Mob Rule In Washington
Spring has come to Washington and, with it, the sickly sweet smell of scandal. Or was that the smell of blood? The public outcry over the sickening $165m in bonuses paid to AIG executives is certainly justified: some of the recipients – particularly those working in the specialised London unit whose creative gimmickry effectively sank the company – are more worthy of jail cells… than new vacation homes.
At $182bn and counting, they’ve cost the US taxpayer dearly. Yet the tabloid-fuelled outrage came dangerously close to becoming the lynch mob. Several executives reported death threats (one involving piano wire), and the mood was scarcely less violent in Congress, where one senator said he hoped executives would follow the Japanese example and “go commit suicide”.
That remark was later laughed off as rhetoric, but Congress was deadly serious in its quest for revenge. In its bipartisan rage, the House saw fit not merely to punish the employees of AIG’s financial products unit, but to vote in a 90% tax on the bonuses of anyone at every bank receiving $5bn in taxpayers money who earns more than $250,000 a year.
A draft Senate version of the bill is even broader. Never mind if the bonus was earned last year or earlier, or under a legally binding employment contract. The confiscatory tax will apply ex post facto. It is certainly one of the more amazing and senseless acts of political retribution in American history. Few stopped to debate the potentially ruinous effect this might have on the financial system, let alone the rule of law. Obama needs to face down the AIG mob, or his presidency may become the next victim.
Obama is clearly uncomfortable with the legislation, but he should do more, and actively oppose it: not least because his Treasury Secretary, Timothy Geithner, desperately needs the private sector to support his new bank rescue plan. What’s the incentive for private investors to risk buying toxic assets if any gains are later confiscated?
The situation was partly defused when AIG reported that most executives had handed back their bonuses. But the stakes remain high. The Treasury plan assumes that the basic problem is one of liquidity: it aims to create a market for securities that are currently not trading. But if the problem is really one of solvency – that these assets are worthless after all – all bets are off. Emotion is high on both sides.
Wall Street is raging against the dying of the light and Congress is responding to populist rage. Those emotions could yet derail this plan.