White House Calls Bonuses a Late Surprise
Congress Moves to Impose Hefty Tax on Executives Who Don't Return Money

By Shailagh Murray, Paul Kane and Michael D. Shear
Washington Post Staff Writers
Wednesday, March 18, 2009

Senior White House officials said last night that President Obama did not learn that bonuses worth $165 million were to be paid to executives of American International Group until Thursday, one day before they were issued and two days after his Treasury secretary was informed that the payments were going forward.

Obama aides defended Timothy F. Geithner's handling of the situation yesterday, with White House press secretary Robert Gibbs saying the president has "complete confidence" in the Treasury chief.

In a letter to congressional leaders last night, Geithner said that in addition to pressing the company on compensation issues, the Treasury Department will deduct an amount equal to the total bonuses paid from a pledged $30 billion commitment to the troubled insurance company.

As Geithner and other Obama aides continued to scramble to pull back the bonuses and calm the public furor they sparked, Congress was preparing its own remedies. In what they acknowledged would be an extraordinary move, leading Democrats proposed using the tax code to punish executives at the firm, in which the federal government controls an 80 percent stake, unless those payouts are surrendered voluntarily.

Action on the legislation could begin as early as today in the Senate. A proposal from Senate Finance Committee Chairman Max Baucus (D-Mont.) and the panel's ranking Republican, Charles E. Grassley (Iowa), would levy an excise tax on AIG and the executives who received the payments, adding up to more than 90 percent of the total of the bonuses. That tax would also apply to future bonuses awarded, either by AIG or by other firms receiving federal aid.

Similar proposals taking shape in the House would target as much as 100 percent of the bonus money, which was distributed Friday to 73 AIG employees in sums ranging from $1 million to $6.4 million, according to New York Attorney General Andrew M. Cuomo, who provided details of the payments -- although not the identities of specific recipients -- in a letter to House Financial Services Committee Chairman Barney Frank (D-Mass.).

The bonus scandal has inflamed lawmakers in both parties and could have broad repercussions, and lawmakers warned that it could serve as the death knell for further aid to the ailing sector. Obama's budget calls for allocating an additional $750 billion to bail out troubled firms, and his administration had hoped to quietly "wind down" operations at AIG without an excess of intervention from Congress, but both of those ambitions could be in doubt after the explosion of attention drawn by the bonuses.

Although the bonuses were permitted under the terms of the 2008 bailout bill, the payments have triggered alarm, particularly among Republicans, about oversight of the way the money is spent. With the prominent exception of Grassley, GOP leaders were noncommittal yesterday about embracing the tax approach and declined to offer their own proposals for recouping the $165 million. But they rebuked Geithner for not stopping the bonuses, and they made it clear that further requests for aid would be rejected out of hand.

"No more bailouts," said Rep. Mike Pence (R-Ind.) "The American people have had it. They want this Congress to get back to fiscal discipline and restraint and the belief that the freedom to succeed includes the freedom to fail."

House Speaker Nancy Pelosi (D-Calif.) said the House will consider its own AIG tax bill, along with measures authorizing Attorney General Eric H. Holder Jr. to recover excessive compensation payments made by companies that received federal financial assistance and to block further bonuses at such companies. Pelosi predicted "tough questioning" today when AIG's chairman and chief executive, Edward M. Liddy, appears before Frank's committee.

A company official said Liddy is expected to issue a letter today to AIG employees asking them to return the bonus payments they received.

Democratic lawmakers raced to put their proposals on the table. Reps. Steve Israel (N.Y.) and Tim Ryan (Ohio) introduced the Bailout Bonus Tax Bracket Act to create a 100 percent tax on bonuses over $100,000 that are distributed to employees of financial firms receiving federal bailout money. Rep. John D. Dingell (Mich.) offered a version that would tax such bonuses at a 95 percent rate.

Some Democrats expressed concerns about the tax approach. House Majority Leader Steny H. Hoyer (Md.) told reporters that he worried about running afoul of the Constitution's equal-protection clause, which forbids laws that treat certain groups differently. For now, Hoyer advocated a course of action that centered on a campaign of public pressure to persuade the AIG executives to surrender the bonuses.

House Ways and Means Committee Chairman Charles B. Rangel (N.Y.) also raised doubts about the tax idea. "It's difficult for me to think of the code as a political weapon," he told reporters outside his office. "Is this an indictment or a bill?"

Although anti-Wall Street sentiment is high on Capitol Hill, AIG has earned special wrath because of the force of its collapse. The company took huge risks with its investments in credit default swaps, an unregulated market that imploded in the credit crisis, and has received more bailout money than any other firm.

The executive bonuses, guaranteed through employment contracts that had been made public to government officials earlier, were offered as a way to lure or keep top talent to help restore AIG's financial condition, company officials said. Recipients worked for the financial products division, the unit at the center of the firm's collapse. But when news of the payments surfaced over the weekend, lawmakers turned to the Obama administration, demanding that it attempt to recoup at least some of the money.

In addition to the $165 million paid to division employees, including 11 who have left the company, an additional $230 million in bonus payments are scheduled to be made next year, according to Senate Democratic leaders.

On Monday, Obama expressed his unhappiness with the bonuses and directed government lawyers to review the company's contracts to determine whether provisions guaranteeing the payments could be overturned. Last week, the administration persuaded the company to restructure some of the payments, and AIG's top seven executives had agreed earlier to forgo their bonuses through this year.

Yesterday, Gibbs said Obama is open to the idea of a special tax on the bonuses, along with other options that lawmakers are floating, including legal action against AIG. "Obviously, the president is committed to working as quickly as possible with Congress to find ways to recoup this money," Gibbs said.

Aides continued to insist that the president and his team are doing everything possible to recover the money used to pay the AIG bonuses, while arguing that the law is stacked against their efforts. Gibbs called the efforts by the president and Geithner "extraordinary actions" taken to "protect the American taxpayers in accordance with all that we could do."

But Senate Majority Leader Harry M. Reid (D-Nev.) said yesterday that the legislative branch of government may be better equipped to do the job. "We as a Congress are not defenseless," he said. "We can also do things."

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