"Outrage"
Financial companies have longed practiced the tradition of compensating their employees with a base salary along with a "bonus" tied to performance. This allows financial firms to minimize operating expenses by keeping fixed costs low while motivating the best and the brightest to superior performance. Companies that offer a generous bonus structure will attract employees that have a drive to achieve. Perhaps, taxpayers should consider imposing a similar compensation structure within the federal government.
The American people became outraged when they recently learned of AIG’s intent to compensate executives with bonus payouts in spite of their overgrowing need for government assistance. Lawmakers from both parties responded to the popular outrage by picking up pitchforks and nooses for an old-fashion lynching of financial service employees. Of course, there were no "pitchforks and nooses", but there were many "yeas" as the House of Representatives voted 328-93 to impose a 90% surtax on bonuses granted to employees who earn more than $250,000 at companies that have received at least $5 Billion from the government’s financial rescue programs. The list include popular names such as AIG, Citigroup, JP Morgan Chase, Wells Fargo, Bank of America, Goldman Sachs, Morgan Stanley, and even the newly government owned Fannie Mae and Freddie Mac.
The House bill calls for the hanging of financial service employees while the Senate version will push for a firing squad. The Senate bill would impose on both the employer and employee a 35% tax on any excessive bonus. Not to mention, the Senate version will impose the higher tax rate on any bank receiving $100 Million in federal money and it is classified as an excise tax, so it is in addition to the income tax. One bright spot is the Senate bill applies only to cash bonuses while the House version will apply to such payments as restricted stock.
The punitive legislation approved by the House is unclear and will open the door for foreign firms to attract the most talented financial service employees during a time of great economic uncertainty at home. Many companies will have to raise base salaries to retain their best skilled workers and that will increase operating expenses during a time of weakness. Cities such as Charlotte and New York could get dethroned as financial centers of the world, which is ironic, because the bill sponsor is Charlie Rangel (D-NY). This is odd when you consider that Rangel’s district – New York City – has been living off of Wall Street’s bonuses and tax revenues for years.
Minority Leader John Boehner (R-OH) summed it up best when he said, "This bill is nothing more than an attempt for everybody to cover their butt up here on Capitol Hill." In fact, the bill is to appease the mob of taxpayers that are screaming for blood, but Congress is on a slippery slope when they begin to use the tax code as a way to punish companies.
Undoubtedly, the best way for financial companies to avoid punishment is not to accept government assistance, and companies that have taken the money can repay the loans early. The legislation will place President Obama in an unusual position of trying to appease fellow Democratic lawmakers while encouraging financial companies to participate in the federal rescue programs that are designed to bolster the financial system.
Unquestionably, investors will view the unpredictability of Congress as too risky, which will discourage banks from participating in the government’s voluntary $250 Billion capital-injection program. Over 200 banks have withdrawn their applications to receive government cash and others are moving to return federal money accepted from the TARP. I cannot imagine hedge funds and private-equity funds rushing to participate in Geithner’s soon to be unveiled Public-Private Investment Fund, which will rely on private capital to buy bad loans and other assets. Most taxpayers will view these actions as positive; however, we need a healthy financial system and that requires financial companies that are stable and well capitalized.
Congress is not concerned about stabilizing the financial system, but only wants revenge on evil Wall Street bankers. Obama called the legislation "vindictive". I, like many Americans, are frustrated and want solutions to the problems that are plaguing our country. However, populist responses to public outrage will not create solutions. We elect members of Congress to legislate pragmatically and with due process. We should all be outraged by laws that are rife with unintended consequences and lawmakers' willingness to abuse the tax code while encouraging class warfare.
Categories: Politics, Economy
Tags: algenon cash algernon algonon algnon north carolina repubicans
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Algenon, you are right on target with your assessment of the situation! Well said. Only thing, I think you were a lot too gentle with those on Capitol Hill.
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Algenon, great insight and analysis of the repercussions of the tax! I also liked your point about the "incentivized" compensation system for politicians.
Open question to everyone, how can we encourage and hold accountable politicians for their decisions as public stewards? Maybe it's correspondence, a grassroots effort or other solution, but I would enjoy hearing your and others thoughts.
Audie Cashion
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Okay Algenon, I'm listening...but I do not understand...
If a company has received monies from the US government and these companies may otherwise have gone out of business then what bonus did they earn?
Those persons making these bonuses made poor decisions...or at least some did...enough so that the company was ready to go bankrupt. So it would seem they should not be rewarded for those bad decisions...just as I would assume if the company went under they would have no monies to pay bonuses.
These companies were allowed to get too big. I am reminded of the corporate raider in the movie Pretty Woman. It would seem now would be a perfect time for the government to divide these huge companies up into smaller entities...kind of like the "Baby Bells" that emerged from the telephone
giant breakup.
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I had to reply to this because it seems a bit short sighted. Absent from you comments is the fact that these executives are/were being rewarded for failure. No one would have a problem with this compensation were this a company headed in the right direction. AIG has been an eyesore for years – it’s a poorly run company. And many of the foreign firms our brightest would be working for tie bonuses to performance and success not for failure the way U.S firms do.
I know when I was working as a Technology Consultant my bonus was tied to my positive performance. If I was out giving clients misleading and inaccurate information that affected their operations I ran the risk of getting fired not getting a bonus.
Executive compensation on Wall Street has been out of control for years and it has always come at the expense of investors and company operations. One of my rules of thumb with investing on the stock market is review the compensation of the people at the top over the last 5 years of the company. If the people at the top got bonuses but the company stock has been performing poorly its a company headed in the wrong direction.
Ask yourself this question - how many of the employees in your office have been given bonuses to for poor performance. How many contractors have you paid for doing poor work? It always amazes me that we have one set of rules with regards to performance and bonuses for failure on Wall Street and another for everyone else.
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Algenon, well written as usual.
However, you brought to light an unintended consequence that I find ironic.
The financial firms now refusing bailout funds and/or returning them due to federal oversight (or punishment)...perhaps may be very viable without government assistance after all. The firms that would indeed take such strong medicine are truly candidates for filing bankruptcy or nationalization, at the least.
This may expose the firms that were excessively leveraged or mismanaged. And, which firms with management prepared to go back making money the old fashion way - They Earned It!
We all want a sound financial system...but letting several financial firms return to business as usual is not an option...in my play book.
Punitive taxation is certainly deplorable...and equally reprehensible is guaranteed compensation not tied to plus performance.
It appears we're heading for another "Boston Tea Party" due to greed and corruption...within our sacred institutions and corporations. Absolute power corrupts absolutely...and too much money has a similar effect.
In my opinion!
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Another good one. The simple truth the people need to get out of this mess on their own and take the government out of the equation!
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Yes... that sums it up.
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Great article! Send it to President Obama…… And, Nancy Pelosi!!!
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Great job, Algenon!!
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The governments attempt to regulate my tax money is a good idea; however their excise tax would need to extend to all salary ranges and all companies that have a loss regardless of government funding. This would protect investers (stock holders) and tax payers alike.
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Good article, but I am in favor of them being taxed heavily. I am sick and tired of people getting richer and richer while I work harder and harder, and still maybe out of a job. I want those people to burn and if they have to give the money so be it.
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Great article! It should also be pointed out that the congressional writers of the stimulus package were well aware of the bonuses to the point that they contractually guaranteed them in the package. Thus they are about to get us into a major lawsuit, at the taxpayers expense that probably can't be won. This tells me that the congressional members who voted for the stimulus package either did not know what they were voting for (did not read it, follow the herd mentality), or they are now grandstanding for their own benefit. Either way it is a strong case for term limits.
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