Obama’s raid on Wall Street

"We want our money back and we're going to get it," the president said, referring to the enormous shortfall faced by the US Treasury on its Troubled Asset Relief Program (Tarp), the emergency bailout fund.

"If these companies are in good enough shape to afford massive bonuses, they are surely in good enough shape to pay back every penny to taxpayers," Obama added.

The logic was hard to dispute. It was a concise attack on the hubris of Wall Street, where the political reality of the financial crisis is still sinking in.

Financial rescues by governments around the world have helped to generate huge profits for the banks left standing. Fuelled by public outrage, politicians of all parties are now hell-bent on stopping those profits leading to huge bonuses.

Obama's tax is the most comprehensive attack to date. It could cost the biggest banks as much as $2 billion a year. Analysts estimate this could amount to about 15% of profits for banks such as Morgan Stanley and Citigroup. It will even hit British banks such as Barclays, HSBC and Royal Bank of Scotland, which did not receive cash from the US bailout scheme.

In Britain, Alistair Darling, the chancellor, has already unveiled plans for a 50% tax on bankers' bonuses, prompting outrage in the City. The French have launched a clampdown, and other governments are believed to be preparing similar measures.

George Osborne, the shadow chancellor, said this weekend that a Tory government would lead calls for a global bank levy to be imposed by the G20 countries to help fund any future bailouts.

Yet in spite of the political crackdown, the bonus gravy train is still rolling. This week, four of America's biggest banks will pay out close to $100 billion to staff in salaries, benefits and bonuses. Some banks are expected to pay near record sums to their top earners.

Closer to home, Barclays is expected to shell out about £3.3 billion in bonuses to its investment bankers for 2009, as it clocks up record profits of more than £10 billion. RBS, 84%-owned by British taxpayers, wants to dish out about £1.5 billion to its investment arm, even though the group will unveil a loss for 2009.

Has nothing changed?

LAST week was not a good one to be a banker, even before Obama's edict. On Tuesday, the bosses of Britain's taxpayer-backed banks were hauled before the Treasury committee for their latest grilling.

Stephen Hester, the chief executive of RBS, confessed once again that even his parents think he earns too much. The committee clearly agreed.

Eric Daniels, chief executive of Lloyds Banking Group, had just sat down when he was asked why he had not had the dignity to resign.

In America, a similar process got under way on Wednesday, when the bosses of America's four biggest banks were forced to give testimony to a special congressional inquiry set up to investigate the crash.

Lloyd Blankfein, chief executive of Goldman Sachs, was subjected to a barrage of hostile questions over his bank's role in creating the sub-prime crisis. At one stage he was accused of being the equivalent of a car salesman who sold a vehicle with faulty brakes and then took out a life insurance policy on the driver.

Jamie Dimon, chief executive of JP Morgan, tried to suggest that the global financial collapse was inevitable. "My daughter called me from school one day and said, 'Dad, what's a financial crisis?' And without trying to be funny, I said, 'It's something that happens every five to seven years'."

The committee didn't find it funny either. While the bankers continued to say their behaviour was above board, the inquiry, chaired by former California state treasurer Phil Angelides, said it would be pushing hard over the coming months to find answers.

And when Dimon unveiled JP Morgan's fourth-quarter results on Friday, some of the answers as to how banks are making such big profits became a little clearer.

JP Morgan is acknowledged as one of the biggest winners from the credit crunch. Through deals forged in the heat of the crisis it acquired Bear Stearns, the investment bank, and Washington Mutual, the giant American retail bank.

Over 2009, JP Morgan made close to $12 billion, in spite of huge bad debts in its credit-card and mortgage units. Its investment bank, which has boomed thanks to companies raising cash to cope with the recession, made $7 billion. However, the 25,000 people who work for it made even more, taking home $9.3 billion. And that would have been higher but for the UK bonus tax, the bank said.

Bankers argue that these profits originated from the bank's ability to negotiate its way through the crisis, staying alive where others failed. Critics argue that the profits are a direct result of government intervention.

"Our governments have handed duplicate keys to Fort Knox and the Bank of England to these last banks left standing," said Lord Oakeshott, the Liberal Democrat Treasury spokesman. "Why should they get bonuses for that?"

The debate over banking profits and how they come about will only get worse in the days to come. Goldman Sachs, the organisation that has become the chief hate figure for public outrage over bonuses, will report net income for 2009 of about $10.5 billion, according to consensus figures from Thomson Reuters. The bank's staff, meanwhile, are expected to get almost twice that figure in salary, bonuses and benefits.

Morgan Stanley could creep into a loss, yet it is expected to pay about $15 billion to its staff.

