AIG controversy results in more legislative wrangling
Yesterday the House passed a new bill that attempts to address how we should deal with the AIG bonuses that aroused furor among the public, on Capitol Hill, and inside the White House. This version of the bill would let the payment of the bonuses stand, if, after further study, the Treasury Department and financial regulators deem them not to be "unreasonable or excessive." The bill - HR 1664 - passed by a vote of 247-171.
If this bill ultimately becomes law, Treasury Secretary Geithner and financial regulators would be called upon to come up with standards for compensation at institutions that take bailout money. The standards would also look at the individual employee performance and the stability of the employing institution.
Finding common ground has not been an easy task for Congress. Their first attempt passed in record time and with all the zeal of a lynch mob. Although the House has moved on to a new version of the bill, the first one still sits in the Senate to be considered. The Senators will not take it up until they return from a two-week spring vacation on April 20th. Although that bill passed, 328-93 with the encouragement of the Obama Administration, the president backed off supporting it when pundits suggested it would violate the Constitution. It allows the Treasury to levy confiscatory taxes of 90 percent on the bonuses. Speculators also suggest that after leading the outrage that brought this bill to the House floor, Obama realized that it would alienate the investors whose cooperation he will need if his plan to buy up sour mortgages is to succeed.
Early yesterday morning the House tried to pass a bill that would have been even more punitive than the first. Proposed by Rep. John Conyers (D-MI), it would have allowed the Attorney General to sue employees to return excessive compensation regardless of whether the payments were made by contract.
After a day-long debate, when the dust settled, HR 1664 mentioned above was the version that passed.
If you thought the AIG bonuses were bad news, the ripple effect from the government's control of AIG spending may be worse. In the uproar that followed the news of the bonuses, the Federal Reserve is watching every penny they spend, and that means some bills are not getting paid. AIG's real estate ventures, like apartment complexes and shopping centers across the country, are cash-strapped, waiting for the money for repairs and to pay vendors. One real estate firm that partnered with AIG to buy low income apartments filed suit against the insurer for non-payment. The developer, Mitchell L. Morgan Management Inc, said in his lawsuit that, "The current Federal Reserve funding arrangement with AIG does not provide for funding of AIG Global's commitmentss to its joint venture partners." An Alabama shopping center developer is finding himself in a similar situation.
The Wall Street Journal Online predicts that 15 banks could end up with loans-gone-bad because of the government's suddenly zealous role in overseeing the bailout funds. Meanwhile, large U.S. companies and European banks did receive payments from AIG with bailout money.
As the search for new information in the AIG bonuses fiasco continues, the probe swells to encompass other institutions, and the Obama administration uses the information to seek unprecedented power. Here are a few of the latest developments.
- AIG's senior vice president of human resources financial products unit, Stephen Blake, testified yesterday in Connecticut legislative hearings that the retention bonus plans were made with no knowledge of the pending financial crisis. According to Bloomberg.com, he told officials, "The program was designed to retain employees for an ongoing business operation with no knowledge of the financial situation we're in today. At that time there was very little understanding of what has happened in the financial markets in later 2008, especially the last part of the year."
- New York Attorney General Andrew Cuomo is expanding his investigation of AIG bonuses to subpoena data from Goldman Sachs Group, Inc, Deutsche Bank AG, and others to determine whether they also improperly used taxpayer funds.
- Under the auspices of circumventing future near-meltdowns for the financial industry, the Obama Administration is proposing expanding its reach, including first time regulation of hedge funds and the power to seize companies that the government deems to be a threat to the economy. The new measures are expected to meet with strong opposition from Wall Street and will likely cause sharp division in Congress.
Treasury Secretary Tim Geithner outlined the proposals, which must be approved by Congress. They include:
- Broad authority for the Federal Reserve – or another agency – to oversee the entire economy for signs of "system risk."
- The establishment of government tools to seize and dismantle institutions which could threaten our financial stability if they were to fail.
- Tougher requirements for the monetary and asset reserves that financial institutions must maintain.
- The requirement that hedge funds, private equity firms, and other private investment funds must register with the Securities and Exchange Commission.
- A new, comprehensive framework of regulation of derivatives, and a central clearing house for trading of derivatives.
