Our House of Representatives

by on March 20, 2009 at 8:38 am in Economics | Permalink

Henry Blodgett writes:

If the "TARP bonus" bill the House passed today becomes law, any of
the hundreds of thousands of people who work for Citigroup, Bank of
America, AIG, and nine other major US corporations will have to fork
over 90 cents of every dollar they make that puts their household
income over $250,000.

That's household income, not individual income.*  If you're
married and filing singly, you'll have to surrender anything over
$125,000.  Indefinitely.

Read the whole thing.  There is this too:

The really distressing part is what this tax will do to the corporations that we now own and are supposedly trying to save.

(Remember?  That's the reason we bailed Citigroup, AIG, GM, and the
rest of them out–to save them.  Because we convinced ourselves that
civilization would end if we didn't.)

Thanks to our stupidity
bailouts, we now own major stakes in these firms (at mind-boggling
expense). So it's not clear why we want to destroy them.  But that's
what we seem determined to do.

Addendum: Here is one of many stories about death threats against A.I.G. employees.

1 Michael March 20, 2009 at 9:03 am

I wonder how long inflation will take to make $125K a trivial amount.

2 floccina March 20, 2009 at 9:16 am

That would teach them to not take welfare. smile

3 joe March 20, 2009 at 9:38 am

Now the big bankers know what it feels like to whipped about by a VC group.

4 Michael Foody March 20, 2009 at 9:41 am

Will this bill destroy these companies? It really depends on how valuable the people who would be hurt by this are to other institutions that are unaffected by this measure. I’m sort of suspicious of how many openings there will be for tainted six figure salary finance types at least in the short term. I’m also not sure about how transferable the skill set of reckless leveraged trading is to financial stewardship. Could it be that absent the ability to work with less risk and leverage these high earners are actually worth much less than they are used to receiving? These are meant as questions not statements.

I suspect that this bill is overkill, and if the state is going to control the company in this way they should probably adjust the dials more incrementally since the potential impacts are so poorly understood.

5 Jason (the commenter) March 20, 2009 at 10:04 am

This is like what used to happen to Jews in Europe. The government made up a scandal, blamed it on a group, then used the public furor as an excuse to appropriate the group’s wealth. These people have homes with mortgages and fixed expenses. They are going to have to leave their jobs or work for slave wages. Contracts made to them aren’t considered valid. They have to live in fear of their lives. And all because of their class.

Forget FDR or Lincoln, Obama is somewhere between Hitler and Stalin.

6 ibaien March 20, 2009 at 10:22 am

“Forget FDR or Lincoln, Obama is somewhere between Hitler and Stalin.”

i’m giving this the ‘most absurd comment on the internets this week’ award. obviously, restructuring the tax rate for a tiny minority of the upper class is identical to instigating the genocide of millions. if you make more than $250k a year, and you’re complaining, you’ll never earn my sympathy. never, never, never.

and while we’re at it?

“They are going to have to leave their jobs or work for slave wages.”

welcome to the america most of us live in. somehow, we get by.

7 mc March 20, 2009 at 10:27 am

@John: If you’re going to make a citation, you could at least read it yourself. Have a look at 1.b.1.A. In your hypothetical case, ‘lesser of’ would be equal to zero. So the teller’s family would have no liability under this bill.

8 Allen March 20, 2009 at 10:30 am

John @ 9:27,
I disagree. It sounds like it’s the LESSER of bonus payments or payments over $250k. So basically,
“rich” people’s bonuses. Unless the bank teller is getting bonuses, her househould won’t owe any add’l tax.

That said, it’s still a stupid idea.

9 jay March 20, 2009 at 10:31 am

Especially upsetting because TARP funds were more or less not optional for many banks who wanted to reject them to signal their strength, which is the opposite of what the government wanted them to do so as to not hint about the weakness of others.

10 Allan March 20, 2009 at 10:45 am

Simple solution: if you don’t like the taxes, leave.

I am sure there are millions of people who would gladly work for less than $250k. The only question is whether those people could do the job.

11 Russell L. Carter March 20, 2009 at 10:51 am

I am SOOOO loving this. Poor liddle peoples having to subsist on $250K or less. Oh think of the children.

Let me emphasize: I dearly dearly love getting to experience at 2nd (or third?) hand Tyler’s (and the rest of the fat cats) angst.

Woot! Made my day. Keep this category of posts flowing!

