Revolt!

by Dick Morris

  While the number of properties involved is small—and Obama likes to dwell on how few people pay the tax—the economic impact is huge. A 2009 study by Douglas Holtz-Eakin and Cameron Smith found that repealing the inheritance tax would create 1.5 million new jobs.68

  The report said that repeal would increase small business capital by more than $1.6 trillion, increase payrolls by 2.6%, and expand investment by 3%.69

  The death tax falls especially hard on farmers and others whose estates are illiquid. The Heritage Foundation notes that “families often must sell such assets that do not regularly trade in active markets to raise money to pay the death tax. Due to the lack of an active market, these families must often accept prices for these assets that are lower than they would have received if they had more time to sell the property.”70

  And all this tax burden is totally unnecessary! The death tax is totally useless, a tax that produces no additional revenue! All the property covered by the tax is also subject to the capital gains tax (except for cash). Where an estate is not subject to the inheritance tax, the heirs must pay a tax on their capital gains anyway. The only difference is that the inheritance tax is fully payable when the parent dies and the capital gains tax is charged when the heir sells the property.

  The Heritage Foundation explains that “currently, the heirs ‘carry over’ the basis of the original owner’s assets when they acquire the possession in question. The capital gains tax is calculated on the difference between the sale price the heir receives when he sells the item and the price the deceased paid when he acquired it.”71

  It is so much fairer, better, and more economically productive to wait to charge the tax until the possession is sold. That’s when the heir has the liquid capital to pay the levy; he makes it back in the sales price. Having to pay the tax at the time he inherits the property means he has to scramble around, sell off assets for a fraction of their price, and take a huge loss in order to pay the Fed. But at the time of sale, the capital is right there and it is easy to decrease the profit from the sale by the amount of the capital gains tax.

  Repealing the death tax would have only a minimal impact on the U.S. budget. In 2008, it yielded only $24 billion, just 1% of all federal tax collections,72 and, were it repealed, capital gains tax revenues would increasingly offset the loss from death tax collections.

  The only folks who gain from the tax are estate planners, insurance companies, and big businesses.

  Estate tax lawyers and planners reap large fees helping families avoid the inheritance tax. They have an obvious interest in continuing it.

  Life insurance companies are no less interested in its extension. Families who cannot afford estate lawyers and planners to help them avoid the inheritance tax usually purchase life insurance policies that will pay their heirs enough to cover the tax liability triggered by the inheritance tax. Of course, the fees of estate planners and/or life insurance premiums siphon money away from small business owners who might otherwise invest it in creating jobs.

  Publicly owned big businesses also gain a competitive advantage over smaller, family-owned firms because most of their capital passes on to the next generation in the form of readily tradable stocks and bonds. The size of the total portfolio of the company’s stocks and bonds is so big that even a large stockholder selling off his holdings would usually not impact the price much, while a small family-owned business takes an enormous hit to satisfy its death tax obligation.

  And big businesses often are able to scoop up smaller businesses—whose heirs are forced to sell to raise money to pay the death tax—at bargain basement prices.

  But repealing any tax will take a great deal of work. Explaining to Americans why they should care about a tax most of them will never have to pay is a challenge. But it is no harder than explaining to those who earn less than $250,000 a year why they should care about tax increases that affect only their wealthier compatriots. A tax on anyone hurts us all. The money may not be paid by each of us in checks to the U.S. Treasury, but it is paid just the same in stymied economic growth, unemployment, and recession.

  We need to work to spread the information about how the death tax hurts us all!

  ENDING THE BANKING REIGN OF TERROR

  Banks are not lending. Those four words summarize, more than any other, the key reason why our economy has not recovered. The crisis of 2008–09 triggered “reform” legislation in 2010, which has, in turn, frozen bank lending. Commerce has not ground to a halt only because of market conditions or economic sluggishness. It has evaporated also because banks are terrified by the new regulations Congress has passed.

