Bonus Backlash

Congress took the first major step yesterday in levying heavy taxes on bonuses paid to executives of AIG and to institutions who have been recipients of significant (more that $ 5 billion) assistance from the Troubled Asset Relief Program (TARP) in recent months. In a move best described as spasmodic, the House voted 323-93 to place a 90 percent tax on the bonuses of TARP-recipient executives with adjusted gross incomes over $250,000.

Senate Majority Leader Harry Reid (D-NV) moved to bring the legislation to the floor yesterday, but Sen. Kyl (R-AZ) blocked the attempt, saying the Senate needs more time to consider the ramifications. Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Chuck Grassley (R-IA) introduced a bill late yesterday that would impose a 70 percent excise tax—35 percent on the TARP recipient companies and 35 percent on their executives—on excessive bonuses, defined as anything exceeding $50,000 in a calendar year.

In an indication of the impact this issue is having in Senators' home states, the New York Times reported today that Senate Banking Committee Chair Chris Dodd (D-CT) is being stung at home by criticism over the provision he inserted into the American Recovery and Reinvestment Act limiting executive pay that specifically exempted bonuses such as those paid to AIG executives. Sen. Dodd is up for re-election next year.

Meanwhile, House Financial Services Chairman Barney Frank (D-MA) is preparing legislation that on a going forward basis would prevent companies receiving TARP assistance from paying out bonuses until they have paid back the assistance they received.

As executive compensation legislation advances, questions are arising as to the impact it may have on the chief goal of the TARP program—restarting bank lending. If pay limits cause institutions to pull out of TARP, will they then just hunker down and focus on survival as opposed to participating in the effort to stimulate lending? As we saw when former Treasury Secretary Paulson insisted that some of the "big 9" banks take TARP aid even when they didn't want to, there is a public policy reason for having banks in this program. If they pull out, the government loses leverage to get them back in the lending marketplace. It will be interesting to see if the Obama Administration seeks to introduce these issues into the discussion in the days ahead.

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