I do want to respond to this:

“At a commercial bank very few people are traders or executives with non trsnsfersble skills”

I posted my resume (I’m a data plumber) to dice.com a while back and got about 75 calls, nationwide. About 15 of those were for cattle call positions at bloomberg. Not one other thing in NYC. I suspect that most will stay put.

12 Anonymous March 20, 2009 at 10:58 am

There is a much larger issue here.

The US is critically dependent on overseas funding. All those trillion-dollar stimulus and bailout packages will blow up spectacularly without it.

The one thing the US has had going for it is a reputation as a safe haven. US long-term interest rates have benefited enormously from the “flight to quality” to US Treasury debt, from riskier assets and riskier countries.

A newfound, well-deserved reputation for gibbering demagoguery (and willingness to tear up contracts) will hurt the US very, very badly. The world is surely watching very closely and taking notes.

13 babar March 20, 2009 at 11:04 am

> Simple solution: if you don’t like the taxes, leave.

And lots of people will leave. They will work for the same companies, in other countries. They’ll leave the US to be run by hedge funds, none of which get TARP.

14 Bushequalhitler March 20, 2009 at 11:10 am

ibaien: “if you make more than $250k a year, and you’re complaining, you’ll never earn my sympathy. never, never, never.” How do you think the Germans felt about the Jews at that time? “If you have jewelry, and a nice house, and a good job that you obviously stole from my fellow German citizens, you’ll never earn my sympathy.” You just proved Jason’s point.

15 babar March 20, 2009 at 11:18 am

> There are three types of Republicans: greedy, scared, and stupid

where’s joe the plumber when you need him?

can a TARP receiving institution pay to have the toilets fixed, or has that been prohibited?

16 Dirk March 20, 2009 at 11:27 am

Re: populist outrage about the AIG bonuses.

Like others, I was incredulous when I heard about them, but internet resources (including commenters at Marginal Revolution) told me these were retention bonuses and obligated under contracts.

I’ve never heard of retention bonuses before, and I guess most Americans have ever heard of such things. It never occurred to us that there would be retention contracts. Do other industries have retention bonuses?

Further, I don’t want to live in a world where there are retention bonuses. Don’t we want people to work hard? Employees should think they could be fired at any time. The size of the AIG bonuses and AIG’s losses are besides the point. It wouldn’t matter if AIG were making billions and the retention bonuses were $1. Retention bonuses are against the whole American free market project: employment at will, your job and income are always at risk.

Haven’t the libertarians been preaching through the years that the auto industry’s woes are partially due to union contracts? And that the schools suck because of teachers’ unions and their contracts? I’ve accepted the libertarian arguments in those cases. OK, but now it appears, much to my surprise, that white collar bankers also have employment contracts. This is part of the outrage many Americans feel. Since when do white collar, highly paid people get contracts?

Further, what is the possible rationale for any retention bonus in an industry awash in excess labor. Everyone agrees the financial sector got bloated. We want it to shrink. We want people to quit. AIG will have no problem filling those jobs.

17 lc March 20, 2009 at 11:35 am

Ed, Head of Equity Sales: “Bill you know you had a great year, really brought in a lot of revenue this year. We talked about it and decided to give you a $5,000 bonus this year”

Bill, Top Broker: “Thanks Ed, but you know that seems a little low given last year I got $450,000 and I got an offer from a hedge fund with a $200,000 base and a guaranteed bonus of $500,000.”

Ed, Head of Equity Sales: “Oh did I forget to mention that we decided to give you a little raise, instead of $250,000 next year you will be making $1,000,000. But if you don’t perform next year, you can expect a 75% paycut, back down to $250,000. COLA has been tough this year, so we figured you needed the 400% raise.”

Bill, Top Broker: “So is this kind of like a ‘bonus’ for doing a good job?”

Ed, Head of Equity Sales: “Heaven forbid no, we don’t give out bonuses anymore. Our overlords in DC would get far too angry if we did anything that pernicious. Keep up the good work.”

18 Brian J March 20, 2009 at 11:40 am

If this law is going to apply to bonuses, can’t they just make what would be a bonus base salary?

Regardless, I’m not sure if Blodgett has this right, as others have said. Why is a teller making $40,000 getting a bonus? And would she even be classified as an executive? If not, and she somehow got extra money, would she get to keep it?

Perhaps he’s right about the details of the bill–that this would affect income not given by AIG or any other financial firms–but let’s say he’s not. If the bill merely targets income from AIG and other firms like it, is he okay? What if it specifically targets the people who made money through massive bonuses even if their divisions were crashing? Is he okay with that?

