as their holding of preferred stock entitles them to dividends.

But should shareholders – ordinary, pension, hedge funds – lose their entitlement? Not a wise thing as our future pension funds – for us who are lucky enough to have them — will be further depleted. Many have been hammered by falling stock markets.

Banking write downs and losses are expected to rise by another 400 billion dollars, according to J.P. Morgan Securities, and could hit 1.3 trillion dollars.

But as soon as the banks become profitable quarter after quarter – governments will claw back money to reduce their massive budget deficits.

As John Terrett mentioned in his blog Friday, investment banks Goldman Sachs, JPMorgan Chase and Morgan Stanley want to repay $45 billion dollars they received from the U.S. government’s Troubled Asset Relief Program.

And now it appears that the British government has started hawking its stakes in Lloyds Banking Group and Royal Bank of Scotland to investors, including sovereign wealth funds.

- Abid Ali, Business Editor