Lack of a Better Idea

Terrance Heath

I’ve seen more than one op-ed or blog post about why the idea of taxing bonuses handed out by banks that accept bailout funds — as the House just voted to do — is a bad idea.What I haven’t heard is a better one.

Plans to tax bonuses at financial institutions that have been bailed out by the U.S. government are the knee-jerk result. The scheme passed on Thursday in the House would result in taxes of 90% on bonuses at institutions that have received funds from the government; in the Senate, which now has to consider the measures, thinking seems to be 35% levied on the employer, and an extra 35% on the employee.

The bonus tax idea is bad for a range of reasons that senators should consider calmly, even if the House didn’t do so. One is that it changes the rules – again – for recipients of government assistance. Government initiatives to kick-start clogged financial markets depend on investors and institutions participating. If they think that the rules of the game are going to change continually, they’ll be reluctant.

The tax plans are also retroactive to the beginning of this year. Bankers awarded bonuses for 2008 – and some payouts were both relatively modest and legitimately earned – received them earlier this year, net of prevailing taxes. They may in good faith have spent the cash, invested it or even given it away. Changing the rules now, and demanding a giant additional tax check, really isn’t fair.

Even more importantly, there’s the longer-term impact on the U.S. financial industry. Wall Street’s finest, together with AIG – admittedly a different beast – are now in the doghouse together. But the finance business is in fact one of America’s global strengths. The planned taxes are just the kind of thing that will give foreign firms and non-U.S. bankers an edge.

Fair? Fair? You wanna talk “fair”?

Look, a good number of Americans are of the mind that it’s hardly fair that they’ve been bailing out the worst offenders in this crisis — whose behavior, business practices and financial decisions played a huge role in this disaster — for months now, and almost no help been given to them, even as they struggle with the worst effects of this downturn; whether it’s a lost job, lost health insurance, a home lost, wages reduced, or a neighborhood slowly consumed by blight.

That AIG has repeatedly added insult to injury with luxury retreats, etc., even as more and more Americans are forced to make sacrifices to economic reality, only makes it worse. You want to talk about “fair”? The teachers in my son’s school district earlier this year voted to forego a salary increase in order to avoid layoffs. (Frankly, I’d much rather see them paid more, and pay for their salary increase, than see the Financial Products crew at AIG — the ones who committed fraud by hiding from investors the full range of their risky practices — get bonuses, let alone supported in anyway at all by tax dollars.) State workers in my state and others are facing furloughs, both of which mean less pay for them in an economy where consumer prices are going up, and less access to services at a time when more people need them.

That’s part of the problem. People might not mind as much if they recieved some relief, already. They might even feel like maybe we really are “all in this together,” as AIG CEO Edward Liddy says people at AIG believe. But the reality is that we’re not. Some of us are struggling, and some of us are getting bonuses,and only the losses and misery seem to be all that’s trickled down in 30 years, and much of the misery Americans are experiencing today  is a consequence of exactly the kind of behavior and bussiness practices that put AIG on the hotseat. 

Even as the furor over AIG’s bonuses plays out in every media outlet, some of the consequences of Wall Street’s behavior are playing out in Sacramento California, where the tent city that became a symbol of the economic crisis is closing down.

The capital’s tent city sprawls messily on a grassed-over landfill beneath power lines, home to some 200 men and women with nowhere else to go. It has been here for more than a year, but in the last three weeks it has transformed into a vivid symbol of a financial crisis otherwise invisible to most Americans.

The Depression had Hoovervilles. The energy crisis had snaking gas lines. The state’s droughts have empty reservoirs and brown lawns. But today’s deep recession is largely about disappearing wealth — painful, yes, but difficult to see.

Then this tattered encampment along the American River began showing up on Oprah Winfrey, Al Jazeera and other news outlets around the world.

On Thursday, city officials announced that they will shut it down within a month. “We’re finding other places to go,” said Steven Maviglio, a spokesman for Sacramento’s mayor. The camp is “not safe. It’s not humane. But we’re not going in with a bulldozer.”

Symbolic as it may have been, there’s no evidence that Sacramento’s tent city was largely populated by the newly-homeless formerly middle class. But the city has been hit hard by the subprime debacle. As in other cities, the rise in homelessness is no coincidence.

Sacramento has one of the highest mortgage foreclosure rates in the United States, and the homeless total in the city and surrounding county is estimated to have jumped nearly 10 percent last year to nearly 2,700. About half are believed to be living outdoors, according to a local survey.

While it lasted,  the subprime market was a profitable one for AIG.

