By Mary Kate Cary, Thomas Jefferson Street blog
The bubble has finally burst. I'm not talking about the credit bubble. Or the housing bubble. I'm talking about the bonus bubble—that ugly, reckless behavior by Congress last week that threatened targeted taxes on AIG executives who failed to return their bonuses. The bonus bubble grew last week as the president promised to get the AIG bonuses back by "every legal avenue"...as Senator Grassley called for AIG executives to commit suicide...and busloads of angry citizens reportedly roved the Connecticut suburbs looking for bonus-takers. The worst of it was when Congressman Barney Frank threatened to subpoena those who accepted bonuses to appear before Congress and CEO Ed Liddy voiced his concerns about their safety, citing E-mails he'd received warning employees of being strangled with piano wire.
In the House-passed version of the bill, special taxes would be levied not only on AIG executives, but also on workers at any major financial institution that accepted more than $5 billion in TARP money. The Senate bill, which Senate Majority Leader Harry Reid announced last week was moving to the floor as soon as possible, was even broader and applied to firms that had accepted even less aid.
It was at that point that Jay Leno began the bursting of the bubble, telling the president on Thursday night that he found the idea of singling out particular groups of taxpayers "scary." This morning's Washington Post analyzes what happened next: "As the scope of the bills sank in over the weekend, industry leaders warned that some firms might reject government funding in an effort to free themselves from federally imposed compensation restraints, potentially jeopardizing economic recovery plans." In the midst of all the pitchfork-waving bloodlust, a truth started to emerge: Why would any rational businessperson want to risk financial, political, and personal ruin by investing alongside taxpayers?
That did it. With Secretary Geithner poised to unveil his plan for public-private partnerships to rid banks of their toxic assets on Monday, it became clear that the AIG bonus nightmare could derail the economic recovery we all want. And so the proposed legislation—unconstitutional, retroactive, and punitive—came to a screeching halt. On Sunday night, the president started talking about not governing out of anger, and on Monday, Senator Reid announced that, really, there's a national service bill that needs to be considered first, then after that the budget, then Congress goes on recess for two weeks, then after that perhaps they'd take up the bonus tax. New York Attorney General Andrew Cuomo held a press conference yesterday to say that a majority of the AIG executives had voluntarily returned their bonuses after all.
Everyone seemed to heave a sigh of relief: Thank God that's over.
There's one lasting effect of last week's bonus bubble. If Secretary Geithner's plan doesn't work—if the new Public-Private Investment Program doesn't stabilize the financial system by removing toxic assets from financial firms' balance sheets—then another option on the table is to nationalize the big banks. Given the spectacle we all witnessed last week when Congress got involved in the management of just one portion of just one bank, imagine the chaos we'll see with three or four fully nationalized big banks in the hands of all those congressmen. Now that ' s a nightmare. Who on earth would be in favor of nationalization now?
Whether we are Wall Street bankers or private citizens with college funds and pension plans, the truth is we all need Secretary Geithner's plan to succeed.
On Facebook? You can keep up with Thomas Jefferson Street blog postings through Facebook's Networked Blogs.