Stephen Blake, a human resources executive from AIG's finance products unit will testify today at a Connecticut legislative hearing about how the compensation packages that included the bonuses were structured, and why the decision was made to pay them. AIG spokesman Mark Herr points to his appearance as proof of the insurance company's willingness to cooperate with the investigation by the federal authorities and New York Attorney General.
AIG officials have contended that part of the decision to pay the money was based on a Connecticut law that allows employees to sue for twice the amount of contracted wages, if those wages are not paid, plus attorney fees. Meanwhile, Treasury Secretary Timothy Geithner is asking for greatly expanded power to regulate financial companies like AIG.
New York Attorney General Andrew Cuomo told reporters on March 23 that nearly of half of the recipients of the largest AIG bonuses have already agreed to return the money. That is, nine of the top ten, and fifteen of the top twenty recipients are forfeiting the bonuses. So far that amounts to about $50 million. Others, many of whom live overseas outside of the New York State jurisdiction, have declined to return the money. Forty-seven percent of the bonuses were awarded to Americans.
Cuomo subpoenaed the names of the bonus recipients from AIG and received the list last Thursday, as part of the overall investigation into how the insurance giant is using the money received in the bailout. After anonymous death threats were made against the bonus recipients, Cuomo decided against releasing the names to the public.
In a statement to the press, Cuomo said, "I would like to say this to the individuals who have given the money back – You have done the right thing. You have done what this country now needs and demands. We are living in a new era of corporate and individual responsibility. I thank you for setting an example for the rest of the company."
Meanwhile the Obama administration, which last week led the fury over the payment of the bonuses, has retreated to a milder position. Obama originally seemed to encourage the House in their quest to slap a brutal 90 percent tax on the bonuses, calling the payments "reckless, outrageous, and unjustified." After witnessing the public reaction, which included death threats from the public and claims from the legal community that the punitive tax could be unconstitutional, the Obama administration backed off. The President told CBS's "60 Minutes" that the tax might be unconstitutional, and he renewed his earlier vow to not "govern out of anger." Also, Obama needs the cooperation of bank executives if he is going to institute his plan to buy toxic assets, and the "hang 'em high" drama that has dominated Congress and the administration's rhetoric over the last week might anger them.
After days of bellowing and blaming, on Friday afternoon, March 20th, Treasury Secretary Timothy Geithner confirmed that his department pushed Senator Chris Dodd to write a loophole into the Economic Stimulus Plan that would pave the way for the AIG bonuses to be paid.
The Stimulus Bill included a cap on executive bonuses for companies that take federal bailout money. But tucked inside the bill – which was passed by a majority vote by Congress before anyone read it – was a provision that modified the cap so that it would only apply to future bonuses and would let slide the bonuses that had been contracted for already, including the AIG bonuses.
At first, the Obama administration declared that Geithner didn't learn of the bonuses until a week ago. After a timeline of events showing that in his previous position as president of the New York Federal Reserve, he knew of the bonuses last fall, the Treasury Secretary modified his statement in a CNN interview to say that he "learned of the full scale and scope of these specific" bonuses last week.
New York Attorney General Andrew Cuomo has filed a subpoena ordering AIG to provide names of bonus recipients, and AIG has complied. Because of threats made against bonus recipients by unknown persons, Cuomo is conducting a risk assessment before releasing any names.
On Saturday, Connecticut's Attorney General Richard Blumenthal stirred things up again by announcing that the bonuses paid by AIG, reported as $165 million, actually totaled closer to $220 million, more than $50 million more than originally thought. On March 15th, $165 million were paid according to contracts signed early last year, when AIG appeared to be sound. But two weeks earlier CEO Edward Liddy told Geithner that in December, AIG had already paid $55 million.
Blumenthal issued a statement disputing AIG's contention that it was contractually obligated to pay the bonuses, according to Connecticut law.
"AIG was categorically wrong when it claimed that state labor law compelled payments of these outrageous, unconscionable bonuses. A provision in Connecticut law requiring double payment for failure to pay wages does not apply to AIG bonuses," he said, calling it "a joke of a justification to reward financial failure and fiasco."
