Tax Wall Street bankers in haste, repent at leisure
Tax Wall Street bankers in haste, repent at leisure
March 20, 2009 1:12am
Beware any financial legislation that passes the House of Representatives rapidly when both the Democrats and Republicans are angry. It will cause a heap of unintended consequences.
That was true of the Sarbanes-Oxley Act of 2002 and it may be even more true of the House’s bill to impose a 90 per cent tax on bonuses earned by employees of large banks that have taken US government capital. It is an ill-conceived and over-hasty piece of populism.
The mistake has been to broaden a bill prompted by employees of AIG Financial Products to the entire set of large Tarp recipients.
I have been very critical of Wall Street pay practices, including in my column this week about AIG’s retention bonuses, and I backed Mr Obama’s curbs on compensation for senior executives. I think the big Wall Street firms have been dismally slow to wake up to the implications of having the government as a significant shareholder.
But there are several reasons why the House bill, if it is followed in the Senate and signed by Barack Obama (neither of which is certain) would make bad law.
First, it is retroactive. The banks that took government capital injections under the Troubled Assets Relief last year did so at the urging of the Federal Reserve and the Treasury. Many of them clearly needed the capital but others, such as Goldman Sachs, might have got by without it.
Imposing strict conditions on pay on banks that took a public investment of $5bn or more - Citigroup, JP Morgan Chase, AIG, Bank of America, Wells Fargo, Morgan Stanley, Goldman, PNC and US Bancorp - will undermine trust in the Treasury when it is badly needed.
Second, it is arbitrary. The House, unsurprisingly, has set a lower limit that excludes many banks based in House districts across the country. What is the logic, for example, in leaving out SunTrust, which gained $4.9bn in government capital and escapes the provision entirely?
It is also arbitrary in applying only to US citizens or people employed either in the US or by US entities. This may well have the bizarre result of making it less painful for AIG Financial Products - the original target - than for the Wall Street banks.
Many of the AIG Financial Products employees are London-based and I assume that quite a few of them are not US citizens. If the unit is a UK entity, which it appears to be, then the Internal Revenue Service will be unable to withhold tax on what are UK-sourced earnings.
Then there is the fact that it applies only to bonuses paid from January 1 onwards. This arbitrarily favours banks that paid 2008 bonuses before the end of the year - Merrill Lynch, for example - and penalises the others. It makes John Thain look far-sighted for bringing the Merrill bonuses forward.
Third, and most importantly, it creates a set of bad incentives. Goldman has already talked about wanting to return the $10bn in Tarp funding as quickly as possible, as has Ken Lewis of Bank of America and others. If I read the bill correctly, Goldman could escape this trap now by paying the Treasury $5.1bn.
Those institutions that can escape the 90 per cent bonus tax will now want to do so quickly, which will mean raising capital simply to return money to the government. But that goes against the whole point of the Tarp scheme, which is to ensure they have sufficient capital to keep lending.
Another incentive problem is that it could cause an employee rush for the exits at these institutions. An orderly reduction of risk-taking and excessive compensation on Wall Street is desirable, as I have said elsewhere. This bill threatens to make the process chaotic.
The best thing for the US economy is to have a steady adjustment of over-leverage and financial excess, not to have these banks struggling to escape the government’s embrace before they lose employees not only to hedge funds and private equity but any company that can pay more than $250,000 a year.
The best solution for the Senate and the administration is to curtail the scope of the House bill and refocus it on AIG Financial Products, which was what the fuss was originally about. A populist measure feels great at the time but the hangover tends to be painful.
March 20, 2009 1:12am in Finance
March 20, 2009 1:12am
Beware any financial legislation that passes the House of Representatives rapidly when both the Democrats and Republicans are angry. It will cause a heap of unintended consequences.
That was true of the Sarbanes-Oxley Act of 2002 and it may be even more true of the House’s bill to impose a 90 per cent tax on bonuses earned by employees of large banks that have taken US government capital. It is an ill-conceived and over-hasty piece of populism.
The mistake has been to broaden a bill prompted by employees of AIG Financial Products to the entire set of large Tarp recipients.
I have been very critical of Wall Street pay practices, including in my column this week about AIG’s retention bonuses, and I backed Mr Obama’s curbs on compensation for senior executives. I think the big Wall Street firms have been dismally slow to wake up to the implications of having the government as a significant shareholder.
But there are several reasons why the House bill, if it is followed in the Senate and signed by Barack Obama (neither of which is certain) would make bad law.
First, it is retroactive. The banks that took government capital injections under the Troubled Assets Relief last year did so at the urging of the Federal Reserve and the Treasury. Many of them clearly needed the capital but others, such as Goldman Sachs, might have got by without it.
Imposing strict conditions on pay on banks that took a public investment of $5bn or more - Citigroup, JP Morgan Chase, AIG, Bank of America, Wells Fargo, Morgan Stanley, Goldman, PNC and US Bancorp - will undermine trust in the Treasury when it is badly needed.
Second, it is arbitrary. The House, unsurprisingly, has set a lower limit that excludes many banks based in House districts across the country. What is the logic, for example, in leaving out SunTrust, which gained $4.9bn in government capital and escapes the provision entirely?
It is also arbitrary in applying only to US citizens or people employed either in the US or by US entities. This may well have the bizarre result of making it less painful for AIG Financial Products - the original target - than for the Wall Street banks.
Many of the AIG Financial Products employees are London-based and I assume that quite a few of them are not US citizens. If the unit is a UK entity, which it appears to be, then the Internal Revenue Service will be unable to withhold tax on what are UK-sourced earnings.
Then there is the fact that it applies only to bonuses paid from January 1 onwards. This arbitrarily favours banks that paid 2008 bonuses before the end of the year - Merrill Lynch, for example - and penalises the others. It makes John Thain look far-sighted for bringing the Merrill bonuses forward.
Third, and most importantly, it creates a set of bad incentives. Goldman has already talked about wanting to return the $10bn in Tarp funding as quickly as possible, as has Ken Lewis of Bank of America and others. If I read the bill correctly, Goldman could escape this trap now by paying the Treasury $5.1bn.
Those institutions that can escape the 90 per cent bonus tax will now want to do so quickly, which will mean raising capital simply to return money to the government. But that goes against the whole point of the Tarp scheme, which is to ensure they have sufficient capital to keep lending.
Another incentive problem is that it could cause an employee rush for the exits at these institutions. An orderly reduction of risk-taking and excessive compensation on Wall Street is desirable, as I have said elsewhere. This bill threatens to make the process chaotic.
The best thing for the US economy is to have a steady adjustment of over-leverage and financial excess, not to have these banks struggling to escape the government’s embrace before they lose employees not only to hedge funds and private equity but any company that can pay more than $250,000 a year.
The best solution for the Senate and the administration is to curtail the scope of the House bill and refocus it on AIG Financial Products, which was what the fuss was originally about. A populist measure feels great at the time but the hangover tends to be painful.
March 20, 2009 1:12am in Finance
posted by Caroline at 8:25 AM
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