SAN FRANCISCO (MarketWatch) — Top Wall Street executives reacted harshly on Friday to proposed legislation that would punitively tax bonuses awarded to employees at firms receiving federal assistance.
Citigroup Inc. Chief Executive Vikram Pandit and Bank of America Corp. Chief Executive Ken Lewis issued strongly worded internal memos about the proposed tax legislation, according to the online edition of The Wall Street Journal, while J.P. Morgan Chase & Co. Chief Executive Jamie Dimon sought to reassure his top executives that the firm is engaging with lawmakers on the matter.
The legislation, passed by the House on Thursday, would impose a 90% tax on bonuses for employees making over $250,000 a year at companies receiving at least $5 billion in federal aid under the Troubled Asset Relief Program, or TARP.
Citi’s Pandit criticized the proposed legislation in a memo to employees on Friday, arguing that it could result in the firm losing top talent.
“The work we have all done to try to stabilize the financial system and to get this economy moving again would be significantly set back if we lose our talented people because Congress imposes a special tax on financial-services employees,” he wrote. [Pandit’s full memo]
Bank of America’s Lewis, for his part, said that he’s written to lawmakers about why the proposed tax legislation “is of such grave concern to us,” adding that it has “the potential to damage the ability of the government to engineer a financial recovery.” [Lewis’s full memo]
The tax legislation emerged in reaction to news earlier this week that employees of insurance giant American International Group Inc., which has been propped up by heavy government assistance, received $165 million in bonuses.
The legislation was introduced by House Ways and Means Chairman Charles Rangel, D-N.Y.
From Trading Markets:
The U.S. Senate will take up bipartisan legislation the week of March 23 crafted by top members of the tax-writing Senate Finance Committee addressing the issue of bonuses at American International Group Inc. and other firms receiving federal assistance, after an attempt to push a bill passed March 19 by the U.S. House through the upper chamber failed to clear a procedural hurdle.
Just hours after the House adopted H.R. 1586 by a 328-93 margin, Senate Majority Leader Harry Reid, D-Nev., attempted to have the bill adopted by the Senate under a procedure known as unanimous consent. The bill would levy a 90% tax on bonuses given by companies that have received at least $5 billion in federal assistance, including not only AIG but also such firms as GMAC LLC, Wells Fargo, Citigroup and Bank of America.
However, the vote was derailed by an objection from Sen. Jon Kyl, R-Ariz., who suggested the bill might run afoul of the U.S. Constitution’s prohibitions on ex post facto laws — those that apply retroactively to behavior before the law existed — and bills of attainder, those that target specific individuals for punishment.
The upper chamber will instead take up the Compensation Fairness Act, introduced by Finance Committee Chairman Max Baucus, D-Mont., and Ranking Member Chuck Grassley, R-Iowa. Co-sponsored with Sens. Ron Wyden, D-Ore., and Olympia Snowe, R-Maine, S. 651 would impose a 35% excise tax on bonuses granted by employers who received at least $100 million in funds from the Treasury Department’s Troubled Asset Relief Program. A separate 35% tax would be applied to those receiving the bonuses. Small banks would be exempt from the rule.
Meanwhile, the House Financial Services Committee will mark up legislation calling for even more stringent restrictions on compensation at bailed out firms. Introduced by Chairman Barney Frank, D-Mass., the would prohibit “any bonus payments by companies who have received capital investments under the TARP [Troubled Asset Relief Program] program and the Housing and Economic Recovery Act until these investments are repaid in full.”
The measure would prohibit payment of any bonus to any employee, including those agreed to by contract prior to federal assistance, as well as prohibiting “unreasonable or excessive” compensation, as defined by the Treasury Department. It also would prohibit any supplemental payment to an employee that wasn’t set in accordance with “performance-based standards.”
Both [Federal Reserve Chairman Ben] Bernanke and [Treasury Secretary Timothy] Geithner have been under fire in recent days about whether they knew, and failed to disclose or prevent, AIG from providing hundreds of millions in bonuses to company executives, including $165 million in retention bonuses to those at the company’s Financial Products unit. AIGFP was a unit that wrote credit default swaps and other derivatives that ultimately imperiled AIG’s solvency when it was unable to meet tens of billions of dollars in collateral calls following a series of rating downgrades in September 2008.
Geithner, who has said he would deduct the $165 million from a new $30 billion standby equity capital facility the Treasury agreed to provide the company earlier this month, also has been facing questions about his role in altering an amendment to the $787.2 billion stimulus package passed by Congress last month that would have capped compensation retroactively at firms receiving more than $500 million in government assistance.
The amendment to the American Recovery and Reinvestment Act initially was proposed by Senate Banking Committee Chairman Chris Dodd, D-Conn., based on a similar amendment by Snowe and Wyden. However, Dodd altered language in the final amendment so that it only applied prospectively. Recently, he has claimed the change came at the behest of Geithner and the Obama administration, who were concerned about litigation and potential constitutional challenges.
With his cabinet secretary under fire, Obama has looked to absorb some of the blame from Geithner, telling a town hall meeting in California “we’re going to do everything we can to deal with these specific bonuses.”
On March 19, AIG turned over details of bonuses it has paid to New York state Attorney General Andrew Cuomo, who had subpoenaed the information.
Similar subpoenas were handed down by Attorney General Richard Blumenthal of Connecticut, where AIGFP’s U.S. operation was based, and 19 other states joined New Jersey in filing requests for the details. In March 18 testimony before Congress, Chief Executive Officer Ed Liddy related physical threats he has received in the past week, and was reluctant to provide Frank with the information without a promise of confidentiality.