If it wasn't so potentially damaging to the economy, the Congressional reaction to the AIG bonuses would almost be comical. The name of the game seemed to be, who is the most outraged among us? And the game includes no rules about targeting the anger in any sensible direction... as long as you are sufficiently angry. The winner is the person who proves his or her innocence by bellowing the loudest. Listening to the proceedings brought one phrase to mind: "Me thinks thou dost protest too much." The longer the probe continues, the more blame there seems to be to go around. Late Wednesday Senator Chris Dodd acknowledged that, under pressure from the Treasury Department, he helped write a loophole into February's Economic Stimulus Plan – the plan that nobody read before signing – that allowed the bonuses to be paid. Now the apparent scramble is to determine, who in the administration knew about the pending AIG bonuses when the "loophole" was created, and of course, when did they know it?
The other hot topic is, now that the money is gone, what are we going to do to get the money back? On Wednesday, at least three fixes were batted around.
Edward Liddy, AIG CEO, has asked the bonus recipients to voluntarily give back some or all of the money, depending on the total compensation of the individual executive. Some had already volunteered to give back at least part of the money.
As AIG is poised to receive another installment of bailout money ($30 billion) one suggestion is to withhold the $165 million in already paid-out bonuses from the funds.
The House hastily put together HR 1586, sponsored by Rep. Charles Rangel (D-NY) that would impose a 90 percent tax on those who earn $250,000 or more and receive bonuses from companies that took at least $5 billion in government bailout funds.
The Senate is working on a bill to tax the bonus at 35 percent, plus the individual federal income tax liability (probably 35 percent), and tax AIG at 35 percent.
The problem with the last two possibilities is, they amount to what some are calling "bills of attainder." That is an instrument used to punish certain individuals or groups without benefit of a trial. Bills of attainder are said to be unconstitutional.
In spite of that fact, on Thursday the House, with uncharacteristic speed, passed HR 1586 with a greater than two-thirds majority of 328 to 93, including significant Republican support. Only six Democrats voted against the bill. (Walt Minnick of Idaho, Harry Mitchell of Arizona, Vic Snyder or Arkansas, Melissa Bean of Illinois, and Larry Kissell of North Carolina.) You can see the official roll call of how your representative voted .
Why did the House go for 90 percent instead of 100? Rangel told reporters, "We figured that the local and state governments would take care of the other 10 percent."
On Thursday, the Senate Majority Leader Harry Reid (D-NV) introduced and tried to pass a Senate version of a plan to recoup the bonuses, but the effort was blocked by Senator Jon Kyl (R-AZ). He told reporters, "I don't believe that Congress should rush to pass yet another piece of hastily crafted legislation in this very toxic atmosphere, at least without understanding the facts and the potential unintended consequences. Frankly, I think that's how we got into the current mess."
The Whack-a-Mole Effect
If you've never seen a game of Whack-a-mole where every time you smack a mole on the head to keep him out of the garden, another one pops up elsewhere... watch the Congressional proceedings and you'll get the same idea. The probing keeps turning up other problems, some of which appear to be much larger than AIG's $165 million bonuses.
Reports have surfaced that Fannie Mae – which received billions in bailout funds - plans to pay retention bonuses to four key executives ranging from $470,000 to $611,000.
Merrill Lynch paid out $3.6 billion in bonuses in December 2008, just before being swallowed by Bank of America, which then received billions in bailout funds.
Rep. John Lewis (D-GA) revealed that 13 firms that have received federal money were behind in taxes, a total of $220 million (two firms each owed more than $100 million), even though, to get the federal funds, they had to certify that they did not owe back taxes.
Lewis told reporters, "Are they signing contracts knowing that they owe taxes but thinking they will not get caught?" Lewis said at the hearing. "This is shameful. It is a disgrace. The American people are fed up, and they are fired up. And they are not going to take it anymore." What seems more amazing is that nobody required them to show proof that their taxes were in order, much the way an ordinary American might have to show tax returns to get a mortgage.
