EconoMonitor

The Wilder View

Congress is being stupid again

There is backward-looking regulation; there is forward-looking regulation; and then there’s just stupid regulation. From the NY Times: The House overwhelmingly approved on Thursday a near total tax on bonuses paid this year to employees of the American International Group and other firms that have accepted large amounts of federal bailout funds, rattling Wall Street as lawmakers rushed to respond to populist anger.

Despite questions about the legality of the retroactive 90 percent levy, Democrats and some Republicans said the tax on bonuses for traders, executives and bankers earning more than $250,000 was the quickest way to show angry Americans that Congress intended to recoup the extra dollars. Even backers of the measure noted it was an extraordinary step.

The legislation would apply to bonuses paid to executives at companies holding at least $5 billion in bailout money and would essentially wipe out the phenomenal paydays that have been a tradition on Wall Street, at least until the firms reduce the amount they owe taxpayers to less than $5 billion. At this point, I wonder what the Congressional members are trying to accomplish? To get re-elected? It certainly seems so. I can only imagine that this silly back and forth about bonuses is going to throw a wedge into other government plans to actually fix the banking system. This is so counterproductive; it’s not going to pass; it can’t.

Take a close look at both the firms that would be subject to the tax and those that wouldn’t: TARP_funds.png This data can be found on the Treasury’s website, however, the NY Times lists total TARP appropriations, and the WSJ lists the initial recipients of TARP capital injections. All of the companies below the bold black line will not face the 90% tax on bonus payments.

Notice that the table (above) lists TARP monies received by banks, insurers, auto companies, and non-banking financial firms. And look at the list on the margin. Below the $5 billion mark are several sketchy deals, including the sum $5.5 billion aid to Chrysler and Chrysler Financial, the $2.3 billion to CIT Group, who only recently became a bank-holding company (i.e., regulated) in order to get TARP funds and was the centerfold for the securitization industry. Fannie Mae is paying bonuses, but are they on Congress’ radar?

Congress is playing with fire here. The government Financial Stability Plan cannot work if the private sector is worried about the political ramifications of participating, or worse, that the government will amend the terms of any agreement six months later – and the private sector must be involved to make the deal big enough. For example, the WSJ argues that TALF is off to a slow start – the first round of TALF loan requests was $4.7 billion – in part because of the rage over the AIG bonus:

One reason for the slow start: the outcry over bonuses paid by American International Group Inc., the troubled insurer that received federal bailout money. Some investors are concerned that they too could be exposed to a political storm should they make too much money from the taxpayer-funded program. Even if this is just for show, which I imagine that it is, it is highly counterproductive.


Originally published at the News N Economics blog and reproduced here with the author’s permission.

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