Canada right to oppose international tax on banks

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The Gazette, Sunday, April 25, 2010

There is no shortage of bad ideas for reforming the financial services industry, but the worst one is the call for a worldwide bank tax.

This was put forward last year by British Prime Minister Gordon Brown, who euphemistically styles it a "global financial levy." Then the other day the International Monetary Fund proposed a financial-activities tax, or as the New York Times called it, "its splendidly named FAT tax."

This was on the eve of the annual IMF-World Bank annual meetings in Washington, with G7 and G20 finance ministers meeting on the margins of it.

The IMF proposal, in response to a request from the G20 for recommendations on how to prevent another meltdown and bailout of banks, effectively proposes a contingency fund in two parts. The first part of the IMF report recommends establishing a financial-stability contribution under which financial institutions would be charged at a flat rate against their liabilities. And the second part, the FAT tax, would be straight up tax on bank profits and executive compensation and bonuses, such as the $20 billion Goldman Sachs paid in bonuses to employees last year in the wake of the $700-billion bailout of Wall Street.

The G7 finance ministers met at the Canadian embassy on Thursday night, and by all accounts it was a lively discussion. Basically, the Europeans - the British, French, Germans, and Italians, are all in favour of a bank tax. The Japanese, the Americans, and the Canadians are opposed. The Japanese are characteristically polite about it; the Americans are tight-lipped, because no one in the Obama administration has a good word to say about the banks; and only the Canadians are outspoken in their opposition to the idea.

Finance Minister Jim Flaherty, who hosted the evening at our splendid chancery on Pennsylvania Ave., did not mince his words before the meeting.

"We are a sovereign country," he said, "we can regulate our banks and financial institutions as we see fit."

He went on: "As finance minister, I'm not going to impose a tax on our banks that performed well during the financial crisis. It seems to me a very odd thing to do - to punish our banks that got the job done adequately."

Just so. And since Canada has the chair of the G8 and G20 this year, we have something to say about the agenda of the June heads of governments meetings in Muskoka and Toronto.

In this, Flaherty is fully supported by Bank of Canada Governor Mark Carney, who points out there is no "one size fits all" approach to the problem. The heads of the Big Six Canadian banks also put out a letter supporting Flaherty's position.

In the end, the G8 and G20 may end with a compromise measure with each country deciding whether to come in. The idea for a global bank tax raises a flurry of questions. Who would administer it? Who would enforce it? Who would collect it? And where would the money be held, or rather, invested?

Well, certainly not in financial derivatives, which Warren Buffett once called "financial weapons of mass destruction."

As Barack Obama put it in a speech in New York on Thursday: "Part of what led to this crisis was firms like AIG and others who were making huge and risky bets, in ways that defied accountability, or even common sense. In fact, many practices were so opaque, so confusing, so complex that the people inside the firms didn't understand them, much less those who were charged with overseeing them."

That's about to change in the financial-services reform bill that will be called to the floor of the U.S. Senate tomorrow. Among other things, it would establish a derivatives exchange, where there would be transparency of buyers and sellers. Initially opposed to the bill, the Republicans are now saying they will support some version of it, a very different tune from the one they sang on health reform, which not a single Republican in either the House or the Senate supported.

To come back to Flaherty's opposition to a bank tax, the fact of the matter is that the Canadian banks never engaged in the kind of practices that culminated in the $700-billion emergency bailout of the U.S. banks in 2008. These same practices led to the synchronized global recession of 2009.

The Canadian banks didn't need a bailout, never missed dividend payments, never stopped lending, never lost the confidence of their customers, and never paid obscene executive bonuses.

Moreover, Canadian banks and the housing regulator require a down payment on a mortgage. It was the mortgage-with-no-down-payment policy that finally burst the housing bubble in the U.S. in 2007, which ultimately led to the financial crisis of 2008.

They can write as many regulatory rules as they like for financial services, but nothing beats the rule of common sense. There is no such thing as a free house.

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