http://www.ritholtz.com/blog/2010/01/tbtf-tax/

Yesterday, the news broke about a tax on the large banks — it was ostensibly designed to close the deficit. Instead, I’d like to rename it the Too Big Too Fail Tax (TBTFT).

What I found interesting about the tax is the somewhat misleading way it has been premised — namely, that it is payback for all of the Non-TARP subsidies the banks have been enjoying at the expense of the taxpayers. Further, went the MSM narrative, such a tax at a time of populist outrage over big bonuses is a slick political move calculated to assuage the angry masses.

I am not sure how clever the Obama brain trust is — so far, the answer has been “Not very” — but there is an opportunity here for a third basis for this tax. Let’s call it the TBTF tax.

A brief explaination:

So far, we have learned that Wall Street has become impervious to regulation. Our Parliament of Whores is bought and paid for, well greased by the Street’s lobbyists. Wrap your lips around this big purple legislation and suck. Even the most benign regulation — i.e., a basic disclosure of mortgage costs relative to a plain vanilla, 30 year fixed — has been thwarted.

When lobbying prevents even the most simple of consumer disclosure legislation, you have a broken political system. Such failures can only occur when a democracy has been lost — when corporations own Congress, when the will of the electorate is ignored, when money has utterly corrupted the political process. Have no doubt about this: Our experiment in Democracy is nearly over; we have morphed into a Corporatocracy – a government by and for large corporate interests. Let’s pray it is only temporary.

Pushing regulation through the front door may have become impossible due to this corruption; However, a TBTF tax can be passed because it raises money to close the deficit. It will be difficult to vote against, given all the undirected anger against banks and wall street during big bonus time.

And, here’s the interesting part: It could potentially do more than reduce the deficit — if it goes far enough, it could actually solve the TBTF problem. Exempt small regional banks with under $25 billion in deposits. Make the tax progressive so it become increasingly larger as deposits become greater. $25-$50 billion in deposits is one fee (Let’s say 0.1%, that’s $25 million on $25 billion in assets). Have it scale to the point where its punitive — 1% on a trillion dollars in deposits.

The goal here isn’t to raise money — its to force the TBTF banks to become smaller — to break up the Citigroups and the Bank of Americas. This tax will restore competition to the banking industry.

These jumbo firms are the ones that can and will bankrupt the FDIC; They are the ones that put the entire system at risk. The bailouts reduced competition for them, and allowed a concentration of power that has been unprecedented.

Penalize them.

It could in theory appeal to both parties out of a sense of self-preservation: The GOP recently rediscovered the evils of Deficit Spending (now that they don’t control the White House); Democrats (excepting Clinton) tend to be big tax & spenders, and have usually paid mere lip service against the deficits. But a TBTF Tax could have bi-partisan appeal.

If we as taxpayers are on the hook for past and future excesses of bankers, we have the right to a) protect ourselves and 2) exact a payment, both after the fact and in anticipation of the next crisis.

Despite the theatrics we are likely to see today from the Financial Crisis Inquiry Commission hearing, there is a possible solution. If our broken Congress cannot regulate the Too-Big-To-Fail banks, at the very least, we can tax the hell out of them.