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Editorial: Sticking it to banks

President Obama's proposal to tax bailed-out banks offers taxpayers a momentary thrill of retribution, but it's not likely to change Wall Street's risky behavior.

President Obama's proposal to tax bailed-out banks offers taxpayers a momentary thrill of retribution, but it's not likely to change Wall Street's risky behavior.

The fees would be imposed on about 50 of the largest banks, based on their liabilities. Among the targets are Goldman Sachs, Bank of America Corp., and Citigroup Inc. - firms with assets of more than $50 billion.

The administration says the tax would raise at least $90 billion over the next 10 years. It would ensure, the president argues, that taxpayers are made whole for the government's $700 billion bailout of Wall Street firms during the near-meltdown of 2008.

It's especially tantalizing to stick it to big banks in light of their return to handing out unconscionably high bonuses. The top 38 firms are expected to award executives about $145 billion, which would top the record year of 2007. So it's not as though the banks can't afford it.

Some banks are requiring their executives to take bonuses only in stock shares, to show the government that they are reducing the incentives for behaving recklessly.

But the administration's proposal for a broad tax on banks is flawed because it aims mainly at public perception rather than policy. "The perception has been we weren't tough enough" on Wall Street, said Sen. Bob Casey (D., Pa.), who generally supports the president's plan. "It helps in terms of that perception."

That's a diplomatic way of saying that this idea is more about scoring political points in an election year, rather than compelling Wall Street to change its ways.

As for the argument about recouping bailout funds, big banks have been repaying the bailout money with interest. Among the biggest recipients of bailout funds were JPMorgan, Citigroup, Wells Fargo & Co., Bank of America, Goldman, and Morgan Stanley. All but Citigroup have repaid the money.

The outstanding losses are mainly at companies such as General Motors, which isn't likely to pay back the government. Banks might respond to this tax by curtailing lending, or passing the tax on to consumers in the form of higher fees.

Wall Street does deserve tough medicine from the government, in the form of more thorough regulation. It's unacceptable that firms such as Goldman Sachs were selling mortgage-backed securities to investors, then betting those securities would drop in value.

Phil Angelides, chairman of a federal commission investigating Wall Street, correctly likened Goldman's scheme to "selling a car with faulty brakes, and then buying an insurance policy on the buyer of those cars."

The solution is to provide financial regulators with better tools to prevent banks from taking on too much risk. Banks invited tougher regulation when they asked taxpayers to rescue them.

Another worthy idea is the president's proposal to create a stand-alone consumer protection agency for investors to monitor Wall Street. It would examine large banks and write new rules for any firm offering financial products. But this proposal reportedly is in trouble in the Senate.

Perhaps the threat of a special tax on banks will get Wall Street to stop resisting the greater regulation that is really needed.