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The Congress AIG Bonus Bill: Bravo! (Seriously...)

Great. Now there's a backlash to the backlash to the AIG bonuses, and everyone is scolding Congress for acting so rashly in crafting a bill designed to recover 90% of the bonuses in taxes.

Conservatives are complaining the bill is unconstitutional and unproductive. In his Obama interview, Jay Leno said he's frightened about its implications, and our own Genghis is mocking the effort.

Gimme a break.

Don't get me wrong. I have plenty of problems with this bill.

I question the constitutionality of the law.

I think targeting bonuses alone is unwise and insufficient. Companies will just get around the law by increasing base salaries, and bonuses in any case are a reasonable compensation incentive, as long as they're tightly tied to performance at the individual AND corporate level.

I agree that some talented people may be poached by companies not encumbered by the law and that this would put the very institutions we're trying to rescue even further behind the eight ball.

I worry that banks that aren't healthy may try to return the TARP money as soon as possible, undermining the main purpose of the program in the first place - keeping the banks well capitalized and the credit flowing.

However, I think all of these potential issues aren't nearly as concerning as the critics would have you believe.

I'm no lawyer or Constitutional expert, but I do believe the bill of attainder issue has been at least somewhat addressed by broadening the law to include bonuses paid by any bank receiving a certain amount of TARP money. At a minimum, the answer doesn't appear clear-cut and deciding questions of legislative constitutionality is one of the reasons why we have the court system anyway.

While I'd rather have Congress devise a broader, much more considerate compensation bill, I'm not going to cry that banks which are receiving significant sums of taxpayer money in order to stay solvent are severely limited in their ability to pay out bonuses to people already making a very good living (the bill only targets households with income greater than $250,000). When these banks are healthy and making a profit again, they can return the money and institute whatever compensation policies they want.

In terms of top talent leaving banks targeted by the bill, I think this concern has been wildly exaggerated. The financial industry has been decimated; unemployment in the sector is very high and even some very talented capable individuals are out of work and available should any talent be poached. Besides, you gotta find it laughable that we are worried about these 'best and the brightest', since it was in large part these very same folks with their fancy financial alchemy that created the monster which finally broke our system. Perhaps a thorough management cleansing at some of these companies would ultimately be helpful.

I also largely dismiss concerns regarding the unintended consequences of incentivizing banks to return the TARP money too quickly. If banks are healthy, we want them to return the TARP money as soon as possible. If banks are not healthy, and still attempt to return the TARP money, the government can stop them. Government regulation requires a certain amount of capitalization, and the stress tests will hopefully further separate the healthy institutions from the sick ones.

In short, I am glad Congress is moving in haste on this issue, even if in practical terms the AIG bonuses are chicken feed and any legislation addressing them will do very little in terms of getting us out of our current mess.

Would it have been so much better had we used force of law to stop AIG from giving out the bonuses n the first place? Absolutely, and if Geithner or others did not act forcefully enough to make that happen, I hope they are taken to task for that failure.

Do I hope our legislators take the time to craft a meaningful, defensible bill that minimizes any negative unintended consequences? Of course. Now that the first tranche of bonuses have already been paid out, and it will be up to the government to get the money back, it only makes sense to do this right.

But symbolism matters, and if we plan on continuing this practice of doling out hundreds of billions of dollars to companies in need, we have to show that this kind of behavior won't be tolerated. It's our money, and we have a right to say how it is used.

If in the process, we begin talking about how our culture of excess and misaligned compensation policies led to an unhealthy focus on short-term profit and an imbalance in dangerous risk-taking, then all the better.

 

Deadman: Your riposte to AIG clawback critics is better than mine. Agree 100%.

Many of Genghis's points are valid, too. Congress's me-too-ism and posturing are indeed craven and hypocritical, even if the bonus tax was the best solution to a sticky problem. He's also right that a major overhaul of the financial system is the real pressing problem. I just think the AIG issue had to be defused quickly if there was to be any hope of enacting those reforms.

