Barely a day goes by on Capitol Hill without some politician expressing a good measure of righteous indignation. It's less common for virtually every member of Congress, Democrat and Republican alike, to have the same target for his or her carefully calibrated anger. But when all that talk actually gets channeled into immediate action, then you know that something really historic is happening in Washington and that Congress (and the public) may well come to regret it.
The unprecedented productivity on Capitol Hill this week stems from the continuing, unanimous outrage over the $165 million in bonuses handed out by AIG, which the government has funneled more than a hundred billion dollars into since last summer. At his congressional testimony earlier this week, embattled AIG CEO Edward Liddy said he'd asked employees to give half of their bonuses back, and that some had already voluntarily given all of it back. And Treasury Secretary Tim Geithner, who had signed off on the contractually promised bonuses after concluding that the government had no legal recourse to prevent them from being paid, said earlier this week that he plans to take the money out of the next $30 billion tranche Treasury approved for AIG two weeks ago. (Read "The AIG Bonuses: Getting Mad and Getting Even.")
But none of that has calmed this week's circus in the nation's capital. And so on Thursday, after little debate, the House overwhelmingly passed a measure to tax at a rate of 90% not just the AIG bonuses in dispute, but the lion's share of bonuses paid since the start of the year to all employees making more than $250,000 a year at firms receiving more than $5 billion from the government's banking rescue program known as TARP. The Senate next week is expected to take up its own clawback bill, which would tax at a rate of 70% performance bonuses starting at $50,000 and on all retention bonuses given by companies that received $100 million or more in TARP funds. Just for good measure, the House next week is also expected to take up a Judiciary Committee bill that would allow the Justice Department to sue for the return of the bonuses.
The plethora of legally questionable bills caps a messy week of finger pointing as all of Washington tries to harness public anger, score political points and figure out how AIG managed to grant the bonuses even after all the legislation Congress has passed to limit compensation to executives of the companies taxpayers have spent trillions of dollars bailing out. The GOP blamed Democratic ineptitude in the rush to pass too many bailouts; Democrats and Republicans alike said the Treasury Secretary Geithner has been asleep at the wheel; and the Obama Administration tried to refocus attention on the consensus point that Wall Street greed is the opposite of good. "In the end, this is a symptom of a larger problem a bubble and bust economy that valued reckless speculation over responsibility and hard work," President Obama said in a statement. "That is what we must ultimately repair to build a lasting and widespread prosperity." (See pictures of TIME's Wall Street covers.)
But the AIG bonus scandal could make that repair job even harder than it already is. Growing doubts about the Administration's revitalization plan have now mushroomed into a full-blown credibility crisis. After all, how can Obama ask for upwards of another $750 billion for another bank bailout (as he has in his 2010 budget) and $100 billion to help the world economies, when it appears the Administration has had little control over how the banks have been spending the money thus far?
And the remedies Congress is in a fever pitch to approve may well end up hurting the rescue efforts. The bonus bills, which would apply to virtually every major bank including Citigroup, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley and JP Morgan Chase, as well as AIG, Fannie Mae and Freddie Mac will probably cause many of them to simply give back the TARP money sooner than they probably should, to avoid losing their best people to foreign banks, boutique firms or hedge funds that can pay bigger bonuses. "The week's events will cause a brain drain of salespeople, rank and file and middle management to non-TARP companies," said Scott Talbott, vice president of the Financial Services Roundtable, which represents Wall Street's interests in Washington. "The loss of these employees will weaken TARP companies." The compensation crackdown already has other private sector players thinking twice about partnering with the Administration to help unload the banks' toxic assets and get the credit markets moving. (Read "Freddie Mac: Government's New Black Hole?.")
"This bill is nothing more than an attempt for everybody to cover their butt up here on Capitol Hill," said House Republican leader John Boehner, one of the few party bigwigs on either side of the aisle to openly question the wisdom of the legislative rush. "It's full of loopholes. A lot of these people who are getting these bonuses likely live in London. And it's not clear how raising this tax is going to recover that money."
There are still many hurdles the various bills must overcome, and even some Senators have suggested the legislation is more about scaring AIG employees into giving the bonuses back. Senator Judd Gregg, a New Hampshire Republican, Wednesday warned that the bills to take back the bonuses through a one-time special tax could face years of challenges in courts for violating attainder laws, which bar Congress from targeting individuals or small groups. "Of course" the government must get back the bonuses, but we've got to do it legally," Gregg told reporters.
Democrat Barney Frank, chairman of the House Financial Services Committee, echoed those concerns, arguing that pursuing restitution by other means was preferable. House Ways and Means Chairman Charlie Rangel also opposed using the tax code "as a political weapon" until the Speaker sat on him to write the legislation passed Thursday in the House. Senate Finance Committee Chairman Max Baucus defended his measure, saying that by expanding the pool of bonus recipients to all institutions that have received $100 million from the government, the legislation would likely survive judicial challenge. "We've pushed the constitutional question pretty hard with constitutional experts and we think it's okay," Baucus said.
Likewise, Democrats and Republicans have concerns about the constitutionality of the Judiciary Committee's bill, which would authorize the Justice Department to sue for the return of bonuses given to employees of companies that have received more than $10 billion from the government. The legislation, if passed, would also allow the Attorney General to restrict future payments to 10 times the average non-management wages at companies receiving TARP funds. "Congress has let expediency override common sense," said Representative Lamar Smith, the top Judiciary Committee Republican. "Congress already has learned the hard way the unintended consequences of rushing to legislate without adequate expert testimony and debate, but that's exactly what we are doing now."
House Speaker Nancy Pelosi has said she'd like to see the matter resolved by the end of next week, though Senate Republicans already blocked a vote on Baucus's bill this week. "Other senators need time to consider the bill," Jon Kyl, the third-ranking Republican in the Senate, said on the Senate floor. "The public ought to have a right to review this legislation to make sure it doesn't have any additional loopholes or unintended consequences."