Dear Mr. President, Two Wrongs Are Still Two Wrongs
Dear President Obama,
I can only imagine how busy you are these days, so let me be get to the point.
With all due respect, two wrongs will not make a right.
By responding to AIG’s bonus fiasco with exorbitant (extortionist?) tax rates on the bonuses of employees at banks with TARP money, a second wrong will most certainly only cause more harm to our very fragile financial system. In addition, it sets a precedent of using the tax system to punitively target minority groups of our country with excessive tax rates which is a very dangerous step for the government to take.
We all agree that the situation at AIG is a mess. Any company that needs a $170 billion government bailout is certainly a mess. And without knowing the facts, it is completely understandable why paying out bonuses of more than $165 million would ignite populist rage. (Whether any of those bonuses are deserved or needed is another question, but let’s put that aside for now).
However, the current taxation proposal is simply an emotional, populist driven reaction that will cause more problems than good. One of the lessons learned from the Great Depression is that populist driven, over-reactions such as the Smoot-Hawley act, which kicked off a global protectionist tariff war, severely worsened the length and depth of the economic meltdown.
The time is now to put aside emotion, ignore political polls, and to rise above party loyalties and partisan politics.
The time is now for you to Lead this Great Nation with integrity, respect and reason.
I strongly encourage you to immediately call for a stop to this legislative process for taxing certain employees of the banking industry and declare you will Veto the proposed legislation.
Yes, this “90% taxing of bonuses” might make some people feel better, but mob “justice” is never just and in this case it will only cause more harm and here are some of the reasons why:
1. AIG is the mess so deal with AIG.
AIG needs more oversight and governance. This administration should take some additional steps to put in place industry standard norms of governance for an investor with 80% ownership. These inlude:
- Appointing a set of board members, both industry executives and bureaucrats, to represent the taxpayers/shareholders interests as would any investor with 80% ownership in a company.
- Assigning at least one of the government appointed board members to the compensation committee.
- Setting requirements that certain expenses over a threshold (say the magical “$250,000″?) require board approval.
These are some basic rules of good corporate governance that even a start-up follows and I am more than happy to suggest additional ones if anyone is interested.
2. We need the best and brightest working hard to help drive growth in our economy.
We as a nation have prospered by unleashing the creative spirits of the best and brightest. And for that work, they should be paid a wage not set by the government but by the market itself. If we limit one’s ability to receive the value for their work because they are employed at US banks that have received TARP money, then it will lead to an exodus of the best and brightest from the places we need them most. We need them working day in and day out to help turn this economy around. And in the just announced Public-Private Investment Program to deal with the illiquid and “toxic” mortgage related assets, a key goal is to enlist the financial sector in helping to solve the problem.
3. It will lead to increased de-stabilization
Based on the resulting brain drain, banks will likely move aggressively to return all the TARP money they have received. While ultimately returning the money is what needs to happen, in some cases this will probably be done prematurely which will very likely lead to further de-stabilization. This will occur for two reasons. First, the banking system will simply be under capitalized. Secondly, those banks that return the TARP money will appear as better banks and could potentially lead to a run on the rest of the banks which do not return the TARP money. This will only serve to undo the improvements that are just now starting to take hold.
4. Lastly, this is simply an attack on the very foundation of our Great Nation.
One of our founding fathers, James Madison, is quoted as saying about taxation “…a national revenue must be obtained; but the system must be such a one, that, while it secures the object of revenue it shall not be oppressive to our constituents.”
The fact is that most of the employees at US Banks that have received TARP funding are good, hard working Americans that had nothing to do with the decisions at the banks that led to the issues we have today. It’s simply wrong to target all of them with exorbitant tax rates. It is wrong for a majority of any type – gender, race, creed, sexual orientation, or economic standing – to abuse the rule of law to oppress or limit the ability of a minority to achieve their full potential. It is a populist, anger driven attack on the basic foundation of our country’s principles of life, liberty, the sanctity of property and the pursuit of happiness.
