An article on the Bloomberg wire sheds some additional light on the "Goldman Tax" suggested by the Wall Street Journal and discussed in an earlier post here today. The wire reports: "The FDIC will propose slapping fees on the biggest bank holding companies to the extent that they carry on activities, such as proprietary trading, outside of traditional lending....The fees would go to a reserve fund for rescues of bank holding companies, modeled on the FDIC's deposit-insurance fund....The Treasury's plan would tax financial firms only after bailouts occurred, reflecting concern that a pre-funded bailout reserve would worsen moral hazard, making the firms confident of a rescue in case their bets go wrong."
One distinction that will be important to draw is between a voluntary insurance program and a mandatory one. With government programs, voluntary assistance has a way of becoming mandatory, and the government has a lot of power in setting the terms, even retroactively (see here and here for the case of Wells Fargo). Another distinction is the one between prospective and retrospective. Will this tax apply to firms that were already bailed out back in the Bush administration? Or only in future bailouts, in which case, announcing that there will be future bailouts would seem to undermine the concerns about moral hazard.
