Senators push for bonus clawback

Senators push for bonus clawback
By Tom Braithwaite and Andrew Ward in Washington

Published: March 20 2009 18:16 | Last updated: March 20 2009 23:28

Senators are preparing a final push next week to impose a punitive tax on bonuses at bailed-out financial institutions such as AIG, the troubled insurance group.

But as Wall Street braces itself for a draconian clampdown on its pay culture, the legislation could yet stall amid criticism that it might undermine the government’s financial rescue programme and even violate the ­constitution.

On Thursday the House of Representatives overwhelmingly passed a bill to impose a 90 per cent tax on the bonuses of employees earning more than $250,000 (€184,000, £173,000) at companies that received more than $5bn in bail-out money.

Originally aimed at AIG, which has taken $170bn in taxpayer money and paid $165m in bonuses, the measure would also affect other institutions including Citigroup, JPMorgan and Goldman Sachs.

The Senate is working on similar legislation involving a 70 per cent tax on bonuses at a broader range of institutions – half to be paid by employees and half by companies – but it remains uncertain whether it has enough support to force its way through a crowded legislative agenda.

A Democratic aide to the Senate leadership said senators were divided between those wishing to push through fast-track legislation and others backing a slower process, including committee hearings, which could see momentum fade as the initial wave of anger over the AIG bonuses subsidies.

President Barack Obama has voiced broad support for congressional efforts to reign in Wall Street pay but stopped short of endorsing legislation to impose retro­active bonus taxes.

“I understand Congress’s frustrations,” he told Jay Leno, the chat-show host. “But I think that the best way to handle this is to make sure that you’ve closed the door before the horse gets out of the barn.”

Recriminations intensified on Friday over the AIG bonuses as Democrats traded blame for an affair that threatens serious damage to the Obama administration.

The White House was again forced to defend Tim Geithner, the beleaguered Treasury secretary, as fresh doubts emerged over when he first learned of the AIG bonuses and why he did not try to stop them.

Maxine Waters, a Democratic congresswoman, expressed exasperation at the administration’s handling of the controversy, saying: “Maybe the president is not up to speed on what is going on.”

The Treasury department acknowledged that Mr Geithner had been questioned on the bonuses in a congressional hearing a week before the White House had previously said he first learned of them. There was also mounting scrutiny of the administration’s role in watering down a provision in the stimulus bill last month that could have blocked the payouts.

Republicans tried to keep the focus on Democratic infighting to mask their own party’s turmoil over the bonus saga, as they struggled to reach consensus over the tax proposals.

The mooted legislation offends the anti-tax principles of many conservatives but Republicans are reluctant to be seen blocking measures to recoup bonuses that have caused a wave of populist anger.

“At least some Republicans made clear that they are not going to allow this to go ripping through the Senate,” said Tom Mann, a senior fellow in governance issues at Brookings Institution, the think-tank. “At the very least they will use their procedural [tools] to hold off any votes for a period of time and use that as a medium for blaming the Democrats for what they did or failed to do earlier.”

Critics say a retroactive tax on bonuses is unfair and potentially counter-productive if it discourages other institutions from participating in government attempts to rebuild the financial system. Supporters of the committee route argue that such a controversial piece of law should be considered with a cool head after the political passion has died down.

The Democratic leadership in the Senate has a very short window to push through a vote before the Easter recess. Bankers will be hoping that the Senate has not, by then, imposed on them an involuntary Lenten fast by taking away their bonuses.

Copyright The Financial Times Limited 2009