It’s going to be interesting to see how quickly Congress and the administration caves in to banks and Wall Street after expressing so much indignation about bonuses over the last week.
Here is the backdrop.
- Senator Chuck Grassley said AIG “Sucking The Tit Of The Taxpayer”.
- President Obama said “It’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165m in extra pay”
- Obama pressed Treasury Secretary Timothy Geithner to “pursue every single legal avenue” to block the bonuses.
House Passes 90% Tax On Bonuses
The indignation was round one. For additional discussion of round one, please see Bonus Bonanza Bingo, a Blessing In Disguise.
In round two Bonus Tax Heads to Senate After House Passes 90% Levy.
The Senate plans to vote next week on steep levies on employee bonuses after the House overwhelmingly approved a 90 percent tax on bonuses at American International Group Inc. and other companies receiving bailout funds.
The Senate’s proposal on companies that got federal money would place a 70 percent tax on the bonuses. Half that amount would be paid by employees, half by the companies.
The 328-93 House vote came amid a national outcry over $165 million AIG paid in bonuses last week after receiving $173 billion in bailout funds as part of the government’s efforts to stabilize credit markets. President Barack Obama said he was “stunned” by the bonuses and vowed to recoup the money. Nineteen state governments have begun probes of the AIG bonuses.
“Paying excessive bonuses to the same group of folks that helped get us into this crisis is simply unacceptable,” Senate Finance Committee Chairman Max Baucus said in a statement. “Millions of Americans continue to struggle to get by, counting their dollars, and Congress needs to do the same.”
The House measure would cover companies receiving 75 percent of federal bailout funds, according to the Ways and Means Committee. The Senate proposal would affect a larger pool of workers and the chamber may vote on it next week, said its primary sponsor, Baucus, a Montana Democrat.
Meanwhile, House Financial Services Committee Chairman Barney Frank proposed legislation late yesterday to ban payments at companies getting U.S. aid until the government is repaid.
More Than $250,000
The House bill passed yesterday would affect employees earning more than $250,000 who received bonuses from companies that received more than $5 billion in aid from the Troubled Asset Relief Program.
“These people are getting away with murder,” said House Ways and Means Committee Chairman Charles Rangel of New York. “They’re getting paid for the destruction they’ve caused to our communities.”
The House’s 90 percent tax would apply to bonus payments made after Dec. 31, 2008, and it would cease when the U.S. government’s investment in the company fell below $5 billion. The tax wouldn’t apply to any bonus returned to a company, or to commissions or fringe benefits.
About $3.6 billion in Merrill Lynch & Co. bonuses wouldn’t be affected by the new legislation because they were paid before Dec. 31. Bonuses for employees at Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley would be affected because they were paid after Dec. 31.
Banks Fight Back
Hold your horses because round three has begun. Citigroup and Bank of America fired the opening salvos. Please consider Wall Street chiefs grumble about bonus-tax bill.
Citigroup Inc. (C) Chief Executive Vikram Pandit and Bank of America Corp. (BAC) Chief Executive Ken Lewis issued strongly worded internal memos about the proposed tax legislation, according to the online edition of The Wall Street Journal, while J.P. Morgan Chase & Co. (JPM) Chief Executive Jamie Dimon sought to reassure his top executives that the firm is engaging with lawmakers on the matter.
Citi’s Pandit criticized the proposed legislation in a memo to employees on Friday, arguing that it could result in the firm losing top talent.
“It would affect countless number of people who will find it difficult, if not impossible, to pay back the bonuses that they earned,” Pandit said.
Bank of America’s Lewis, for his part, said that he’s written to lawmakers about why the proposed tax legislation “is of such grave concern to us,” adding that it has “the potential to damage the ability of the government to engineer a financial recovery.
Spare Me The Sap
Citigroup should not be in existence at all. It is a failed zombie bank, kept alive only by the government (taxpayer) guarantee of $300 billion of likely worthless debt, and additional cash infusions amounting to billion of dollars.
Everyone at Citigroup ought to be damn thankful they have a job at all. The same applies to Bank of America.
Pandit’s statement is particularly galling “It would affect countless number of people who will find it difficult, if not impossible, to pay back the bonuses that they earned“.
Exactly how many earned anything? Even if they did, why should that be my problem as a taxpayer?
When it comes to being treated fairly, taxpayers have earned that right. Instead we have to listen to ridiculous whining by the CEOs of two failed organizations, begging for taxpayer handouts.
Supposedly this “top talent” will go elsewhere. If so, that would be a good thing especially if it led to the dismantling of Citigroup. I am damn tired of “too big to fail” and all the crap that goes with it.
However, I doubt that anyone is going anywhere. Pray tell exactly who is hiring?
Fannie, Freddie Regulator to Stand Behind Retention Bonuses
Those that believe regulation is the answer to this mess need only consider Fannie, Freddie Regulator to Stand Behind Retention Bonuses.
The regulator for Fannie Mae and Freddie Mac said he still supports the companies’ retention bonuses for senior executives.
“The loss of key personnel would be devastating to the companies and to the government’s efforts to stabilize the housing system,” Federal Housing Finance Agency Director James Lockhart said in a letter today to House Financial Services Committee Chairman Barney Frank. “FHFA initiated these programs prior to conservatorship as we and our advisors agreed that they were critical to a successful conservatorship. I still believe that.”
Lockhart Is A Fool
Lockhart is a fool. Any regulator in his right mind would be attempting to shut down Fannie Mae and Freddie Mac as opposed to guaranteeing bonuses of “key personnel”.
There are exactly ZERO key personnel at Fannie Mae and Freddie Mac because the organizations should not exist at all.
If Lockhart was suggesting keeping people on only so long as to totally dismantle Fannie and Freddie that would arguably be a different matter. Unfortunately that is not what he is saying.
By the way, there is no such thing as a “successful conservatorship”. Conservatorship is always and everywhere a failure, by definition.
“Fool” is arguably the wrong word. If Lockhart shut down Fannie and Freddie he would be out of a job. Perhaps “leach” or “parasite” is a better word.
Obama to Weigh Impact of Bonus Tax on Credit Flows
Inquiring minds are wondering if round four is where Obama wimps out. Please consider Obama to Weigh Impact of Bonus Tax on Credit Flows.
President Barack Obama will consider what impact taxing employee bonuses paid by companies that receive taxpayer aid will have on credit flows, his spokesman said.
Obama is balancing assuaging “taxpayer anger and frustration” about bonus payments at American International Group Inc. and other companies with the need to “stabilize the financial system and ensure that credit flows from banks and lending institutions,” White House Press Secretary Robert Gibbs told reporters at a briefing today.
The financial-services industry is warning that allowing a steep tax on bonuses may cause some banks to consider exiting the Troubled Asset Relief Program before their competitors are healthy enough to do so, risking a new freeze of the nation’s credit markets.
“This will undermine the recovery efforts,” said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, an industry trade group in Washington. “It will decrease industry interest in participating in any recovery program and cast a pall over existing and future contracts.”
Obama said yesterday the vote on the House measure “rightly reflects the outrage” over disclosure of payouts at companies like AIG. He said he looks forward to getting the final legislation.
Gibbs today stopped short of saying Obama would sign the House bill. “That’s the evaluation that is being undertaken here,” Gibbs said.
Now we get to see who wimps out first. Will it be Congress, Obama, the banks, or a joint effort?
I am hoping the legislation passes and every bank returns 100% of the TARP funds in response. Reckless lending got us into this mess, it cannot possibly get us out of this mess.
Mike “Mish” Shedlock
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