As you stated in your inauguration speech:
We remain a young nation, but in the words of scripture, the time has come to set aside childish things. The time has come to reaffirm our enduring spirit; to choose our better history; to carry forward that precious gift, that noble idea, passed on from generation to generation: the God-given promise that all are equal, all are free, and all deserve a chance to pursue their full measure of happiness
The time is now for you to Lead. I truly do HOPE you are able to not only “proclaim”, as you did in your inauguration speech, but to bring about the CHANGE which results in “an end to the petty grievances and false promises, the recriminations and worn-out dogmas, that for far too long have strangled our politics.”
Sincerely,
Joseph Ansanelli
www.ansanelli.com
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Totally agree re: taxing the bonuses, and Pres. Obama agrees with you. Spoke candidly about it on 60 Minutes. He said passing tax legislation is not the right thing to do.
yes, he’s staring to reel in his “wall street versus main street” rhetoric mostly because he realized he needs the banking industry and they have all stood up and said enough, and that they are not going to help if this continues, but not because of a true belief that excessive taxation is a bad idea in general. remember, he was “outraged” and angry. that’s not leadership.
the truth of the matter is that he and the congressional majority all think high compensation (CEO compensation, private equity compensation, entrepreneurs compensation) should be reined in – why? for no other reason than the some how it is not “right” or “just” for someone to make a lot of money.
of course the standard response is that – “look at this ceo that trashed this company and made all this money!”. well many of them have been fired. and more importantly, what about all the CEOs that have created all the jobs in this country. without them, we would have nothing?
it’s a slippery slope we are on…
Thank pelosi for this, she (and her kind) is ne of the main reasons things are movikng at a snails pace. When there is more interested in punishment for prior admin deeds (which were inexusable in some instances) than looking forward, nothing gets done. It is why recent poll put approval ratings of democrats in congress equal with republicans (who would you most likely vote for actually).
Geithners plan is great as it has details.
Either throw aig into recievership (can’t happen now) or need real regulation of derivative market with major collateral put ups or else this will hapen again.
From your mouth to Barack’s ear…reason will shine through. Nicely put. Now if we could the righteous outrage correctly placed, mountains could move!
Right on. I would only add that you can not cut your nose to spite your face… how much will the bureaucracy cost vs. what is the expected income from such a tax. Some loop hole will be found such that few ever pay anywhere near the 90% amount on a bonus.
Washington, Congress, etc need to stop trying to get even and start helping us all get ahead.
Correct on all points, but maybe it should have been addressed to Congress? As Churchill noted “Democracy is the worst form of government except all those other forms that have been tried from time to time”. Populism comes with that territory, and strong leadership is key.
Me thinks that AIG, even in its present state, sometimes looks like a well-oiled machine when compared to the financial recklessness, etc. of Congress.
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/23/AR2009032302140_pf.html
yes, the article brings up a future post topic around the “Employee Free Choice Act”. Sounds like a great thing that employees have Free Choice. But don’t they already have Free Choice?
Today, if employees want to unionize, they are protected under the law to have an election by SECRET BALLOT. Unfortunately, someone thinks that Free Choice in a secret ballot is not enough and what is needed per this bill ((that President Obama said will pass…) is the ability for a Union Organizer to go up to a worker and simply ask them, in public, in front of the Union Boss, to sign a card saying they want to join the union. Both the companies and the unions are interested and biased and want to sway employees, so let’s keep both of them out of the decision process by keeping the employee choices secret.
Now how is that free choice when someone can not vote on something privately? Slippery slope…
I disagree – sometimes two wrongs do make a right. For example when you put a mass murderer to death. Killing is wrong in principal but keeping someone alive which has caused so much pain, and at the expense of other people is not right either.
