Even though I am furious at the people who brought down AIG, along with all the other Masters of the Universe, I do not support the House bill that passed yesterday — the one that would tax bonuses at 90%. For starters, it’s badly targeted. On the one hand, it leaves out the incredibly troubling Merrill Lynch bonuses, along with any other bonuses paid before Jan. 1 of this year. On the other hand, it hits people who were just writing life insurance policies at AIG. Moreover, it also hits anyone AIG hires now. Suppose, for instance, that AIG were to hire Paul Krugman to supervise the liquidation of its Financial Products Division. And suppose AIG wanted to pay him a bonus if he did his job quickly and well. His bonus would be taxed under this bill, even though he had nothing to do with the financial crisis (which is why I picked him), and is being given a bonus for helping to solve it.
The bill would also allow firms receiving TARP funds to avoid the tax by simply paying their employees exorbitant salaries. Bonuses are bad, but exactly the same amount of money paid to exactly the same employee in the form of a salary is apparently fine. This seems exactly backwards to me. Part of the problem with the AIG bonuses was precisely that they were not tied to performance in any way: the people at AIG-FP, who had gotten enormous amounts of money when times were good, supposedly on the basis of their performance, locked down the same level of compensation when it looked as though their trades were about to go bad. Now, apparently, we want to give people an enormous incentive to decouple their compensation from performance in exactly the same way. Oh goody.
If that weren’t enough, it seems likely to drive down the value of AIG generally, which will make it much harder for us to get the rest of our money back.
Besides all that, it’s spooking the banks needlessly. I want to emphasize the word ‘needlessly’ here. There are a lot of things I think we ought to do that would spook the banks. Nationalizing several of the large banks, for starters. Putting in place regulations that ensure that no company is “too big to fail”, that depository banks and investment banks are different companies, that liquidity requirements are bigger and (preferably) countercyclical, etc. Regulating all types of financial services firms, including hedge funds, and all financial instruments, including derivatives. Setting up procedures to liquidate any companies that manage to become systemically important despite these regulations, procedures that ensure that their investors take a very serious haircut. Unless someone can explain to me why off-balance entities serve some useful purpose, I think they should be banned. So I am fine with spooking banks.
That said, no business does well when the rules are constantly changing all around them. A lot of the reforms I favor are aimed not just at making the rules better, but establishing predictable rules where none exist. The fact that we have been improvising ever since this crisis hit is a tremendous indictment of every preceding administration that could have set up mechanisms to deal with these sorts of problems but did not.
If we want to spook the banks, then, I think we ought to do it in some way that actually solves a genuine and serious problem, and does it in an intelligent and targeted way. This bill is neither intelligent nor targeted. Moreover, while the bonuses are outrageous, they are not on my list of the top 100 things we need to worry about right now.
I’d rather save my fury and use it to force serious, lasting reform of the entire financial industry, and save spooking the banks for something really worthwhile, like nationalizing Citi.