A statement issued late Thursday by the Internal Revenue Service addressed the issue: "The IRS has every expectation that these amounts will be paid and is committed to collect every dollar of taxes that is owed. The IRS recognizes that those entities that receive taxpayer support have a special obligation to pay their taxes, and these taxpayer accounts will remain closely monitored by the IRS to ensure that the full amount of taxes due are paid."
The existence of the bonus contracts were known at least by some officials and yet a loophole that allowed the bonuses to be paid was written into the Economic Stimulus Bill – the nearly 1,100 page bill that was passed with great urgency in mid-February, giving no one time to read it before voting. This just proves that our mothers were right when they told us never to sign a document without reading it. Let's hope that whatever "fix" is applied, those who vote on it will read it first and consider the unintended consequences.
What do you think?
March 19, 2009 Breaking News - This afternoon the House overwhelmingly approved a bill that would levy a 90 percent tax on bonuses paid to individuals who earn more than $250,000 from companies that have received at least $5 billion in government bailout funds.
At the end of the day on Wednesday, March 18, the push by Congress to pass a "bill of attainder" - defined as a piece of legislation declaring a person or persons guilty of a crime and punishing them without trial - was stronger than ever.
The hearings were marked by what seemed like misdirected anger, targeting the man who was brought out of retirement last fall to clean up the mess made by others. Edward Liddy took the job for a salary of $1 per year, after the revelation that AIG was nearing collapse. Unfortunately, the bonuses that were paid out on March 15th, were paid because AIG was contractually obligated to pay them.
Liddy told Congress that he has asked those who received bonuses to return at least half, of the money. "Some have already volunteered to give back 100 percent," he said. As Congressman Barney Frank – one of the men who wrote the bailout law which permitted the bonuses – pushed Liddy to release the names of those who received bonuses, Liddy resisted doing so unless he was given a guarantee of confidentiality. Frank refused the request for confidentiality, but retreated slightly when Liddy read some of the death threats that he's received, aimed at bonus recipients. One threat asserted that if Congress didn't confiscate the bonuses, through whatever means, the American people would take matters into their own hands. One of the threats said: "All the executives and their families should be executed with piano wire around their necks. My greatest hope."
The New York Times reports that "furious Democratic leaders" refused to wait for the executives to return the bonuses, vowing instead to go to the House floor on Thursday with a bill to tax 90 percent of bonuses paid since January first by AIG and any other company that took more than $5 billion in bailout funds. Senate leaders are proposing a bill that would tax bonus recipients 35 percent (in addition to what they would ordinarily pay, probably 35 percent) and tax AIG another 35 percent on the bonuses.
Senator Chris Dodd, a co-writer of the bailout law made a dramatic reversal of his previous assertions that he had nothing to do with the exemption in the bill that allowed the bonuses to be paid. On Tuesday, he told Fox News that he did not put the exemption in the bill. Then late on Wednesday he admitted that he did. He and his staff inserted the last minute change when the legislation was drafted, allowing the payment of bonuses that were part of contracts made before February 11,2009. Dodd told reporters that his staff helped add the change into the bill after the Treasury Department requested it.
"As many know, the administration was, among others, not happy with the language. They wanted some modifications to it," he said. "They came to us, our staff, and asked for changes, and the changes at the time did not seem that obnoxious or onerous."
The reason behind the change, according to Dodd, was that the Treasury Department worried a flood of lawsuits would follow if the bonuses were not allowed. The Senator added that he believes the Treasury department will be able to use the language of the bill to take back the bonuses.
Now as the investigation continues, two new interesting facts have been revealed that promise to keep the controversy alive and fuel Congress's drive to use the tax code to punish certain businesses and individuals:
-- 13 other companies that took taxpayer funded bailout money had failed to pay their own taxes, to the tune of $220 million.
--In December 2008, Merrill Lynch paid bonuses of $3.6 billion, eclipsing the amount paid by AIG. Merrill Lynch was then swallowed by Bank America, which got $45 billion in bailout money.
Last fall we heard, "AIG is too big to fail." Today some are saying "AIG is too big to fix."
All that noise you hear coming out of Washington D.C. and around the country is the sound of outrage. American International Group asked for and got a federal bailout of $180 billion in taxpayer-backed loans. That means the taxpayers now own more than 80 percent of the company. Just a few months later, AIG has used $165 million of that taxpayer money to pay hefty bonuses to unnamed executives.
