US: "if you want bonuses, that's fine. But we'll tax them out of existence."
If those who think they will get to keep taxpayers' money as a reward for driving the US financial sector into the ground were rejoicing on Monday, by yesterday they were trying to spit the champagne back into the bottle as the House or Representatives passed a law applying a tax rate of 90% to bonuses paid to those in companies receiving assistance under TARP or TALF.
The House was unusually unified: 228 voted for the law and only 93 voted against it.
But in the Senate, a weaker proposal - to tax only those companies that had received USD100 million or more and then at 70% - was blocked. It will come back before the Senate next week - and in the light of the House decision it is likely to adopt the same measure or beef up its own.
The Treasury is under pressure: a direct question of Secretary Geithner in the Senate Banking Committee revealed that the AIG bonuses were not a surprise - in fact Treasury had known about them for some weeks. So now it's an Obama problem: he is perceived as trying to shut the door not just after the horse has bolted but long after someone told him (or at least his close team) that the door was open.
The taxation approach is being adopted as a sledgehammer, knee-jerk response for one simple reason: the bonuses are contractual. And whilst New York DA Cuomo is examining the case to see if there is any way of claiming that the contracts were fraudulent, the payments are not just legal, they are obligations.
The next problem for lawmakers, however, will be that legislation is not supposed to have retrospective effect: and so, arguably, whilst others may fall within its ambit, those who have already had payments in respect of AIG may well have a strong argument for claiming that the new law - whatever it says - does not apply to them.
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