The New York Times in its recent editorial “Taming the Fat Cats” called on President Obama to impose Britain’s special 50% tax on all bank bonuses over $40,00 this year. Concurrently Senator Charles Schumer of New York was voicing his outrage that AIG executives have not returned the major portion of the $45 million they agreed to return by the end of the year, in spite of the $183 billions they received from taxpayers in order to keep their company afloat.
In the meantime Goldman Sachs has set aside a bonus pool of $23,000,000,000 for 2009. This after receiving billions in Tarp funds (which it has since paid back to the government, much in the manner of a rescued drowning man returning a life preserver to the ship’s crew after it had served its purpose), and after having been given a free pass to change its corporate moniker from ‘Investment Bank” to ‘Bank Holding Company’ with all its attendant access to federal programs and to near costless money, and after having been showered with ‘give away’ billions of government counter-party funding, permitting Goldman to be made whole on credit derivative bets which otherwise would have been worth next to nothing. As pointed out in the NYTimes’ editorial this catalog of excess is the result of “the way America’s voracious bankers leveraged hundreds of billions in taxpayer bailouts to line their pockets with multibillion-dollar bonuses while American businesses starve for credit.” Not to speak of the millions of unemployed and the millions who have lost or will lose their homes.
The rage is widespread and to the financial community’s great relief, it is grossly misdirected. Focusing on bonuses to come has taken the public’s, the media’s, Congresses’ and the President’s eye off the ball. To the bankers the issue of primary concern is the specter of ‘clawbacks’ of the hundreds of billions of bonuses and salaries paid out these past years against illusionary profits from trading value-destroying derivatives, opaque market instruments, accounting practices bordering on the spurious, off the book entities, vastly inflated balance sheets altogether resulting in bonuses that were largely based on erroneous information, and erroneous calculations, if not outright fraud. Being taxed on or reducing this year’s bonuses is but an irritant if the hundred’s of billions paid out over the past few years can be held free and clear by their recipients in the financial world. To be kept in spite of bringing the economy to the brink of catastrophe through “their foolhardy bets that tipped the world into the worst economic crisis since the great depression.”
Had these banks/financial institutions gone bankrupt, as indeed many technically would have without the government’s bailouts, the trustee in bankruptcy would have deemed the bonuses paid out as “fraudulent transfers” and would have forced their repayment to the estate in bankruptcy, namely the myriad banks and financial institutions that received government help both directly and indirectly. Certainly given the billions it is costing the public purse, it is incongruous in the extreme that those who caused the disaster should retain the spoils of their irresponsibility and mismanagement.
Back in March Senator Schumer minced no words. In a letter dated March 17, 2009 to then AIG Chairman Edward Liddy he wrote:
“We write today to express our outrage at American International Group’s recently revealed multi-million dollar bonus payments. In these perilous economic times, it is unconscionable for the American taxpayer to find out that the very employees responsible for running the company into the ground have now received “performance based” awards that are hundreds of time as large as average American’s yearly salary. If these contracts are not renegotiated immediately, we will take action to make American taxpayers whole by recouping all of the bonuses that AIG has paid out to its financial products unit, which, by all accounts, is primarily responsible for the near-failure of the company and the devastating impact on the global financial markets.”
Senator Schumer was on the right track, but why limit the focus to AIG? The same could be said for just about all of the entities that received assistance from the Fed and Treasury over the past 16 months. It has crippled the national budget, and the economy both here and throughout the world. In the spirit of Senator Schumer’s admonition it is past time to right a great wrong perpetrated on the American taxpayer and to demand the recapture of all bonuses derived from trading in such financial instruments as CDS and CDO’s or derivatives per se, designating the bonuses paid out from the illusionary ‘profits’ in trading these financial products as ‘fraudulent transfers’. It is time for Congress to act. As the New York Times pointed out in its editorial, the ‘constitutional ban of bills aimed to punish a specific group — so called bills of attainder — is unlikely to apply because a tax would not be aimed to punish named people but an economic class.”
Congress should now forcefully take the matter in hand and act to remedy one of the great con games ever visited on the American public. Forceful action on this issue would restore in large measure the nation’s confidence in its financial markets and their governance, restoring a level of confidence that has been shaken as never before.