President Obama’s State of the Union address was admittedly rather vague, focusing “less on a checklist of proposals” and more on values, particularly the growing wealth gap in the U.S. But he did say a few things that may eventually have an effect on Wall Street and certain bankers in particular.
Again, Obama was vague, but he hinted that the administration may look to create laws to ban inversions, where large companies reduce their tax burden by re-incorporating overseas, typically through the acquisition of a smaller company. It’s a rather easy way to avoid paying loftier U.S. taxes.
“For far too long, lobbyists have rigged the tax code with loopholes that let some corporations pay nothing while others pay full freight,” Obama said. “This year, we have an opportunity to change that. Let’s close loopholes so we stop rewarding companies that keep profits abroad, and reward those that invest in America.”
Any legal change would affect companies that are mulling doing an inversion themselves, but there would also be significant fallout for M&A teams at banks and boutiques.
Take a look at Goldman Sachs, which worked on more than $1 trillion in deals last year, the most since 2007. Goldman worked on 11 of the 23 inversion deals that were completed through August, the last time the numbers were crunched. Those 11 deals were valued at $226 billion, according to the Wall Street Journal.
So more than one-quarter of the deals they worked on were inversions. Goldman has banked over $200 million in fees working on inversions over the last four years.
Any ban would certainly hurt M&A revenues.
Part of Obama’s plan to narrow the wealth gap is by taxing rich people on the main avenue that they rely on to keep their bank account bloated: the stock market. He is proposing to increase the tax on capital gains from 20% to 28%. The idea is that it’s unfair to tax people just 20% on what they make in the market when the maximum federal income tax rate is 39.6% (though it’s much lower for people who don’t make huge salaries).
If passed, this will affect everyone who invests in the market, but the realized amounts that investors pay will be higher for big earners, like bankers. You could conceivably make the argument that this could also affect money managers, as Americans may be less willing to invest, but it wouldn't be all that compelling. It's likely just the investor who will lose.
The Obama proposal would also end a policy that currently lets people pass down assets to heirs with limited tax liabilities. The administration has called it "the single largest capital gains tax loophole."
Over the last few years, Wall Street and their Washington advocates have successfully watered down Dodd-Frank to make it less onerous. Obama suggested that the government (if he has his way) will no longer be willing to budge.
“We can’t put the security of families at risk by…unraveling the new rules on Wall Street,” he said. “And if a bill comes to my desk that tries to do any of these things, it will earn my veto.” Obama has already promised to veto any legislation that delays a portion of the Volcker Rule involving the sale of collateralized loan obligations.