What Was the Financial Crisis Responsibility Fee?

The Financial Crisis Responsibility Fee was a proposed federal tax put forward by President Barack Obama in 2010. The tax would have been imposed on financial firms that received money from the Troubled Asset Relief Program (TARP) in order for the government to recoup every dollar spent on bailing out companies during the 2008 financial crisis. The fee, however, was never enacted.

Key Takeaways

  • The Financial Crisis Responsibility Fee was a proposed tax legislation put forth by President Obama in 2010 in order to recoup the money spent on bailing out Wall Street firms during the 2008 financial crisis.
  • The money used to bail out financial firms was distributed under the Troubled Asset Relief Program (TARP) in the amount of $117 billion.
  • Certain companies were to be taxed every year for at least 10 years or more until the TARP bill was paid back in full.
  • The goal was to prevent having taxpayers pay for the bailout and to avoid an increase in the government's deficit; however, the tax was never enacted.

Understanding the Financial Crisis Responsibility Fee

The Financial Crisis Responsibility Fee was part of President Obama’s budget proposal in 2010. It was intended as a way to recover the government’s investment in the financial system bailout. Under this proposed tax, the government would have taxed the largest financial firms that were considered to be at the root of the 2007-2008 financial crisis.

The proposed tax would have been levied on about 50 banks that each had $50 billion or more in consolidated assets, and would have charged them $9 billion per year for at least 10 years. The fee would have applied both to domestic firms and U.S. subsidiaries of foreign firms. It was estimated that 60% of tax revenues would be paid by the 10 largest financial institutions.

According to the proposed tax, if implemented, the government would have levied the tax until the United States recovered the costs from stabilizing Wall Street during the financial crisis through TARP. When President Obama proposed the Financial Crisis Responsibility Fee in January 2010, the government estimated that TARP would, by conservative estimates, cost $117 billion.

The goal was to prevent taxpayers from having to bail out Wall Street firms and to avoid growing the government's deficit. The money generated from the tax would be collected by the Internal Revenue Service (IRS) and then allocated to the government's budget deficit.

Obama was determined to see this regulation pass, particularly in what he saw as the continued excess wealth of those responsible for causing the financial crisis when compared to the average American taxpayer, whose tax dollars were used to bail out the financial institutions responsible for the crash. However, the proposal ultimately never passed into law.

The Troubled Asset Relief Program (TARP)

TARP, which was signed into law in October 2008 as part of the Emergency Economic Stabilization Act, was a response to the global financial crisis. 

TARP was a group of programs created and run by the U.S. Treasury Department that were intended to stabilize the country’s financial system, restore economic growth, and address the subprime mortgage crisis.

The government did this by buying troubled companies’ assets and equity. TARP initially authorized the government to spend $700 billion to buy illiquid mortgage-backed securities (MBS) and other assets from key institutions. But The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed in 2010, reduced this authorization to $475 billion. 

Under TARP, the government bought stocks in Bank of America/Merrill Lynch, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan, Morgan Stanley, State Street, and Wells Fargo.

According to the rules of TARP, the companies involved in the program lost certain tax benefits. It also did not allow recipients to give bonuses to their highest-paid executives and in some instances, put limits on compensation for executives.

Under TARP, the government spent $245 billion to stabilize banks, $80 billion on the U.S. auto industry, $68 billion on stabilizing AIG, $31 billion on other expenditures, and $19 billion on purchasing toxic assets. The Freddie and Fannie bailout did not fall under TARP.