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New York Times, March 20, 2009 article


The New York Times




March 20, 2009

House Approves 90% Tax on Bonuses After Bailouts

WASHINGTON — The House overwhelmingly approved on Thursday a near total tax on bonuses paid this year to employees of the American International Group and other firms that have accepted large amounts of federal bailout funds, rattling Wall Street as lawmakers rushed to respond to populist anger.

Despite questions about the legality of the retroactive 90 percent levy, Democrats and some Republicans said the tax on bonuses for traders, executives and bankers earning more than $250,000 was the quickest way to show angry Americans that Congress intended to recoup the extra dollars. Even backers of the measure noted it was an extraordinary step.


The House vote sent some employees into a panic about the prospect of, in effect, having to give up money they might already have spent. And it had regulators fearing it could undermine the Treasury’s efforts to stabilize the financial system if banks tried to flee the bailout program or if other firms refused to participate in coming rescue operations to protect their bonuses, some executives said.

Vikram S. Pandit, chief executive of Citigroup, lobbied against the legislation in a meeting Thursday with the Senate majority leader, Senator Harry Reid, according to an industry official.

But the rush to curb the bonuses by lawmakers, many of whom have previously been torn about limiting executive compensation, reflected Congressional anxiety about heightened public dismay over the bailout. The Senate is expected to consider a similar tax on bonuses but has some differences with the House, which could slow final action.

In a statement, President Obama suggested he was supportive of the legislation, urging Congress to deliver a “final product that will serve as a strong signal to the executives who run these firms that such compensation will not be tolerated.”

In an appearance later on “The Tonight Show” on NBC, Mr. Obama was measured in his reaction, saying he understood that Congress was “responding, I think, to everybody’s anger” but that the best way to handle the situation was “to make sure you’ve closed the door before the horse gets out of the barn.”

The legislation would apply to bonuses paid to executives at companies holding at least $5 billion in bailout money and would essentially wipe out the phenomenal paydays that have been a tradition on Wall Street, at least until the firms reduce the amount they owe taxpayers to less than $5 billion.

According to a tally by The New York Times of bailout recipients, employees at 11 institutions — including Goldman Sachs, Bank of America, Citigroup, Wells Fargo and JPMorgan Chase — would face restrictions immediately.

The current version of the Senate bill would apply to an even wider array of companies. It would tax bonuses at companies that received as little as $100 million in federal bailout assistance, though at a lower rate.

In response, financial institutions that have received federal bailout money mounted a broad assault Thursday on the House legislation, which was opposed by leading Republicans. But nearly half of House Republicans joined Democrats in supporting the measure, which was approved by a 328-to-93 vote.

Its backers said the companies had forced Congress to act by inexplicably handing out generous rewards to employees after tapping taxpayer funds to survive an economic calamity brought on by irresponsible and risky executive decisions. A.I.G. gave out $165 million in bonuses, saying the payments were essential to retain employees who could help the company sort out its financial problems.

“Have the recipients of these checks no shame at all?” asked Representative Earl Pomeroy, Democrat of North Dakota. Summing up his personal view of the so-far-anonymous A.I.G. executives, he said: “You are disgraced professional losers. And by the way, give us our money back.”

But several executives at Wall Street banks said they were being unfairly caught up in a hasty response by Washington that would ultimately deliver a sharper blow to their companies than to A.I.G., which set off the furor. One bank executive said employees were coming into his office in tears.

Several banks are considering refusing to participate in government financial rescue programs if the bill passes, according to a person briefed on the banks’ plans. Hedge fund and private equity firms may also be hesitant to work in partnership with the government to purchase bad assets from banks — a central component of the Treasury Department’s coming financial recovery plan — if they think the government might later add restrictions on their pay.

“If this stands, you will destroy the value of institutions where the government is an owner,” said Orin Kramer, who runs a hedge fund and helps oversee the New Jersey pension plan.

“You will drive people away from being willing to do business with the government,” said Mr. Kramer, a prominent fund-raiser for Mr. Obama.

Members of both parties raised doubt about whether the legislation could survive a court challenge, saying it was tantamount to a retroactive “bill of attainder,” which is banned by the Constitution. Even backers of the bill acknowledged it amounted to an extraordinary use of tax law.

“It is an extreme use of the tax code to correct an extreme and excessive wrong done to the American taxpayer,” said Representative Dave Camp of Michigan, senior Republican on the tax-writing Ways and Means Committee, who backed the measure despite reservations.

But experts on constitutional and tax law said it was likely the House bill could pass muster. Numerous court rulings have upheld retroactive tax provisions, particularly over short periods. The House bill applies back only to Jan. 1, 2009. The measure is also strengthened by the fact that it does not apply to just one company or group of individuals, and does not take aim only at past bonuses but also bonuses to be paid in the future, experts said.

The effort to impose the tax was led by the House Ways and Means Committee chairman, Representative Charles B. Rangel, Democrat of New York, who just days earlier had expressed reluctance at using the tax code for this purpose. Mr. Rangel has also sought donations from A.I.G. for a public policy institute at City College in New York that will bear his name.

But on Thursday Mr. Rangel said that the executives were “getting away with murder.”

“They are getting paid for the destruction they have caused our communities,” he said.

Bank executives, who requested anonymity because they did not want to further alienate lawmakers, said their employees were on edge and many would face severe financial hardship if they were severely taxed on money already paid.

“It’ll impact tens of thousands or maybe hundreds of thousands of people,” said Alan Johnson, managing director at Johnson Associates, a compensation consulting firm in New York, noting that the tax would apply to a bonus recipient with family income of more than $250,000. “If you’re a receptionist and your husband is a doctor, your $5,000 bonus just vaporized. It’s not just the C.E.O.’s.”

Led by Representative John A. Boehner of Ohio, the party leader, several House Republicans assailed the legislation, calling it a diversion by Democrats eager to escape scrutiny for failing to block the bonuses.

They also pointed to a last-minute addition to the economic stimulus legislation approved in February that appeared to restrict the federal government’s ability to block bonuses for the most senior executives if they were negotiated into contracts before Feb. 11, including some at A.I.G.

“This bill is nothing more than an attempt for everybody to cover their butt up here on Capitol Hill,” Mr. Boehner said. “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.”

But their attacks were somewhat undermined by the fact that 85 Republicans, including Representative Eric Cantor of Virginia, the No. 2 party leader, ended up backing the new tax, suggesting they wanted to be seen as restricting the bonuses even as others in the party were trying to hit Democrats over the issue. In all, 87 Republicans opposed the bill.

Senator Reid said he hoped Congress could send a final tax bill to Mr. Obama by Easter.

Louise Story and Jonathan D. Glater contributed reporting from New York, and Helene Cooper from Burbank, Calif.



A version of this article appeared in print on March 20, 2009, on page A1 of the New York edition.



Copyright 2009 The New York Times Company




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