  Banking is based on lending. And lending always entails risk. That’s why we pay interest on our loans—to give the lender an incentive to take the risk. But bankers are no longer willing to take the risks they once did. Particularly small banks are fearful that if their loans go bad, the Federal Deposit Insurance Corporation (FDIC) will use the new regulatory powers it got under the Dodd-Frank Wall Street Reform and Consumer Protection Act to close them down, fire their boards, dismiss the management, and wipe out shareholder equity.

  The banks keep their stone facades, their pediments and columns. They may still look like ancient Greek temples, but they are no longer banks. They are mausoleums. The commerce that once thrived inside is dead, killed by the fear of federal regulation.

  Bryan Real, president of United Food Group in Elgin, Illinois, put it best: “Banks don’t want to lend. The last three years have been the worst for small business lending I’ve ever seen.” Mr. Real sought financing to develop a coffee and condiment dispenser but got turndowns from four banks.73 He had 6,000 orders for the new equipment, but couldn’t get the loan to pay for the start-up.

  He’s not alone. The National Small Business Association reported in July 2010 that 41% of small business owners could not obtain the financing they wanted.74

  The Federal Deposit Insurance Corporation reports that, nationally, banks’ small business loan portfolios dropped from $711 billion in the second quarter of 2009 to $652 billion in the second quarter of 2010.75 And when banks don’t lend, small businesses can’t grow. According to the Federal Reserve, small businesses get more than 90% of their financing from banks.76

  Ben Bernanke, chairman of the Federal Reserve, noted that “it seems clear that some creditworthy businesses have had difficulty obtaining the credit that they need to expand and, in some cases, even to continue operating.”77

  Some small businesses have given up and are not even applying for loans anymore. The National Federation of Independent Businesses survey found that while only 27% of small business owners reported that their credit needs had been met, 52% so despaired of the marketplace that they didn’t want to borrow money.78 Barlow Research Associates reported that only 17% of small businesses had even applied for additional credit in the past year, about half of the proportion that normally do.79

  It isn’t just small, community banks that are closing their loan windows to small businesses. Chase made $2.1 billion in small business loans in 2010, down 40% from the $3.5 billion it made in the first half of 2008.80

  A cycle seems to have set in where banks won’t lend, small businesses don’t expand, jobs are not created, sales dry up, and small businesses don’t want to borrow.

  The loser, of course is the American economy. The Census Bureau reports that small businesses create 72% of the new jobs in the United States while medium-size companies generate only 16% and large firms only 12% of the new jobs.81

  Small banks, which make the bulk of small business loans, are particularly unwilling to lend in the new financial and regulatory climate. And it is these banks that provide two-thirds of all loans to small businesses throughout the nation,82 even though they have only 12% of all bank assets. Big banks—those with $100 billion or more in assets—make only 22% of small business loans.83

  Why aren’t small banks lending to small businesses?

  It’s not that they don’t have t
he money. In the third quarter of 2010, banks with assets of less than $5 billion hoarded their cash, lending out just 82% of their deposits, compared with 91% at bigger banks.84

  The regulatory reign of terror that has stopped lending to small businesses has been induced by the Dodd-Frank Wall Street “Reform” and Consumer “Protection” Act of 2010. The Act vastly expands the power of the FDIC to close down financial institutions, even those that do not avail themselves of its deposit insurance.

  It confers new powers on the FDIC that would make Fidel Castro or Hugo Chavez envious. It lets the agency “seize, break-up and wind down a failing financial company whose failure threatens financial stability in the United States.” This power covers bank holding companies, nonbank financial companies supervised by the Federal Reserve, a company that is “predominantly engaged in activities that the Federal Reserve has determined are financial in nature or incidental thereto, and subsidiaries of these companies.”85

  The FDIC can move in if two-thirds of the Federal Reserve Board and a similar proportion of its own board find that the financial company “is in default or danger of default” and that its failure would have “serious adverse effects on financial stability in the United States.” The FDIC also has to get an order from the U.S. District Court for Washington, D.C., or the consent of the financial company’s board of directors.86

