As the saga about the AIG bonuses, bank bailouts, and general handling of the TARP funds continues, the general anger of ordinary taxpayers seems to grow. People are mad. See, e.g., Reuters, AIG massive payments to banks stoke bailout rage, Mar. 16, 2009.
Perhaps that's a good thing. If people are mad, and if they figure out what went wrong well enough, they can apply the kind of pressure that is needed to get Congress to change the way it operates. Not corporate cronyism as usual, but legislation that considers the ordinary people. Not advantaging the rich with super-low tax rates (e.g., 15% on capital gains), but considering the hardworking ordinary Americans and eliminating the capital gains preference, maybe. Maybe, just maybe, the widespread anger at the "greed is good" "I'm worth millions even if I lose the company money" attitudes of Wall Street will end up changing the way the corporate-financial system works. Right now, it works for the rich and doesn't give a damn for the ordinary person. Unions find it hard to organize, but wealthy CEOs have their boards made up of their peers, and get the results that are favorable to them. In that climate, the ordinary taxpayer's anger is reasonable and perhaps even cathartic.
The reasons for the anger are many. First, Congress and the executive stayed asleep at the switch through the speculative expansion of the investment banking industry, letting corporations like AIG get "too big to fail" and letting speculative derivatives take over the market. These same big banks and insurance companies were also acting as accommodation parties in tax shelter transactions, so that our ire is even greater--we let them speculate us into a market disruption credit crunch that has reverberated through the economy, hurting especially the little guys who have little resources to support them through this kind of disruption, and we let them dupe the government in tax shelter deals where they got lucrative fees, and again the little guy was hurt, paying payroll taxes while the big guy got reduced capital gains rates or no taxes at all because of aggressive tax shelters.
Then when the government decided that it had to act to help the financial system--way back in September under the Bush Administration--it didn't bother to attach the kinds of strings that should have gone with all that bailout money, at least not when it came to banks. So AIG contracted to pay ridiculous bonuses to every member of the financial products unit that caused the company the stupendous losses that require taxpayer assistance. AIG paid out $165 million to 73 recipients on March 15, with many of those getting multiple millions in "retention" bonuses so they can handle the winding down of the losing transactions they created, even though some have already left the company. We even find that the current Treasury secretary intervened to be sure the bailout bill didn't make it impossible to pay big bonuses to AIG, based on some concern about honoring contracts. Funny, when it comes to ordinary workers'--especially ones that are unionized--Congress doesn't seem very concerned about honoring contracts. Remember that the bailout provisions for the auto companies required them to gain concessions from labor! So now Congress is considering a special tax provision that will tax bonuses paid to employees at bailout companies at a very high rate (90% in the bill passed by the House on March 19, drawing 85 Republicans in the 328-93 vote; 70% in the proposed bill under consideration in the Senate). Baucus indicated that he wanted "the highest excise tax rate that could be imposed on the bonuses that would be sustainable in court." BNA Daily Tax RealTime, Mar. 17, 2009. The Senate's proposed 70% rate (35% company, 35% recipient) would apply to "excessive executive compensation" for all companies that accepted government funds. See Grassley, Baucus would tax all bonuses, Mar. 17, 2009. And New York Attorney General Cuomo proclaimed: "If the taxpayer didn't bail out AIG, those contracts wouldn't be worth the paper they’re printed on. ... Just because there's a contract doesn't mean there's no way around the contract." Salon, Take this bonus and shove it, Mar. 17, 2009.
We may dislike this approach, but it may succeed in causing employees to cough up the bonuses paid. Being retroactive does not make a tax unconstitutional. Of course, it will need to be treated as a tax, and not as an unconstitutional taking without compensation. The Senate and House bills differ in a number of details. See Rangel release, Mar. 18, 2009; text of H.R. 1586; Reuters, U.S. to Claw Back AIG Bonuses, Lawmakers Eye Tax, Mar. 18, 2009; 70% tax on AIG bonuses?, Straits Times, Mar. 18, 2009. This issue should have been handled when the Bush Administration first arranged to bailout AIG--by clear provisions attached to the bailout funds that resulted in the change of funding meaning a change to business as usual. That didn't happen, so we are left with after-the-fact solutions. An excise tax on retention payments that are in excess of a reasonable amount may be the best solution possible. Does AIG need to pay each of these employees multiple millions to get them to stay on and wind down their disastrous deals? One suspects that there are competent financial analysts available in this recession market who could figure things out pretty quickly. I just don't buy the "only those employees can do the job" attitude.
Of course, our anger is made worse by the fact that the government--especially Phil Gramm and his midnight putsch putting through the Commodities Futures Modernization Act- let a company like AIG serve as a counterparty in credit default swap contracts that can be purely speculative, with no regulation to monitor capital reserves, size of the swap portfolio, or counterparties at risk. Now we are finding that the big investment banks that are mostly responsible for getting the global economy into the mess it is in are also receiving much of the taxpayer bailout money that has been "loaned" to AIG. More than half of the bailout money to AIG has gone to pay Deutsche Bank, Societe Generale, Barclay's, Goldman and other banks who are counterparties on these bets, making ordinary taxpayers even angrier. See, e.g., Reuters, AIG massive payments to banks stoke bailout rage, Mar. 16, 2009. Many of them are foreign banks, so that the US taxpayer is essentially bailing out the foreign banks (instead of the foreign governments doing so). Weren't the banks that entered into contracts with AIG at least as responsible as AIG for the mess--they should have seen that it was unreasonable for any one company to take the guarantor position that AIG took on so many of these swaps, shouldn't they? Cambell Harvey, a finance professor at Duke, agrees with me. "A hedge is not a hedge if you did not factor in the counterparty risk. And the U.S. taxpayer should not be obligated to make people whole for hedges that were not properly executed." Id. And shouldn't those banks have taken a "haircut" on their swap payments? They'd have been paid substantially less (maybe nothing) if AIG had claimed bankruptcy. See Goldman Sachs defends $13 billion payment from AIG, Los Angeles Times, Mar. 21, 2009.
Then, to top it all off, we learned March 19 (in the Ways and Means Subcommittee on Oversight hearing) that 23 large recipients of the bailout monies owe millions in unpaid taxes. 13 companies that got TARP funding owe unpaid taxes, according to Rep. John Lewis, even though they signed statements to the contrary ahead of the distribution of the cash. $214 million of the $220 million total is owed by 2 of the companies. Various items are available at the Hearing on the Troubled Asset Relief Program.
Maybe Congress needs to sit down and work out some reasonable corporate governance rules that will be federally mandated for all corporations, existing or new. A few items to consider--providing a seat on the Board representing workers, providing shareholders a real say on the board membership and on executive compensation, eliminating the power of the board to clone itself through board nominations. Then Congress should put some real restraints on executive compensation, such as requiring any stock options to be held for at least 8 years before being exercisable, limiting deductibility of bonuses to no more than 2X regular salary, limiting deductibility of regular salary to no more than 40X average worker salary, etc. Other ideas?
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