19 Dirk March 20, 2009 at 11:43 am

My leftward movement over the past several years has been fueled mostly by things I learn from the internet, including the excessive compensation for bankers. In 2004 John Kerry said he would raise taxes on the top 1% of incomes. Meaning people making $85K would see their taxes increase. Or so I thought, and so did many voters. Gosh, we know people who make $85K.

It turns out we were being played for chumps. $85K wasn’t even close to the top 1% of incomes. Even twice that doesn’t put you in the top 1%. The incomes of some people out there are outrageously high. Why didn’t someone tell us? If we knew what other people made we would press our employers for higher salaries.

The internet is a great way to learn things, and has already benefited society by setting the stage for a populist move toward greater equality. People who thought they were doing well, who thought they were alpha, will learn they are just betas. And that will cause agitation and an evening out of inequalities.

The “transparent society† idea – where Google or someone on the internet knows everything about everyone and makes the information freely available. That gives me hope.

Why shouldn’t tax returns of everyone in the country be available on the Internet? No more secrecy.

Suppose you need to get your car’s oil changed and there are two Jiffy Lube’s in your area. You look up the owner of each and how much money he made last year. One made $200K and one made $300K. You go to the Jiffy Lube where the owner made $200K. In a transparent society, this information will be accessible through a handheld device and people will use it to even out inequalities.

20 vanya March 20, 2009 at 11:59 am

Tyler also clearly thinks nobody in AIG is responsible for any wrongdoing. It’s perfectly fine for financial houses to strip capital out of industry to line their own pockets, but it’s unreasonable for anyone to question the productivity or usefulness of such activity. And not only were the bonuses excessive on their own merits, but there is increasing evidence that much of AIG’s activity is basically fraudulent – that’s what the AIG executives don’t want exposed.

21 Diana March 20, 2009 at 12:08 pm

“It’s wicked hard to find people who can do these jobs well.”

This may explain why AIG wound up with 1.6 trillion of liabilities with only a few million in assets. Clearly that crowd wasn’t doing their jobs well.

So why do we have to pay them millions in bonuses?

22 Russell L. Carter March 20, 2009 at 12:32 pm

“Hate and envy are the handmaidens of demagoguery. I fear for my neighbours to the south.”

I think *you* need to calm down. The reaction is more like schadenfreude:

“largely unanticipated delight in the suffering of another which is cognized as trivial and/or appropriate.†

Quite frankly I don’t envy anything at all of the people in question, certainly not the lifestyle (an hour each way on the train, and 12 hours a day, every day?), and if I wanted to do the work as an intellectual challenge I would have done it. But I read the books and we’re talking parabolic PDEs, solved using spreadsheets. Not challenging. (And they weren’t even good at it!)

As for hate? That’s silly. Quite possibly you’ve got some projection going here. Really, us poor people are nice folk. Even though I don’t make (much) over 5 figures, I do have a viking stove and can do tasty things with it. And Tyler would like what was playing on the sound system.

Relax! Take a deep breath. Bread line is around the block.

23 Bushequalhitler March 20, 2009 at 12:41 pm

Dirk: “Further, I don’t want to live in a world where there are retention bonuses. Don’t we want people to work hard? Employees should think they could be fired at any time.”

The whole point of a retention bonus is to keep employees who would otherwise leave the company. These are not people who you have to threaten to fire them if they do not work hard. These are people you know they will work hard and you know that if you do not give them the retention bonus they would leave the company. You cannot threaten to fire somebody who wants to leave you.

I understand you have no basic understanding of economics of the business world, and that the lefty internet websites you read are scarce in such content. But don’t you even have, or had, a girlfriend? When she wanted to leave you, have you tried to keep her by threatening to dump her? How did that work out for you?

24 Douglas Knight March 20, 2009 at 12:51 pm

Dirk:
I’ve never heard of retention bonuses before

I bet you have a pension that takes time to vest.

25 Rex Rhino March 20, 2009 at 12:56 pm

Well, the great thing is that this business has pretty much squashed the whole idea of successful public-private partnership.

26 Aaron Aardvark March 20, 2009 at 1:02 pm

Meanwhile, Rome continues to burn.

27 gus March 20, 2009 at 1:44 pm

Hope and change and more power for liberals in Congress to control the peeps.

Vote Obama for Hope and Change.

28 kurt March 20, 2009 at 1:50 pm

If you don’t like the taxes, divorce.