  Once the FDIC moves in, its powers are almost unlimited. It can

  Take over and manage the assets of the bank

  Merge the bank with another company

  Transfer its assets or liabilities without getting anyone’s consent

  Remove the managers and employees who are “responsible for the failed condition” of the bank87

  Ensure that “shareholders…do not receive payment until all other claims…are fully paid.”88

  When Dodd-Frank was going through Congress, the administration justified the expanded FDIC powers to the public saying that they were necessary to police financial institutions that were too big to fail—i.e., that their collapse would engender the same kind of national panic that hit when Lehman Brothers went bankrupt in the fall of 2008. But the FDIC is using its new powers to close down small community banks and financial institutions whose failure would barely cause a blip on Wall Street radar screens. The main consequence of these takeovers is to obliterate entire towns, robbing them of the cornerstone of their economy: the local bank. It has the same impact that closing the train station used to have—it wipes out communities.

  Granted, the economic crisis has been hard on small banks. In 2010, 143 of them have failed, in addition to 140 that went under in 2009.89 But the FDIC’s regulatory hit list goes much further. It fingers 829 small banks—one in eight—that it says are at risk of failure.90

  Or at least at risk of FDIC takeover.

  The spread of the FDIC’s oversight powers has terrified small-town bankers. One West Virginia small bank owner commented that “we see federal regulators looking over our shoulders and [we] just won’t make loans that they might consider risky. We don’t want to lose our bank.”91

  One Tennessee banker noted that beyond the danger of losing his bank, he felt hobbled by the need to hire layers of professionals, accountants, lawyers, and other staff to comply with the new federal regulations. The costs that can easily be absorbed by a big bank can make the difference between a profit and a loss at a smaller one.

  Time magazine tells the story of Community Bank & Trust (CBT) of Cornelia, Georgia. The FDIC took over CBT on January 29, 2010. It claimed that the bank was on the brink of insolvency. Thirty-five homes and 189 businesses underwritten by CBT had already been foreclosed and another 1,500 were listed as in serious trouble.92

  The effect of the FDIC seizure on Cornelia was traumatic. Time notes that “CBT’s $1.2 billion in assets represented 75 times the county’s $16 million annual budget.”93 Ed Brown, president of the Habersham County Historical Society, said, “A lot of people put a lot of stock in the bank, and when it failed, it shook the whole town.”94

  The FDIC decimated CBT after the takeover. It forced a sale to an out-of-town bank, South Carolina Bank and Trust, which, in turn, fired 100 of CBT’s 400 employees, closed ten branches, and moved more than 200 loans toward foreclosure.95

  CBT lay at the very core of Cornelia. As Time noted, before the town “got a sewer system, Cornelia got a bank.”96 The bank was the town’s economic lifeline. By 2005, it held nearly half of the residents’ bank deposits.97 CBT had an honored place in the community. A famous story in town was that when the bank president’s eldest son, who worked at the bank, said that he and his wife were going to live elsewhere, his father said “not and work in this company, you’re not.” He promptly fired his son.98

  Now, under the new management of the South Carolina Bank and Trust, it’s a new day. Cornelia city manager Donald Anderson says that the South Carolina bank “is really killing the town, and I blame the FDIC.” He and other Cornelians worry that South Carolina Bank and Trust “is sucking the assets out of Cornelia to help build business in the larger city of Gainesville, 24 miles to the southwest, a fear fueled by the fact that CBT’s new market president, Jeff Fulp, has chosen to live in Gainesville rather than Cornelia. ‘It’s like Invasion of the Body Snatchers,’ says Don Bagwell, a [Cornelia] city commissioner.”99

  Should the FDIC have taken over CBT and forced a shotgun marriage to the South Carolina Bank and Trust? Some Cornelia residents wonder if the Feds were way too quick to pull the trigger. After all, the new South Carolina owners have foreclosed on just 2.14% of the business loans and only 1.75% of the residential mortgages. Were things so dire that the bank would have failed had the Feds not stepped in?