I get the slippery-slope argument. But at least this time, the path of political expediency was the right one.

I don't disagree with the general sentiment of these posts; however, most people are making a classic fallacious "straw man" argument in favor of the tax.  Of course it is offensive to any right thinking individual that someone would take government money and pay bonuses to poor performers (or, worse, undue risk taking poor performers).  Almost nobody would argue that point.  Therefore, AIG is a great example to use to hammer "greedy conservatives" that are just trying to protect an unfair compensation system that got us into this mess. The problem is, not every person working for one of these banks falls into that category.  There is a reason that AIG is the only financial institution discussed when the outrage is expressed!

Consider, though that many of these TARP fund receiving banks were profitable and would have survived the crisis even without the government's money.  Is it really reasonable to think that ALL of the U.S.'s largest banks were going down the tubes?  In fact, the government all but forced many lenders to take the money because they were afraid to "pick winners and losers" when Lehman and WAMU were going down the tubes.  Some lenders were profitable enough that the government virtually strong armed them into buying failing banks (Wells-Wachovia, JPMorgan-WAMU, PNC-National City) because they didn't want to do it.  The government money was marketed as cheap capital during a time when the capital markets were frozen.  It was even offered up as extra incentive to purchase the bad banks and help out the financial system.

Does anyone think that if these lenders had known how the government would punish them for actually agreeing to take the money, they would have done it?  AIG was involved in all manner of arcane engineering of financial risk instruments.  They were not properly regulated or, for that matter, understood.  In the end, they had made bets that were many multiples of the equity cushion that they had available to protect them and there shareholders.  They are now 80% owned by the government.  Fine.  They will get what they deserved.

How, though, does that apply to the senior exectutive of a bank that MADE A PROFIT last year, whose job had nothing to do with highly complex financial tomfoolery?  What about the woman who runs the ATM network for Wells Fargo (I don't know if it is a woman).  Should she have her compensation capped because a group of knuckleheads made wild bets on derivatives at an insurance company in Connecticut?  If you believe that, I respectfully disagree.

I agree with you that AIG is being held up as an example and that innocent people will be penalized if the bill is passed, but the profitable companies aren't without blame. They may not have plunged into sub-prime loans with as much enthusiasm as AIG, but there's a reason that they're insolvent. Even without AIG, the banking industry would be in serious trouble.

Nor do I have any difficulty with stringent requirements on bailout money. If the banks can afford to survive without the bailout money, it suggests that their need is not dire enough to merit a bailout.

That said, I've argued that the goal should not be to punish wrongdoers but to discourage future wrongdoing, any bailout requirements, as well as related legislation, should be designed for that end.

As an aside, I judge from your username that you lean to the right of most of those writing here, and I want to thank you for commenting and urge you to keep writing. While dagblog is a pretty moderate place, there's always a risk of an echo chamber, and we could use more reasoned dissent. Also, I'm curious about why you seem open to the bailouts and government takeovers given your implied anti-socialist beliefs.

Is it really reasonable to think that ALL of the U.S.'s largest banks were going down the tubes?

Not all, but most. Many more than was initially apparent, that's for sure. The rot infected an enormous amount of the financial system. Trillions of dollars of near-worthless derivatives were created, and AIG insured a lot of them. It's clear by following the money from the AIG bailout that even institutions considered 'healthy' had a lot of exposure to the crisis. Even the most conservative financial institutions employ a significant amount of leverage. it doesn't take many losses to bring any bank down. I agree letting the free market decide for itself 'the winners and losers' in theory would have been so much better, but what if the virus was so pervasive that it would have brought down the entire system.

Does anyone think that if these lenders had known how the government would punish them for actually agreeing to take the money, they would have done it?