29 gus March 20, 2009 at 2:17 pm

If you don’t like taxes leave?? Get your focking hands off of my money libtard.

30 Rachelle March 20, 2009 at 2:17 pm

Patrick:

TARP Bonus is defined as any income in excess or 250,000 dollars.

So yes, it does refer to normal income over 250,000.

Learn to read and stop passing around misinformation.

31 babar March 20, 2009 at 2:35 pm

@highgamma.

i agree 100% with your conclusions.

you can probably fire 75% of the traders though but you need to keep the best ones.

32 Andrew March 20, 2009 at 2:52 pm

So, Krugman thinks the right path is to fix a problem it took really smart people years to create in 6 months with dumber people?

Good luck.

33 chip March 20, 2009 at 3:12 pm

Also, note that the definitions of “Covered TARP recipient”/”Federal emergency economic assistance recipient” in the two bills effectively include majority-owned portfolio companies of the venture capital, private equity and merchant banking arms of the TARP funds recipients.

Let’s say you’re a married, mid-level executive at a software company that’s majority-owned by a Goldman Sachs affiliate. Or the new CEO trying to turn around a manufacturing company that PNC lent money to, foreclosed on/credit-bid for in bankruptcy, and now owns. Any bonus _you_ get is subject to the proposed tax.

In fact, in the House bill, (performance-vested) restricted stock grants–which are noncash, and are pretty standard in employment contracts–might get treated as bonus income and trigger cash tax obligations. This bit at least has been fixed in the Senate bill.

It’s obvious that no one involved in either bill gave this issue a moment’s thought. The benefit of a day or two of extra thought helped the Senate staffers fix some really senseless bugs that made it into in the House bill, but not all.

Even better, many of the AIG bonus recipients whose pay kicked off this whole kerfuffle are in the London office of AIGFP and probably aren’t subject to the proposed tax anyway.

Fortunately the two bills are so different that this issue might die in conference committee. This is an object lesson in how to make really, really bad legislation.

34 Andrew March 20, 2009 at 3:33 pm

So, I’ve decided to go into the financial innovation business. I just invented the Fitch Pork Torch-o-matic. Now, you can have your fork and torch handy with one hand free to dial up your I-pod to drown out the screams and gnashing of teeth.

35 Careless March 20, 2009 at 3:52 pm

I think *you* need to calm down. The reaction is more like schadenfreude:

“largely unanticipated delight in the suffering of another which is cognized as trivial and/or appropriate.†

Russel Carter: Have you missed the very numerous death threats? CNN had a guy on tv yesterday who said “why haven’t we broken out the pitchforks and torches yet?” There’s an incredible amount of anger about this.

36 Suzan March 20, 2009 at 4:16 pm

Now things are really getting scary. I can’t believe they passed this thing. Talk about knee-jerk reactions! We should not be mad at these AIG employees. We need to be mad at Barney Frank, Geitner, Rangle, Pelosi, and the rest of the idiots who put this in the stimulus package. It’s IN the stimulus package. AIG was contractually obligated to pay these. I know that if I had a bonus coming, I’d want it. Class warfare, plain and simple. Hang on to your wallets folks, we’re next.

37 Leah March 20, 2009 at 5:01 pm

Be careful what you wish for. Eurpope has had the class system for centuries. You were what you were born into. If you can turn on one class, you can turn on another. Class warfare is a dangerous path to take because what you do to one group can be also done to you. I guess that’s why they call it warfare. I have faith that America’s freedoms will survive in the end because of our history and Constitution. However, me and millions of others are willing to fight for those freedoms even if it’s within our own borders.

38 Russell L. Carter March 20, 2009 at 5:42 pm

Careless writes:

“Have you missed the very numerous death threats?”

Hmm, from the linked-to article:

‘Officials at several police departments in Connecticut towns where A.I.G. executives live said they did not know about possible threats against the bonus recipients. “We haven’t heard of it,† said Sgt. Carol Ogrinc of the New Canaan police. “There have been no complaints made to our department.†’

Who knew that the AIG grifters were such sissies?

I think we have enough data now to “shorter up” the weepers in the above comments:

“Only the exact set of private enterprise people responsible for the colossal failures that endanger the global economy have the intelligence and nobility to clean up the mess, but they’ll only do it if we pay them millions.”

Riiiiiiight.

Wonderfully satisfying thread. More like this.