Bank of America Merrill Lynch and Citigroup are expected to unveil sizeable losses this week - yet both are likely to hand bonuses to their investment bankers.

For the man on the street, loss-making banks paying out bonuses to staff will be even harder to understand. But that won't stop the banks - and neither will the tax.

EVEN as Obama unveiled details of his tax plan, a phalanx of sharp-suited lobbyists assembled in an office just four blocks down Pennsylvania Avenue from the White House.

In Washington, the Financial Services Roundtable speaks for Wall Street. The lobbying firm represents the 100 biggest banks in the world's largest economy - and they are girding their loins for a fight.

"Tell us what your problem is, then we can talk about it," said Scott Talbott, the organisation's vice-chairman. "If your problem is bonuses, let's talk about that. Using the tax code to punish people is not right."

The lobby group argues that this is a purely political raid on bank profits to help solve America's national debt problems. And there are unintended consequences to consider.

While many politicians want so-called "casino" investment banking to be split from everyday high-street retail banking, Obama's tax pushes in the opposite direction.

The way it is calculated means that investment banks like Goldman now have an active economic incentive to start raking in savers' money - which could then fund their risky trading business.

Brad Hintz, senior analyst at Bernstein Research, believes small print in the proposed tax could stifle trade in US government bonds, making it harder for the Obama administration to raise finance. He also believes the big banks will be able to offset about 30% of the tax without too much effort.

"Any tax they have to pay will simply pass through to borrowers, potentially harming economic recovery," he added.

Michael Bloomberg, the mayor of New York, is up in arms over the damage the tax could cause his city. He argues that the tax is so much more severe than Darling's bonus levy that American bankers could move to Britain. In London, Boris Johnson thinks everyone will move in the opposite direction.

Several Republicans have already lined up against the tax. "To think that banks will loan more money if you tax them more is economic ignorance," said Jeb Hensarling, a Texas Republican who sits on the Tarp oversight panel.

Politically, however, the tax is already a success. "Whatever happens, the president wins," said Tony Podesta, one of Washington's most influential political lobbyists. "If it goes through, he wins. If it gets voted down, it was the Republicans who blocked it - which would look like the Republicans supporting their friends on Wall Street."

Bankers are finding their new role in politics frustrating. They are learning the hard way that public perception is often more important than reality. The most frustrating thing for many of them is that hitting bankers' bonuses is a side-show to the real issue of fixing the system. "Yes, a new tax on these profits will raise money," said Simon Johnson, former chief economist at the International Monetary Fund. "But it will not prevent a big collapse in the future."

Andy Shaw, a former risk adviser in a number of the world's biggest banks who now runs Links Risk Advisory, said: "Very little that is currently being spoken about by the politicians is a sensible, long-term solution that would fix the problems of the financial system."

Clearing up the system comes down to boring details about financial ratios being discussed through forums like the Basel committee of international banking regulators. Proposed new rules will make banks hold more capital, and slash the risks they take on. Some banks will be forced to ask their shareholders for even more cash, potentially running to tens of billions of pounds.

Later this month, Lord Myners, the City minister, is pulling together ministers from the G7 countries, along with officials from the International Monetary Fund, to discuss longer-term solutions.

One proposal being examined would force banks around the world to set aside a portion of their profits to fund a global insurance fund that could bail out banks in any future crash. The numbers involved in those proposals, which are still years away from being agreed, will dwarf even Obama's $90 billion tax take.

"The banks have to realise that they can't just go on milking profits from the system on the assumption that taxpayers will bail them out when everything goes wrong," said one government source. "We have to change that."

Nobody's laughing

BANKERS still don't seem to get it. That was one of the messages that emerged from the political hearings into the banking crisis held last week on both sides of the Atlantic.

While the politicians were out to set the record straight, some of the bankers involved thought it was appropriate to crack jokes.

"If you asked my mother and father about my pay, they'd probably tell you it is too high," Stephen Hester, chief executive of Royal Bank of Scotland, told the Treasury committee after being questioned about his lucrative long-term bonus scheme. When asked how he planned to deal with the announcement of the bonuses he plans to pay out to his investment bankers, Hester quipped: "I thought I might go on holiday for a long time."

In America, the first sessions of the Financial Crisis Inquiry Commission set up by Congress to investigate the crisis, set a similar tone.

Lloyd Blankfein, chief executive of Goldman Sachs, spent much of the session trying to talk over the top of his interrogators. "That is what a market is," Blankfein said at one stage, leaning across the desk. "I know what a market is," his questioner replied.

Jamie Dimon, the JP Morgan boss, admitted that one blunder all the banks made was "how we just missed that housing prices don't go up forever". The flippant response did not go down well.