  We’ll never know. What we do know is that one-eighth of the small banks in the U.S. are in danger of an FDIC takeover, a chilling prospect for these companies and for the small businesses that depend on them for credit.

  Another example of the FDIC’s overreach comes from the heart of Obama country—the Chicago suburb of Oak Park, where Park National Bank, a small, community financial institution, was closed prematurely by federal regulators out for scalps with which to festoon their walls.

  Park National was owned by Michael Kelly, who put together a group of nine privately held community banks under his holding company FBOP. The banks had $19 billion in assets combined.100

  A philanthropist, Kelly devoted all the profits of his banks—27% over two years—to charity work aimed at helping the poor. Rather than pay himself dividends, he gave to schools, parks, affordable housing, social services, and community organizations. His banks refused to make subprime loans and offered banking services, according to inthesetimes.com, to “predominately black Chicago neighborhoods otherwise served only by predatory payday lenders and currency exchanges.”101

  FBOP got into trouble when quasigovernment mortgage guarantors Fannie Mae and Freddie Mac went under in 2008–09, costing Kelly’s banks $756 million of their capital, about half their total holdings. The Treasury Department came to the rescue, and announced that $545 million in TARP funds would go to FBOP as part of a package of small bank loans.102

  But then TARP changed its mind and refused to process the loan. Kelly, who had previously secured $600 million in private capital commitments, found that the stigma of having been turned down by TARP led his alternative capital sources of dry up. “It was the kiss of death,” Kelly says.103

  Despite the losses, Park National remained profitable, but two other banks owned by FBOP were critically undercapitalized. Inthesetimes.com recounts that the “FDIC invoked an optional rule—used only six times over two decades—that made the two stronger banks liable for the losses of all the other banks in the group. The FDIC notified FBOP that it had the standard 90 days after its warning to meet capital requirements.”104

  “As the…deadline drew close, FBOP presented a plan for private investment but asked for a week’s extension, a common courtesy in such cases, to finalize the details.
The bank knew—as did the FDIC—that the following week Obama planned to sign new legislation allowing corporations to carry losses forward for more years in the future to write off against taxes. That would have effectively given FBOP up to $200 million, making it possible to raise the capital it needed from just one investor.”105

  But the FDIC wouldn’t wait. It had already cut a deal to sell all FBOP banks to U.S. Bancorp (America’s sixth largest bank) with a $2.5 billion taxpayer subsidy to pay for loan losses, terms that would easily have saved FBOP, had they been offered.

  Irony of ironies, on the morning of October 30, 2009, Treasury Secretary Tim Geithner went to Chicago to hold a press conference honoring the Park National Bank for its service and presenting it with $50 million in tax credits for expansion of its community development work. At 5 p.m. that same day, the FDIC seized the bank and turned it over to U.S. Bancorp!

  They wouldn’t wait the week.

  The other end of the takeover equation is that large banks are feasting on the corpses of their smaller competitors, often with a generous subsidy in hand from taxpayer funds.

  For example, after BankUnited was taken over by the FDIC, it was bought by a group of private investors with a taxpayer subsidy. According to Reuters news service, “the FDIC lost $4.9 billion when it sold BankUnited.” Part of the reason for the loss is that the federal agency is “guaranteeing more than 80% of the bank’s assets and the future income stream from the FDIC to the bank is worth a whopping $800 million.”106

  Reuters summarizes the lucrative FDIC-banker connection this way: “It certainly looks as though the FDIC is selling dimes for a nickel to its highly exclusive group of qualified buyers, and that purchases from the FDIC have invariably turned out to be fabulous deals. That’s not the boring banking that the US wants to see: instead, it’s the kind of high-stakes deal making which makes Wall Street so resented in the heartland, and which, clearly, is never going to die.”107