A dangerous precedent

It has been another ridiculous week on Capitol Hill in the midst of the controversy surrounding $165 million in bonuses paid to AIG employees. In a nutshell, here is how it went down: AIG paid out the bonuses as it was contractually bound to do. The Treasury Department and many others knew of the bonuses but chose not to share that information. The media found out, made noise about it, and suddenly the American public became outraged. And those that were already aware of the bonuses feigned outrage: "How dare they use taxpayer money to pay fat bonuses to the the very people that caused this mess?! HOW DARE THEY?!" Give me a break. You're in DC, not Hollywood, so spare me the theatrics, and just tell the truth for once.

The most entertaining spectacle of the week was when CNN caught Connecticut Senator Chris Dodd in his lie that he knew nothing of the bonuses, when in fact, he had added language to the stimulus bill that allowed AIG to keep its bonuses. (Dodd is known to some as the Senator from AIG due to the massive campaign contributions he has received from the company. He is apparently giving back the 2008 election contributions from AIG. It's funny that he did not feel compelled to do so until this week.)

All the bonus outrage prompted Congress to quickly enact legislation that would essentially return the bonus money back to Washington. The House passed a bill yesterday that would retroactively tax bonuses paid by "bailed out" companies starting on January 1, 2009, at a rate of 90%. And that's just federal income tax; when you include state and local taxes, some of these execs could actually owe more money in taxes than they received!

It is a very populist measure that will attempt to appease the outraged American public. The more I think about it, however, the more concerned I become. My thoughts:

• The employees that this will affect will inevitably find employment elsewhere. Hedge funds, private equity firms, and foreign banks would be happy to pay big bonuses to Wall Street's most talented, top performers. I am certain that head hunters for these institutions are going to be very busy in the coming weeks.
• The TARP banks will now be rushing to pay back the bail-out money to get out from under the restrictions at the expense of the credit markets. So essentially, this measure is contradicting previous attempts to recover the markets, and the credit freeze will continue.
  
• The government is a shareholder in the institutions that it bailed out. Now the government is driving away the top talent that run these companies, which one would assume could potentially hurt the performance of the firms, and drive down value. Generally, I thought shareholders hope for investments to appreciate in value, but what do I know?
• These bonuses were in the employees' contracts. Yes, $165 million is a lot of money and it came from us, the taxpayers, and yes, some of these individuals are a part of the reason that we got into this mess. But I think it sets a dangerous precedent to allow an ex post facto law to tax these incomes. I will be interested to hear a legal discussion on its constitutionality.

It is maddening to know these individuals on Wall Street and elsewhere make such an absurd amount of money. Not to mention, a handful of these financial gurus are the same people that came up with the whole notion of credit default swaps that (in part) created our economic disaster. But they may also be the only ones that can figure out a way to get us out of this mess. God knows the government doesn't have a clue.

I suppose that a look on the bright side is that if D-students are running Wall Street, they may not be smart enough to generate the next derivative that could bring down an entire economy.