Uh, I do. Even when they took the money, there was concern over how it would mean these institutions would have to answer to their government masters. Funny that even the banks who have been harping about giving the TARP money back a) haven't done so and b) benefited a great deal from the AIG bailout. Do you really think these lenders were so naive to believe that this money wouldn't come with strings attached? And what exactly do you mean by punish - it's a loaded word, and I'm not sure it applies. Government only reacted because many of these institutions have acted poorly since taking the money.

How, though, does that apply to the senior executive of a bank that MADE A PROFIT last year, whose job had nothing to do with highly complex financial tomfoolery?

Well, I'm not sure how you are defining profits (i.e. are you talking accounting profit, or positive cash flow from operations) but there were very few institutions that made money last year (esp. at banks that were 'forced' to take TARP money). No one is saying these companies shouldn't continue to compensate their workers appropriately, but I for one question the sagacity of doling out multimillion bonuses when your company overall is losing billions of dollars and requires the largess of the U.S. government to stay afloat.

All in all, you make a decent case, and I certainly appreciate the respectful manner in which you presented it. thanks for participating!

Nice post D. Acanuck and I have chasing each around three threads on two websites. May as well add a fourth thread. I don't think this bill is end of western civilization; I just think it's asinine. How does this symbolism thing work? What will it do to a) help the economy today, or b) discourage bad behavior 20 years from now when the excesses of the 00's are as far from mind as the excesses of the 80's are today?

a) nothing

b) not sure. by itself, probably nothing. if it is followed by fuller, smarter legislation and regulation, maybe a bit. but probably not because we humans are kind of forgetful like that.

it will do:

a) get our money back. the bonuses are indefensible and i think almost all agree they should be returned.

b) make it so that anyone else receiving government money considers very carefully how they spend those funds.

i actually still hope that throughout the legislative process, the bill gets fine-tuned.

but in my mind a crime, at least in terms of decency if not in terms of actual legality, has been committed here, under the rather careless watch of the government. i wish they had stopped it beforehand, but mistakes happen. doesn't mean you can't try and rectify them. it's just not a good enough answer anymore to say, oh well, the money's out the door.

I'll just add that it was important and useful -- a teachable moment, if you will -- for Congress to buckle to the will of the mob for once.

Everyone talks about overcoming the crisis of confidence for investors and lenders. Well, the confidence of Joe Six-Pack is every bit as crucial to the economy. And from the start of the meltdown, Joe has felt absolutely powerless as billions (probably trillions by now) of his and his future children's future dollars were shuffled between the big players.

This may be a totally symbolic victory for the little guy -- but damn, he needed a victory. Obama was the closest thing he had to a voice in the halls of power. The AIG-bonus fiasco suggested even the president had no choice but to yield to the business-as-usual forces of much-disliked Congress and much-despised Wall Street. So people started shouting: "We paid for this shit, so we run this shit!"

Quite rightly. No-one wants actual heads to roll or actual blood to run in actual gutters. But listen up, motherf-s, we run this shit! Ah, that felt good.

 

I might want heads to roll. I haven't decided yet. But I have a pitchfork in my shed, just in case.

Also, can we find a new name for Mr. Middle America? Joe is so 2008. How about Brady or Cody or Tyler? And while we're at it, I also think it's time to retire Jane in favor of Zoe or Kristin or Ashley.

a) get our money back. the bonuses are indefensible and i think almost all agree they should be returned.

b) make it so that anyone else receiving government money considers very carefully how they spend those funds.

a) Not by the time the courts are finished with it

b) Perhaps. Though why they haven't learned that lesson after a series of scandals is beyond me.

I'll just add that it was important and useful -- a teachable moment, if you will -- for Congress to buckle to the will of the mob for once.

Yes, thank goodness Congress has finally learned how to pander and engage in symbolic gestures.

Agreed, this was pandering. And Mr. and Mrs. Six-Pack sorta know it was. They don't really run this shit, and wouldn't know where to begin if they tried. (Arguably, Summers and Geithner don't either; math is hard.)

