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Geithner Defends Bank Tax in Senate Hearing

WASHINGTON (CN) - Treasury Secretary Timothy Geithner defended President Obama's proposed bank tax in a Senate Finance Committee hearing Tuesday, assuring a handful of doubtful Republican senators that the tax would affect only banks that took on big risks and would not hurt small community bankers.

Geithner said the proposed bank tax, or so-called "financial crisis responsibility fee," will affect fewer than 1 percent of financial institutions. The tax was proposed as a way to recoup the funds paid to banks through the Troubled Asset Relief Program, instituted by the Bush administration to pull the country out of the subprime mortgage crisis.

The tax could be included in pending financial reform legislation currently being debated in the Senate.

"We have a legal obligation to cover the costs of TARP," Geithner said, adding that the tax ensures that the "direct costs of TARP are paid for by financial institutions."

TARP's estimated cost to the federal government is up to $117 billion, less than initial calculations. Geithner said he expects the tax to raise $90 billion over the next 10 years, the proposed lifespan of the tax.

Geithner said the tax is designed to fall most heavily on banks that take the most risks, trying to allay Republican committee members' concerns that the tax could cripple small banks that are already struggling.

The tax "leaves out most of the businesses that provide loans to small business," Geithner said. "Firms that take on more risk would pay more than those who manage conservatively."

He said the tax would be levied on banks with more than $50 billion in assets, which excludes 99 percent of U.S. banks.

He seemed somewhat aggravated at committee members' repeated accusations that the proposed bank tax would be harmful to small banks despite his explanations.

"The more risk, the more capital you have to hold and the higher portion of the fee you have to pay," Geithner said.

Senators also repeatedly questioned Geithner about the administration's decision to push the tax proposal now instead of in 2013, when the amount of TARP funds that need to be recouped will be clear.

Sen. Jim Bunning, R-Ky., said the proposed tax "looks like a political stunt" to disassociate the Obama administration from Wall Street.

But Geithner said it was important to "do it now ... to make it look like we have the political will to pay down the deficit." He said the whole idea behind the tax was to ensure that TARP costs did not add to the national debt.

He said he could not imagine another option that would do less damage to the financial system, but added that he was open to suggestions.

Committee Chair Max Baucus, D-Mont., suggested that banks would get smart about evading the tax. "There must be a way to game this," he said. Geithner responded that the tax was designed to be adaptable in case banks tried to avoid it.

Sen. Olympia Snowe, R-Maine, said she has observed a "lethargic effort" at the federal level in helping small banks get access to capital so they can start lending funds to small businesses, crucial to economic recovery.

"It's really dire," Snowe said, quoting recent job data showing the unemployment rate holding steady at 9.7 percent and more than 6.5 million Americans unemployed for six months or longer.

"I agree with you," Geithner said. "It's time now."

Geithner said the tax was "an important complement" to the financial reform bill currently on the Senate floor.

The hearing was the second in a series of three on the proposed bank tax. The first hearing occurred in late April.

In his opening statement, ranking committee member Sen. Chuck Grassley, R-Iowa, quoted Obama's promise to pay back "every single dime that the American people are owed."

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