I’m not comparing AIG to a mass murderer – there are many honest, hard working employees there but the company as a whole has shown extreme disregard for the dire situation they have put themselves, their shareholders, the US taxpayer and even the nation as a whole. There is a consequence for making bad decisions and one of those is getting ducked in pay.
In my opinion we (US government vis-a-vis US taxpayers) should have covered the toxic assets AIG is protecting and let the company file for bankruptcy.
In addition no tax payer funds should go to any bonuses for anyone at these companies. Their employees should be happy they have a job and believe me if they had better opportunities they would jump the ship with or without bonuses (as some of the AIG employees with the bonus have done already). I wonder if people in the financial/banking industry have their noses plugged and do not smell the stink the banking industry has created. This is not going to go away soon and the industry needs to take the lead in cleaning the mess – so far all I’ve seen is gimme more money so I don’t have to deal with my real problems. Remember, no contracts are going to be honored when your company is bankrupt, and believe me there are others waiting to pick up where the failed banks left off and create new institutions which will be better run and more profitable.
If president Obama lets the scare tactics of the banking industry scare him off, he will have made a huge mistake.
i agree that AIG is a mess. that’s not the point. the point is because AIG is a mess, then fix AIG. Don’t go targeting employees at every US Bank that get bonuses. That does not fix AIG. And with respect to banks all just wanting money, many banks did not want to take TARP money but the government insisted so that no bank would seem at a competitive advantage and seem like a more stable bank. And then the government is proposing changing the rules on those very banks? that’s not just.
Joseph, you’ve committed a straw-man fallacy that is commonly used is arguing against bonus recision. When you write “Don’t go targeting employees at every US Bank that get bonuses,” you gravely mischaracterize the law. It specifically revokes bonuses paid to salaried employees of institutions receiving greater than $5B in government aid who earn greater than $250k a year.
And the “misplaced populist rage” argument, while not necessarily fallacious, is disingenuous. The bonuses are for retention of employees in the very department that brought AIG to it’s knees. If these are the “best and the brightest” at AIG, it was doomed anyway. Worse, several of these people have already left, but still qualify for something called a “retention bonus?” It doesn’t even pass the smell test.
I’m the president of a small US corporation and feel that all the executives out there need to see the writing on the wall. Looking out for ourselves and our buddies at the expense of our shareholders, employees, and customers can not be sustained.
FSG – Thanks for the comment and thoughts.
To be honest, though, I must correct you as the “law” you reference is not a law. It was a bill that was only passed in the House and never became law. And when I wrote this, the Senate was discussing a similar bill that did not have the $5 billion minimum for the bonus tax which was the basis for my comment.
That said, this week the House now passed a new bill which gives regulators power to deal with compensation that is actually worse. At a high level it is designed to “prohibit unreasonable and excessive compensation” and now covers all pay of all employees and not just bonuses. And by the way it is retroactive and allows the treasury dept to go back and nullify existing contracts. One of governments key roles is protecting the sanctity of contracts, and this is a slippery and dangerous slope.
Most importantly, regarding your suggestion of misplaced populist rage, i do not suggest that dealing with AIG is a bad idea. I believe we need to deal with and fix AIG and deal with the bad decisions there. The first point was deal with AIG.
The actual point which you summarized as misplaced populist rage is that it does not make sense to deal with AIG by blindly going after every employee in banks just because they took TARP money – whom did not have anything to do with AIG and many of whom had nothing to do with the trading in these mortgage related assets.
Thanks again for the comments and thoughts.
“target minority groups of our country with excessive tax rates which is a very dangerous step for the government to take”
Not really, the wealthy get money form the middle class, and redirect that stream to other circles that are out of touch to the middle class. That makes the middle class less wealthy as time passes. This is one weapon that I hope would be used against that.
i am not sure how the wealthy “get” money from the middle class? the wealthy certainly pay a larger share of all tax dollars which are then distributed directly and indirectly through social programs and other government spending on a greater share to others.
if not for the “wealthy” there is no middle class. and there are no social programs for the lower class. jobs are generated by the wealthy.
bloomberg (mayor / NYC) recently said that 52% of all tax revenue comes from the small slice of wage earners making more than $500,000 and of that 5,000 people paid more than 30% of the city’s taxes. if the local gov’t chooses punitive/excessive taxation, they will go elsewhere. simple economics 101.
