Let's Tax Wall Street Out of Business?

December 14, 2009

I recently published a blog, The EU's Tax-And-Spend Plan: Noah's Umbrella http://www.brokeandbroker.com/index.php?a=blog&id=276, in which I criticized the European Union's plan to impose a transactional and bonus tax on the financial community.  In language that I thought was pretty clear and blunt, I said:

Having caused much of the present carnage, there seems some fairness in asking the world's banks and brokerage firms to chip in their fair share towards the rescue effort. Nonetheless, my concern isn't so much with the levy proposed by the EU but with the use of the funds so derived. . .

As such, my initial concern about the EU's proposal is that the collected funds will be earmarked for government (and international organization's) coffers - and will likely be foolishly spent on White Papers, blue-ribbon panels, seminars, and, worse, will inevitably serve as payoffs to cronies and corrupt officials. Sadly, this is an international affliction.  

I have long advocated the creation of a Fraud Fund to fully compensate victims of provable Wall Street fraud.  As I noted in the above cited blog:

In my September 2009 Forbes column: We Need a Wall Street Fraud Fund, http://www.forbes.com/2009/09/11/commentary-singer-fraud-intelligent-investing-fund.html,  I stated:

One proposal I urge is the creation of a Fraud Fund through which defrauded investors would be able to obtain full payment for their losses. And please note that I'm limiting this fund to repaying victims of fraud, not those who made foolish bets or lost money after taking a calculated risk. Victims of fraud--particularly fraud that should have been detected earlier by Wall Street's regulators--deserve more from Wall Street than its pity.

I would create a multibillion-dollar restitution fund for all Wall Street victims of proven fraud. You could impose a fee on all trades and public offerings, and add an annual fee on all Wall Street firms. As to Sen. Schumer's proposal, I would redirect it. I would take all of the SEC funding he has included in his proposal and earmark those dollars for the Fraud Fund. After all, what would most defrauded investors prefer? Would they prefer knowing that the SEC has spent its fines and fees on expanding its ranks or that those same dollars are now the ultimate guarantor of America's financial markets? I think restitution will trump lousy regulation every day.

Alas, sometimes clarity ain't what you think it is.  

Shifting the Burden: The Politician's Shell Game

Notwithstanding my best efforts to underscore my opposition to both the pending EU and US proposals to impose transaction and bonus taxes on the international securities industry, some readers found a somewhat different message.  One writer sent me the following email:

Bill,

While your proposal for a fraud fund is noble, the tax ideas you offer to fund it hit traders and public rather than the companies engaging in the fraudulent practices. A per-trade tax or a tax on IPOs will simply be passed through to traders or firms going public.

[Ed: Redaction of identity] [T]he SEC tax already imposed on each trade is a huge burden on our firm since we trade higher volumes relative to our income. In the past couple years the SEC tax on trades has moved from under $5.60 per $1 million to $25.70 per $1 million. How many firms can operate with a tax system that can change by 500% with 30 days notice?

Under your funding scenario, a fraud fund designed to reimburse customers in the event that their brokers or research firms defraud them would be funded to a large extent by firms that have no customers (daytraders, hedge funds) and by the customers themselves (through the trading tax). Brokerage houses doing only customer business (the most likely violators of fraud statutes) would pay nothing.

Senator Harkin is already planning to introduce transaction tax legislation in congress designed to make "Wall Street" pay. At the suggested .25% rate, the tax would be $250 on a 1000-share trade in a $100 stock. We charge our traders a commission of $6 on that trade and the SEC charges $2.57. You know the industry, please don't encourage these congressmen who have no idea of the impact of their pandering schemes.

That being said… Keep up the good work on your blog, I read it all the time and it is very enlightening for anyone that has to operate under FINRA/SEC.

Sincerely,

[Ed: Redaction of identity] 

The above letter points to the shell game that is behind the imposition of the proposed blanket taxes.  The writer fairly criticizes the effort to place the blame on too-big-to-fail but to place the reform burden on those who have already been victimized by failed regulation and unbridled risk.

I too believe that any tax imposed upon the securities industry for the remedial purposes stated in the EU and US proposals should fall proportionately upon the firms and market sectors responsible for our present crisis. Unfortunately, the proposed blanket transaction tax punishes many public traders who had no role in creating the Great Recession.  Those financial interests that packaged and marketed the subprime and other toxic assets are not targeted by such a tax, and that results in an unfair shifting of responsibility and burden.  How are the too-big-to-fail punished when we ask public investors to pay for the reforms? How does Main Street benefit from a marketplace where investors' dollars are diverted from their profits and losses and into the bottomless public coffers of government bureaucracies? 