39 torris187 March 20, 2009 at 6:06 pm

“The Paulson plan is better than nothing”

Reminds me of what my college roommate said “The fat drunk chick at the bar is better than nothing”

Both turned out to be incorrect.

40 David March 20, 2009 at 6:28 pm

This is why you don’t bail out AIG. Nothing we have done will save them, nothing their employees can do will save them. The “great deal” we got on the initial loan has been quietly abandoned. Now they’ve taken hundreds of billions more, at a reduced rate.

We give them billions so their counterparties (Goldman) can get 100 cents on the dollar, when nobody else is getting 100 cents. Their employees get 100% of their bonus, while we non-TARPers lose our jobs.

AIGs derivative positions need to be unwound in preparation for sale of the insurance business and the end of the compnay’s existence. This should have been done in bankruptcy, with creditors lined up to collect what they could, but this “too big to fail” idea has taken over the common consciousness.

All this worry now about bad laws and bad precedents and abrogation of contracts is a bit late. The law, our captialist system, and sanctity of contract was all thrown in the trash last September.

“The Paulson plan is better than nothing.” Indeed.

41 Joshua March 20, 2009 at 10:52 pm

“I actually think Senator Dodd may be an especially great risk factor for the markets for the foreseeable future, not for any partisan reason but because he is fighting for his political life in Connecticut and as a result

may continue his destructive appeals to populist sentiment,

as when he airdropped compensation limits into the conference report of the stimulus bill, or suggested the possible nationalization of banks in multiple media appearances.”

42 ChrisA March 21, 2009 at 4:28 am

On the ethics, we have people who are basically saying that if you don’t pay me vast amounts to stay and sort out the mess I created, I will leave and join a competitor who will pay me vast amounts to learn how to take advantage of my insider knowledge. This sounds like blackmail to me. So these tax rises are a perfectly acceptable moral response, perhaps the blackmailers did not take into account as a possibility, but they should have. So ethically there is no problem. It just game theory.

On the practical issues about needing to keep people motivated in this sector, we have to massively shrink the financial sector, the sooner we do it the better. Wall Street is not required for a functional economy, it only exists through massive government subsidies. It’s like the Brahamian caste in medieval India, expensive parasites believing in their privilege as a right. Clearly, from the comments here, everyone working in that sector are still in denial, so should not be listened to. Get on with nationalizing retail banks, let the rest fail, the BK courts can sort out the mess. Yes we will have a couple of years of pain, but that will be worth it.

43 Mr. Econotarian March 21, 2009 at 9:58 am

So if the “bonus” is just converted into a raise, it isn’t taxable…as if AIG doesn’t know something about regulatory arbitrage.

Note: 1994 opinion United States v. Carlton, the U.S. Supreme Court unanimously held that retroactive tax laws did not violate the constitutional prohibition on ex post facto legislation. Of course, that’s idiotic.

44 Frank March 21, 2009 at 11:06 am

Sorry for doubling.

45 Jackson March 21, 2009 at 8:12 pm

This bill would be a great idea if it worked the way it was intended to work (discourage bonus payments to those who did not earn them with performance); unfortunately, it’s not going to work that way.

A couple of key points:

1 – The bonuses at AIG were largely retention bonuses (attempting to keep some of the people who could help unwind their book in-house, rather than having them jump ship to hedge funds and trade against AIG) in large part, not performance bonuses. If you have a company in bankruptcy (explicit or not) and you have good job offers elsewhere, you have to convince someone not to take those offers.

2 – Penalizing all banks to take TARP funds is outrageous. While I agree that maybe a bank like Citi should be put out of their misery (as disallowing them from paying employees will do!), this is terrible for WF and JPM. The last thing the US should be doing is taking profitable banks and steamrolling them with compensation legislation.

3 – There are two big winners in this game:

– The employees of those banks receiving TARP money who are the good employees (the ones you would want to keep, not the ones you wish would leave).

– Foreign banks.

This is because all of the good people are about to head to foreign banks. I know for a fact that recruiters are placing large numbers of calls to certain individuals at TARP fund receiving banks. Why? Because there are a lot of people who had nothing to do with mortgage backed or securitized products that caused many of these problems who are very, very profitable for the banks… who now cannot get paid at those banks if this sticks, but who can definitely get paid elsewhere. The big winners here are people like UBS, BNP, DB, and CS. We’re outsourcing the best American talent to foreign banks if we go through with this, while keeping only those who can’t get better jobs for ourselves.

If congress wants to destroy our economy, I’d prefer they just start bombing our cities. At least it’s faster.

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