Congress Moves to Slap Heavy Tax on Bonuses
90% Levy for Biggest Payouts at Bailed-Out Firms

By Shailagh Murray, Paul Kane and David Cho
Washington Post Staff Writers
Friday, March 20, 2009

Congress moved yesterday to levy punitive taxes on bonuses paid by financial firms receiving government aid, threatening to undermine federal efforts to rescue the financial system by driving away participants in the programs.

A quickly assembled House bill was approved 328 to 93. It struck hard at Wall Street's compensation system, which has come under fire because of the $165 million in bonuses distributed last week by American International Group to executives of the troubled unit that helped lead the insurance giant to the brink of collapse. Under the legislation, those who received bonuses of more than $125,000 would surrender 90 percent of their payments to a special income tax.

But the bill's reach would extend to bonuses paid to tens of thousands of employees at the nation's nine largest institutions that have received at least $5 billion in assistance under the $700 billion financial rescue package Congress approved last year. The measure also applies to Fannie Mae and Freddie Mac, the mortgage giants the federal government took over in September.

Because virtually all Wall Street employees receive bonuses -- in many cases making up the majority of their compensation -- firms would rather back out of the government's rescue programs than be subject to such harsh tax measures, industry officials said. The banks could still survive, but without federal assistance they would not have enough capital to restart lending, which is considered central to reviving the economy.

Senate leaders aim to act next week on an even tougher bill that would affect all large banks that have received more than $100 million in asset relief payments. Collecting the tax is not necessarily the intent of the measure, lawmakers and aides said yesterday. Some AIG employees have returned their bonuses, and some Democratic leaders said they may forgo the tax effort and turn to other measures already in the works to limit executive compensation at recipient firms.

"It will have a chilling effect on participation in any government recovery effort," warned Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, an industry group. "It harms middle management and the rank-and-file sales force, thereby weakening the very firms we are working to strengthen."

Lawmakers said they were aware of the potential consequences but were unfazed. "Frankly, bonuses for what?" said Sen. Olympia J. Snowe (R-Maine), a co-sponsor of the Senate bill. "They have to engage in more financially prudent behavior."

"Let's take a step and say we want our money back," House Speaker Nancy Pelosi (D-Calif.) said moments before the vote. "Here's one way to get it."

But other lawmakers said they want the legislation to go forward regardless of whether AIG bonuses were returned. The actions signaled that many on Capitol Hill have run out of patience with the administration's handling of the financial rescue.

Some lawmakers said even a return of all the bonuses would be unlikely to prompt Congress to drop the measure. House Democratic leaders described White House officials as "active observers" who had asked to see language of the bill as it emerged earlier in the week, but had not engaged in negotiations.

President Obama struck a somewhat neutral tone after the vote, noting that it "rightly reflects the outrage that so many feel over the lavish bonuses that AIG provided its employees at the expense of the taxpayers who have kept this failed company afloat." He continued: "I look forward to receiving a final product that will serve as a strong signal to the executives who run these firms that such compensation will not be tolerated."

Although leading Democrats thought the bill's chances were threatened when House Minority Leader John A. Boehner (R-Ohio) condemned it, about half of the GOP House members backed the measure. The lopsided House tally sent shock waves across the financial sector. Officials predicted dire results, saying the brightest talent could flee institutions that remain wobbly as the firms themselves leave the rescue program prematurely.

The Senate measure would apply to the banks and investment firms that received 97 percent of the federal rescue money issued to date, capturing far more institutions than the House legislation, although small banks would be exempted. "It's about public accountability. This isn't the time for the status quo mentality," Snowe said.

The Senate legislation represents a dramatic step toward dismantling the bonus structure that has made banking and investment highly lucrative professions. But that same structure is blamed as a chief contributor to the current crisis. The Treasury Department issued guidelines, based on executive compensation caps approved last fall, that limited compensation to $500,000 for only the top officials of the largest recipients of future federal rescue money. Last month, in the $787 billion stimulus legislation, Congress imposed those limits on all federal rescue fund recipients, past and present, and limited bonuses to a third of annual compensation, payable in company stock.

Republicans voiced strong objections to the tax approach, calling it a smokescreen for the administration's faulty oversight of the Troubled Assets Relief Program. "It sounds to me like these guys are trying to cover their tracks," said Sen. Jon Kyl (Ariz.), the No. 2 Republican leader.

But in the House, GOP members bowed to the public outrage that the bonuses have stoked. Eighty-five Republicans voted in support of the bill, and bipartisan backing is expected in the Senate as well. Along with Snowe, the Senate measure is cosponsored by Sen. Charles E. Grassley (Iowa), the ranking Republican on the tax-writing Finance Committee.

The AIG crisis exploded this week after news broke of the long-planned bonuses, which were promised in employment contracts as a way to retain employees as they worked to "wind down" activities in the derivatives division. Finance Committee Chairman Max Baucus (D-Mont.), sponsor of the Senate bill, said he hoped the threat of the legislation would prove sufficient to persuade AIG employees to relinquish the bonuses.

At a tense hearing Wednesday on Capitol Hill, AIG chief executive Edward M. Liddy said that he had asked his employees to give back at least half of the bonus money, and that some had agreed to do so.

Said Baucus: "We're going to introduce the bill. I think it's sufficient leverage to get these paid back."

AIG responded yesterday to a subpoena from New York Attorney General Andrew M. Cuomo and turned over a list of employees from its Financial Products division who had received bonuses. Cuomo said he was performing a "risk assessment" before releasing any names, saying in a statement: "We are aware of the security concerns of AIG employees." Liddy told Congress on Wednesday that the company, which has received threats, is concerned for employees' safety.

Eager to blame Democrats as not preventing the bonuses, GOP lawmakers pointed to a last-minute tweak last month to the $787 billion stimulus package that allowed for bonuses that were signed in contracts before Feb. 11.

No Democrat accepted authorship of the timing provision until Sen. Christopher J. Dodd (Conn.), chairman of the Senate banking committee, acknowledged Wednesday night that his staff had worked with Treasury officials to craft the timing language.

Dodd accepted the provision "at the request of administration officials, who gave us no indication that this was in any way related to AIG. Let me be clear: I was completely unaware of these AIG bonuses until I learned of them last week."

Rep. Barney Frank (D-Mass.) introduced a separate measure last night that would give the administration the authority to retroactively change bonus contracts and ban such payments until a financial firm repays government aid.

Staff writer Steven Mufson contributed to this report.

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