But laying claim to ownership is a crucial first step. A shot across the bow of the powers-that-be. Putting a little fear into their hearts is always a good thing, IMHO.

a) you may be right that court fees and/or rulings could negate or erase any monetary gain. though mere outrage alone has apparently convinced some AIG employees to voluntarily return the money, and perhaps the law will convince many others the fight isn't worth it. and as we've both agreed, the $170 million is largely beside the point. it is a symbolic gesture, and as I've pointed out, that's fine by me. i think symbols matter - kind of like how i said in my previous buzz that it would help if executives demonstrated some genuine shame as opposed to the pass-the-buck attitude i've seen. will it do anything concrete? no, but at least americans will begin to feel like their government is working for them again.

b) i think we had this populist outrage gaining steam up over time. the AIG bonuses were the trigger that sparked the powderkeg that all of the previous scandals had helped build. perhaps, just perhaps, these banks hadn't learned the lesson because they were still largely left to their own devices with how to spend the billions of dollars they were getting.

Leave it to the house to move at the speed of light on something so meaningless that will end up being negated.  Now they can all go back home and say see I did something, re-elect me.  Where were these jokers hiding the first time in the TARP bill?  They had a chance with the bonuses before.  Did you hear anything then?  The only time they have responded to the people is when it doesn't look like it will hurt their chances of re-election.  This bill must have been so short they were able to stick it in between birthday wishes for seniors and naming of bridges.  I reject, condemn, throw back and vomit up the little crumbs they just tossed our way. 

It worked this time Genghis. Oh and I do agree this is all pandering from both sides. The peasants are revolting again and Congress has to look like it is doing something.

I do think that politically, Gramma Pelosi really hit pay dirt.

These guys at the middle of the corporate ladder know more about how to get money from a corporation than most people in Congress, let alone the electorate. Good points.

I am still for a transfer tax on every sale of stock or bonds or warrants or whatever taking place in this country. We could build a new nation out the proceeds.

 

I read something about the transfer tax.  Probably here.  Are they talking tenths of a cent on each transfer yielding mega bucks?  Do you know who in government is talking about that?  Or is it being discussed?  Why hasn't it been done before?  I think it sounds great, I wonder what the cons are.  Thank you.

Right on with this Deadman 

Besides, you gotta find it laughable that we are worried about these 'best and the brightest', since it was in large part these very same folks with their fancy financial alchemy that created the monster which finally broke our system. Perhaps a thorough management cleansing at some of these companies would ultimately be helpful.

And all your concerns about the bill are mine also, but they have more weight my mind.  I don't like giving congress a thumbs up on symbolism.  They try to do as little as possible so they won't offend their voters and encouraging hollow bill passing is not appropriate with this age group.

 

Final thought for the night (could have gone on either Deadman's or Genghis's blog): We seem to be in broad agreement that Congress is pandering to its constituents, and that those constituents aren't concerned about the AIG bonuses themselves so much as what they symbolize.

That's why Congress had to pass the clawback bill, whatever its flaws or unintended consequences. The AIG bonuses didn't just come to symbolize culpable fat cats getting richer off the public teat, even after causing long-term harm to society. Crucially, by week's end, they had come to symbolize the government and the corporatocracy colluding to screw the public.

Dodd's initial compensation amendment was publicly touted as fixing an oversight in the bill as passed by the House. The fact it was gutted without fanfare at the conference stage could fairly be interpreted as deliberate deception.

Democrats had no choice but to scramble to make their error good. Even House Republicans were split on the clawback. Now, Senate Republicans are making noises about possibly denying the bill its needed 60 votes. Lord, please let them be that suicidally stupid.

amen

This bill is a disaster.  Geithner's plan for toxic assets is leaking out today, and it would have worked, except that now nobody will lay any money on the line to take down these toxic assets at any price, due to the demonstrable probability that Congress will confiscate the gains if it doesn't like how they were gotten.

Excellent point

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