Consequently, I concur with the writer's concerns and pointedly reject any revenue-raising effort that allows Congress to place its crosshairs on the backs of public investors or small businesses.  Moreover, I also reject any effort to impose new or higher taxes for the purpose of funding yet another big-Government slush fund that will somehow, some day, be used to come to the aid of a beleaguered Main Street.  We all know that such funds will never find their way to Main Street in any meaningful fashion.  That is why I have called for the creation of a Fraud Fund -- at least the dollars used to create and maintain such an indemnification vehicle will be put to a fair and proper use.

Another writer, sent me a brief but to the email: "This tax is a deal killer for all trading firms write your congressman and smash this before they can enact!" Attached to his message was a recently issued notice from Penson Financial Services, Inc., a clearing firm. In part, Penson's Notice states:

09-12-08 - Compliance Notice

December 11, 2009

Proposed Securities Transaction Tax

Attached is an important article published by the Bureau of National Affairs (BNA) that provides a brief overview related to proposed legislation intended to create a tax on securities transactions. The legislation, called H.R. 4191 - Let Wall Street Pay for the Restoration of Main Street Act of 2009, would impose transactions tax of 0.25 percent on stock transactions, 0.02 percent on futures, swaps, and credit default swaps, and options at the same rate as the underlying asset. Exemptive relief will be available via an unknown refund mechanism for smaller investors and certain tax-deferred vehicles (e.g. IRA's). 

This proposed legislation may lead to significant adverse impact on the securities industry and investors. Increasing execution costs of an individual trade may greatly increase the cost of doing business for the essential liquidity providers on U.S. stock, options and futures trading venues. Further, such increase in transaction costs will likely result in a ripple effect across our industry in many ways, including: 

1. Significant decreases in liquidity and volumes 

2. Widening of spreads resulting from reduced liquidity 

3. Driving trading activity offshore in avoidance of this tax 

4. Threatens the US economic recovery by putting US companies at a financial disadvantage to overseas competitors 

5. Actually taxing the small investor on Main Street, the very people the Act is supposed to help 

Penson Financial Services, Inc. wanted to make you aware of this potential threat to our industry and to your business, and suggests that your firm and employees write your respective Congressional delegations. To facilitate your letter writing, the Security Traders Association has provided an easy method to make contact with your legislators should you want to oppose this bill. This process takes less than one minute to complete as the letter has already been written for you. 

To accomplish this, simply follow these instructions: 

1. Go to www.securitytraders.org 

2. Click on the link to STA Trader Advocate (look for the ‘Eagle' in the bottom right corner) 

3. Click on the Action Alert - Proposed Transaction Tax-H.R. 4191 

4. Enter your zip code 

5. Indicate Senators and Congressman 

6. Finish as instructed

Thank you,

Penson Financial Services, Inc.

Again, let me respond directly to the second commentator and Penson's Notice. First off, I have to cringe when I see such nonsense as a law titled: Let Wall Street Pay for the Restoration of Main Street Act of 2009.  It's yet more demagoguery at a time when we need less of such rhetoric.  Now, more than ever, we need pragmatism and sensible solutions.  To be fair, I also find much of the language in the Penson Notice to be over the top.  I doubt that the ill-considered transaction tax will put the final nail in Wall Street's coffin, but I do share the overall belief that transaction taxes will disproportionately hit smaller investors -- and I'm not quite sure I understand why the small fry should be punished for any of Wall Street's recent incompetence, fraud, and crimes.  There are more than enough faces and names to put to the misconduct.  It shouldn't be that difficult to effectively and efficiently place the blame, and then send the bill to those so designated.  

Final Thoughts

For example, how about we impose a tax upon banks that charge outrageous fees and credit card rates? How about we impose a bonus-tax of sorts upon all contributions to elected officials?  How about we cap the salaries paid to self-regulators and place a bonus tax upon their excess compensation?

Ultimately, it's time to adopt remedial measures that will punish those who pushed us to the brink AND will result in meaningful reform and relief.  The calls for blanket transaction or bonus taxes may be commendable on some levels and may even have merit -- but the easy part of this phase of things is to point an accusatory finger at the monster of Wall Street and to whip the villagers into arming themselves with pitchforks and flaming torches.  Unfortunately, while the villagers are burning down the castle and killing the monster, the politicians will be stealing into town, breaking into the bank vault, and looting every last cent.  

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