This is a great WSJ article. It summarizes everything I have been saying about what Congess did last week in seeking to punish employees at AIG. Even Jay Leno said to President Obama last week that this legislation "scared him". Scare us all it should!!
In my opinion, an incredibly stupid and unconstitutional act. It will make the financial rescue that much harder to do for all the reasons listed in this article. Already, employees are leaving AIG and other banks. Employees that are needed to run these companies successfully. These are not the top brass who have already been fired. These are the people who actually know how to unwind the crazy deriviative contracts. They need to be there for there to be much hope that our invested Trillion $$dollars is going to be worth anything.
I am glad that the WSJ is denouncing this. Anyone who reads this should understand that what Congress did last week, and what Obama will do if he signs the bill, will most likely be a major turning point in the history of the US. This issue will not go away. I think it is so big that Obama's presidency rises or falls on whether he vetos this terrible act of Congress! Unfortunately I think he signs the bill and it will be another reason he will be a one term president.
Read the article carefully.
A Smoot-Hawley Moment?
Congress on AIG and banks: 'Oppressive, unjust and tyrannical.'
When does a single policy blunder herald much larger economic damage? Sometimes it's hard to know ahead of time. Few in Congress thought the Smoot-Hawley tariff was a disaster in 1930, but it led to retaliation and a collapse of world trade. The question amid Washington's AIG bonus panic is whether Congress's war on private contracts and the financial system is a similarly destructive moment.
It is certainly one of the more amazing and senseless acts of political retribution in American history. In its bipartisan rage, the House saw fit last week not merely to punish the employees of AIG's Financial Products unit that the company still needs to safely unwind credit default swaps. The Members voted, 328-93, to slap a 90% tax on the bonuses of anyone at every bank receiving $5 billion in TARP money who earns more than $250,000 a year. A draft Senate version 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.
Never mind, too, that such punitive laws were expressly deplored by America's Founders. In Federalist 44, James Madison warned that "Bills of attainder, ex post facto laws, and laws impairing the obligation of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation."
In 1827 in Ogden v. Saunders, the U.S. Supreme Court issued a similar warning about legislative limits under Article I, Section 10 of the Constitution: "The states are forbidden to pass any bill of attainder or ex post facto law, by which a man shall be punished criminally or penally by loss of life of his liberty, property, or reputation for an act which, at the time of its commission, violated no existing law of the land," wrote Justice Bushrod Washington.
"Why did the authors of the Constitution turn their attention to this subject, which, at the first blush, would appear to be peculiarly fit to be left to the discretion of those who have the police and good government of the state under their management and control? The only answer to be given is because laws of this character are oppressive, unjust, and tyrannical, and as such are condemned by the universal sentence of civilized man."
Yes, Article I, Section 10 applies to the states, and this is a federal law. Congress may also figure it avoids the "bill of attainder" objection by applying the law to individuals at several companies receiving TARP money. But Congress's willingness to wreak such vengeance against a specific class of Americans is still as offensive as a matter of principle as Justice Washington and the Federalist Papers noted. The Founders feared the punitive whim of the legislative mob as much as they did the tyranny of a King.
The House legislation may also be unconstitutional on equal protection grounds given that it treats a homogeneous group of individuals differently depending on which companies they work for. It is one thing to treat the companies that receive federal funds differently from those that don't. But the individuals receiving bonuses may have nothing to do with the decision to receive TARP money. The House's 90% tax on some bankers but not others is only a step away from deciding to impose a higher tax rate on employees of any company out of political favor -- say, tobacco companies, or in the next Republican Congress, the New York Times Co.
Which brings us to the Smoot-Hawley analogy. With such a sweeping assault on contracts and punitive taxation, Congress is introducing an element of political risk to economic decisions that is typical of Argentina or Russia. The sanctity of U.S. contracts has long been one of America's competitive advantages in luring capital, a counterpoint to our lottery tort system and costly regulation. Meanwhile, the 90% tax rate marks a return to the pre-Reagan era when Congress and the political class behaved as if taxes didn't matter to growth or incentives. It is a revival of the philosophy of redistributionist "justice" of the 1930s, when capital went on strike for an entire decade.
The financial system will suffer in particular, just when the Obama Administration is desperately seeking more private capital to ride out future losses. Facing such limits on the ability to reward talent, every bank CEO will try to pay off the TARP as soon as possible, whether or not this leaves the bank with a weaker capital base. Hedge funds and other investors that Treasury needs for its new Public-Private Investment Program, or for the Federal Reserve's TALF, will also be warier, if they'll play at all. Treasury may promise nothing punitive for these programs, but that's also what it said about the TARP.
The other Smoot-Hawley comparison relates to our new President. Herbert Hoover sent mixed signals about the tariff until he finally bent to a panicked GOP Congress. President Obama has behaved in the past week as if he can appease and "channel" Congressional anger without being run over himself. So not only did he incite the Members last Monday, he welcomed the House bill on Thursday. By the weekend, cooler White House heads were whispering that the mob had gone too far, but it will take more than words to kill this terrible legislation. Mr. Obama will have to fire a gun in the air -- which means threatening a veto.
On Inauguration Day, we wrote that our young President has a first-class intellect and temperament. Our question was whether he is tough enough. So far the answer is no. He has failed to stand up to a Congress of his own party on anything difficult -- from stimulus priorities, to earmarks, to protectionism against Mexican trucks. Mr. Obama needs to face down the AIG mob, or his Presidency may be its next victim.
