Where Is Congress
Congressman Barney Frank was elected in 1981 and has been Chairman of the House Financial Services Committee since 2007. Congressman John Boehner was elected in 1991, became the House Majority Leader in 2006, and then the House Minority Leader in 2007 when control of the House passed from the Republicans to the Democrats. Both of these men have appeared on television in the past couple of days loudly criticizing AIG for paying the bonuses. Yet both of them, along with many other members of the House and Senate, approved the Troubled Asset Relief Program (TARP) program that gave AIG the bailout money with no safeguards or restrictions. If they are looking for someone to blame, all they have to do is look in the mirror. Former President George Bush and his Treasury Secretary, Henry Paulson, are largely responsible too, but Congress should have stood up to them. That's their job.Imagine if a group of venture capitalists funded a business and told the CEO "Here's our money. Go spend it however you want." They wouldn't be in the venture capital business for very long doing things like that. Instead, they would put very strict reporting requirements in place, reserve the right to approve major financial decisions before they are implemented, and have the ultimate power of being able to fire the CEO, cut off all further funding, or both. And that's what Congress should have done with AIG and all the other TARP recipients.
We Own AIG
The good news is the Congressman Franks is starting to talk like an owner. Since the US, in effect, owns 80% of AIG we can start calling the shots and we should.Cutting off the money is not a good idea. Nor is firing the CEO. It's time to put in place the reporting requirements that should have been part of TARP in the first place. Passing legislation to tax the people who got the bonuses, as Congress is currently discussing, is foolish. It is petty and aimed at the wrong place. Instead, make sure it never happens again. Pass legislation now that creates the oversight, reports, and PENALTIES that should have been part of TARP in the first place. Then we can get down to making sure that this doesn't happen again in the future.
President Obama has announced plans to put federal regulations in place to govern the insurance industry (AIG is an insurance company) similar to those governing financial institutions like banks. Those regulations will be stricter than before and will be enforceable. That's a good step, but it doesn't get to the root of the problem - greed.
Tax As A Tool
We currently have a system in place that not only allows individuals to strip huge sums of money from companies and their stakeholders, it actually encourages it. In a weak attempt to rein in Wall Street excesses, Congress passed laws limiting the amount of an executive's salary that a company could write off on it's taxes to $1 million. All that did was push the companies to find new, creative ways other than salary to pay the huge sums to their executives. (One of those creative ways was the guaranteed bonuses that AIG just paid out.) It would have been more effective to have made the $1 million limit apply to total compensation, not just salary. I think that would have been counter-productive, however. The real solution lies in individual taxes.As a result of tax changes of the early 1990s, current US taxes income over $373,000 at 35%, the highest tax bracket. Any income over that, say the $6.4 million bonus paid to one AIG executive, is still taxed at only 35%. There is no incentive whatsoever for any individual to not try and get as much income as he/she possibly can, regardless of the consequences. Sure, we will be told that taxing the upper income people at higher tax rates will be a disincentive to them, will cause them to take their investments and companies overseas and out of US jurisdiction, but don't believe it. The US is still the safest place to do business and invest. And, for that mater, it would bother me all that much of some of them had taken their crazy money-grabbing schemes overseas earlier and saved us some of this mess we're in now.
Edward Liddy, chief executive of AIG, is taking a salary of $1 per year. That may seem like a generous gesture except that he was paid $137 million when he was chairman of Allstate from 1999 to 2007. Anyone ought to be able to live out their lives comfortably on $137 million.
So let's stop deferring to Wall Street. It's time for the government to step up and do its job of making sure that the rules we play by are fair for all, not just for a few. Put restrictions on past and future government aid to these companies, sure. Continue to make loans to fix the economic mess, sure. But fix the underlying problem - regulate marketplaces and tax away the incentives for greed.