“if the local gov’t chooses punitive/excessive taxation, they will go elsewhere.”
“elsewhere” like to the middle class? In fact, right now they go elsewhere, like helping the needy in africa, or buying a huge Vila in Italy or whatever. They go to circles outside what the middle class in US can reach. Don’t be fooled by all the propaganda you hear. Don’t be scared that the wealthy create all the jobs, that is complete BS. A particular corporation will exist equally well if top executive was taking 15mil a year and if the same was taking 1mil a year. As a mater of a fact, more of the money (14mil) will now go down to the middle class. Anyway, this is just my opinion, we don’t have to agree, it is all right
Take care
Totally agree. It looked like a hasty move to me… which may make washington look good on paper. I hope they fix the AIG problem if they can and do not come saying that in the end atleast we saved 90% of 165 million.
Carl Icahn makes some of your points in today’s NYT regarding board vs shareholder rights under US Corporation law:
http://www.nytimes.com/2009/03/29/opinion/29Icahn.html?_r=1
Kind sir:
I do not think you get it.
What you call a “mess: is borderline, if not actual fraud on the part of AIG.
They leveraged almost worthless “assets” as insurance for other companies without properly determining the risk. Then they took federal money (which has liabilities attached). and then violated the rules by bailing out other sick financial institutions.
Soomeone has to be the adult under these circumstances, since AIG and its governance group did not act responsibly.
Unsupportable belief in the “free market” does not make sense. By the way, government regulation is part of the free market that firms neeed to heed. Ask Microsoft after their anti-trust wars.
Compensation is emotional. There is no actual, supportable basis for establishing individual copensation. The laws of cause and effect are supeceeded by the laws of individual want, tangled and biased relationships, and a policy of get what you can, while you can, because others are doing so.
Business history is replete with these tails.
I do not advocate government fiddling where it is not warranted. The abuses and misjudgments of AIG and its ilk are a clarion call for accountability to a higher authority, in this case the law. Not the tax law. But basic business governance, common sense, and justice.
Roger -
Thanks for the comments and thoughts.
I can not agree more that we need to deal with the problem of AIG. I started that as point #1. Yes, a “mess” was a euphemism for all the issues and challenges with AIG.
However, the other point that is important is that we should not react to AIG and its issues by dealing with compensation at every other company involved in the TARP recovery effort for the reasons stated above.
Thanks again.
I totally disagree. To say “it will lead to an exodus of the best and brightest” or “an attack on the very foundation of our Great Nation” sounds equally rhetorical populism. As opposed to Obama’s this populism is more of the right wing kind, Glenn Beck style.
Worried about taxed bonuses? How about worrying about the TAXPAYERS who funded such bonuses in the first place?
No company that needs our taxes to be bailed out should award ANY bonuses. This is a simple principle of capitalism. Company not doing well? No bonuses, full stop. Are you afraid employees are going to leave? Rubbish. 1) Where are they going to go? 2) If they do leave, well, don’t other less rogue/risky/gambling institutions deserve to attract the best and brightest as opposed to the bigger more irresponsible ones?
Let’s not try to paint these people (AIG/TARP Banks) as victims or feel sorry for them, please. They were pushing toxic assets for years and they all KNEW this was going to collapse sooner or later. You don’t need to be a genius to know there is no such thing as infinite growth, much less in real state.
I am opposed to any bailout, period. Let them fail and sink. We’ll figure something out or the market will, eventually. But using my taxes to pay for AIG or any other bankers bonuses is called STEALING and precisely what Reagan called ‘country club socialism.’
If 90% taxing is the only way to recoup the money from these crooks. So be it.