The Obama Administration and some members of Congress are screaming. Some are demanding the bonuses be returned. Others are threatening that if the money is not returned, it will be taxed away at 100 percent, which could mean a narrowly focused tax bill designed to punish AIG.
The outrage itself isn't hard to understand. Especially since the bonuses – which ranged from $1,000 to $6.5 million, went to about 415 employees, most of whom worked in the financial products division that marketed the risky contracts that led to the company's financial problems. Seventy-three of those individuals received more than a million each, and about 52 of the packets of money were "retention bonuses," for employees who have already left AIG.
The problem is, the bonuses were contractual obligations, put in place in 2007 when the company still appeared to be sound. In 2008, after AIG asked for and got the bailout, new laws to administer the bailout funds were written by Congressman Barney Frank (D-MA) and Senator Chris Dodd (D-CT). Part of the process of writing the bailout law was the approval of existing contracts, including the bonuses.
AIG's Chief Executive Officer Edward Liddy was not the CEO when the contracts were made, or when the bailout was requested. He was appointed to the job by the federal government in September in an effort to turn AIG around, for a salary of $1 per year. Even so, in hearings that began today, he has come under tremendous fire.
According to the contracts, the bonuses were to be paid on March 15th, which happened to be a Sunday. Some members of Congress are pointing to the fact that the payments were made on the weekend as evidence that they were done in secret. With the Obama Administration in a fury over the payment of the bonuses, Liddy reminded Obama that the bonuses were contracted before the financial meltdown, that the plan to pay the bonuses was known by the White House, and that they were obligated by law to pay the money.
Now the Administration has ordered the Treasury Department to find a way to get the money back. One way to do that is to attach conditions to the next installment of bailout funds due AIG.
Another plan that has been floated is to tax the bonus recipients at an additional 35 percent, plus the 35 percent they will already pay on their incomes, and tax AIG 35 percent, to more than fully recoup the taxpayer funds.
As Liddy testified before Congress on March 18th, the focus seemed to be more on demanding that bonus recipients simply give the money back. According to Reuters, Senate Majority Leader Harry Reid and nine other Democrats have told Liddy and AIG executives that they must either return the bonuses or have it confiscated in taxes.
"We expect that you will report back to Congress on your efforts to recoup these payments in short order," they said.
Senate Charles Schumer (D-NY) told reporters, "If Mr. Liddy does nothing we will act and we will take this money back and return it to its rightful owners, the taxpayers," Schumer warned. "So for those of you who are getting these bonuses, be forewarned - you will not be getting to keep them."
Representative Steve Israel (D-NY) said, "If we can't kill the bonuses, we'll tax the bonuses." In a statement, he added, "American families shouldn't be forced to reward these professional financial failures with extravagant bonuses that could buy fancy cars and yachts. AIG may not like it, but since they had to come to the federal government for help, the federal government now has a say in how they spend taxpayer money."
Republican Congressman Thaddeus McCotter of Michigan told Fox News that AIG should be broken up and re-privatized. "That would stop the slow bleed of the taxpayers and it would also help bring some certainty to the markets rather than continuing to try to prop up something that is clearly too big to fix."
When asked about the possibility of a special tax to punish AIG, McCotter said, "What you're seeing is an overreaction by many people, some of whom voted for the TARP (Troubled Asset Relief Program) in the first place, or in subsequent rounds of it. They're trying to overcompensate by passing legislation for a specific incidence that will have general ramifications that would be detrimental to the economy and the American citizens... Taxing is not the answer...."
Instead he would like to see the contracts for the bonuses not set aside, but renegotiated as part of a precondition for receiving the next installment of bailout money - $30 billion - that will be paid to AIG.
While the outrage seems justifiable, if the government steps in to void contracts made by private parties and approved for payment by the makers of the bailout law, you have to wonder where the interference will end. The bonuses may have been a mistake, but they were the result of private contracts that were disclosed before the bailout money was granted and approved for payment by those who wrote the bailout law. If the government can set aside contracts it doesn't like and obey only the laws it does like, is that a dangerous precedent?
What do you think?