American International Group (AIG) ignited a national firestorm of rage when it shelled out at least $165 million in bonuses to its tainted executives. But what has gotten almost no attention is a big reason that AIG had to stiff the government and everyone else. That’s the role that the company played in the subprime loan racket – a racket that hurt tens of thousands of black and Latino would-be homeowners.

The lender’s bait-and-switch tactics, deliberately garbled contracts, deceptive and faulty lending, questionable accounting practices, and hidden fees – all with the connivance of sleepy-eyed, see-no-evil federal regulators – are well known and documented. Their snake-oil loan peddling wreaked havoc with thousands of mostly poor homeowners. A disproportionate number of them were Latinos and African Americans.

Enter AIG. It saw a treasure trove of fast-buck riches in the subprime business. AIG dumped $33 billion into bonds and securities that were tied directly to subprime loans. This was nearly four times more than the next insurer, the German-based Allianz SE, had invested in subprime loans. In fact, AIG was the only U.S.-based life insurer that had more than three percent of its general account assets in debts tied to subprime loans.

Then and now, it seems the consequences of AIG’s actions (among others) goes unconsidered.

The financiers at AIG were awarded millions in bonuses because their contracts were based on the transactions they completed, not the consequences of those transactions. A 32-year-old mortgage broker told me: “I figured my job was to get the transaction done…Whatever came after the transaction—that was on him, not me.” A long list of business executives have reaped sumptuous rewards even though they fractured the world’s economy, destroyed trillions of dollars in value, and disfigured millions of lives.

Most experts now blame a lack of regulation and oversight for this madness. Or they point to misguided incentive programs associated with the push for shareholder value that tied executive rewards to a firm’s share price. These factors are surely important, but they ignore the terrifying human breakdown at the heart of this crisis.

Each day’s economic news leaves me haunted by Hannah Arendt’s ruminations on Nazi war criminal Adolf Eichmann as she reported on his trial in Jerusalem for The New Yorker 45 years ago. Arendt pondered “the strange interdependence of thoughtlessness and evil” and sought to capture it with her famous formulation “the banality of evil.” Arendt found Eichmann neither “perverted nor sadistic,” but “terribly and terrifyingly normal.

It is precisely this kind of remoteness and thoughtlessness that brought our economy to its knees. As we learn more about the behavior within our financial institutions, we see that just about everyone accepted a reckless system that rewards transactions but rejects responsibility for the consequences of those transactions. Bankers, brokers, and financial specialists were all willing participants in a self-centered business model that celebrates what’s good for organization insiders while dehumanizing and distancing everyone else—the outsiders.

 I’ve heard that the defense that brokers at AIG were just doing their jobs. They did their did their jobs, thus they are due their bonuses. The bonuses were based on performance. I’ve heard that the AIG bonuses are just

I hear that it’s a matter of contracts. (Let us not even speak of the social contract, OK?) But apparently contracts are alot less sacrosanct if they’re union contracts. Then contracts can be brushed aside for the higher purpose of making your industry suffer to get one tenth of what the government shelled out to AIG just in the most recent bailout installment. Nevermind people who go to work and make someting other people can actually use. We’ve got to keep the people who make exotic finaicial weapons of mass destruction instruments afloat, otherwise….

Well, otherwise they’re going up and go work for for someone else, and tell them all of the firm’s secrets. I’ve heard that these people need to get their bonuses, otherwise they might get mad and really wreck the company and the economy. Don’t think they can’t, or that they won’t. Evidently, all we’ve gotten so far is just a taste. Well, where I come from, we call that getting jacked. In more polite conversation its called extortion.

I’ve heard that it’s bad for any number of reasons.

What I haven’t heard is a better idea. If Americans don’t want firms they’re bailing out handing out bonuses to people who helped cause this mess, especially when those firms can’t pay back their loans, then what’s the best way to prevent that from happening? Hoping for the best and trusting finaicial firms to exercise discretion and common sense hasn’t worked.

The best that congressional Republicans have been able to come up with is — wait for it — a non-binding resolution asking the Treasury Department think of something. Rep. Eric Cantor had a lot to say about the House vote, except for two things: how he would vote, and what he would suggest be done instead.

So, how do you prevent it? How to you prevent it if there’s no prohibitions against it and no penalties for it?

Got a better idea?

What do you think we should do? And if the answer is “nothing,” don’t bother. That’s been tried already, and it hasn’t worked.

If all you’ve got is your lack of a better idea, come back when you’ve got something resembling a solution.

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