It really is too much to hope, apparently, that business journalists writing about the financial crisis and the AIG bonus fiasco will actually inform themselves before they spout off. Once again it was front and center in the NYT's Business Section -- at the top of B2: A lovely, little gem by Rob Cox giving six (count them, six) reasons why Congress should not seek to recover taxpayer funds that were given out as lavish bonuses to the AIG folks who blew up the world.
If you want to read it before we go through those six "reasons" feel free here.
But I'll say in advance: They are risable. And to paraphrase the scene in Blazing Saddles, where C. Little points a gun at his own head: "Nobody move or the TAXPAYER gets it!"
Okay, from the top:
Number 1.
. The bills would almost certainly be challenged as an affront to Article I, Section 9 of the United States Constitution, which states that, "No bill of attainder or ex post facto law will be passed." Congress has the right to set tax policy. But legal experts are divided on whether the Supreme Court will uphold a blatant attempt to punish a subsection of society after the fact. At least one lawmaker has talked about retaliation. It would also be a field day for lawyers, incurring huge legal costs on both the government and banks — money much better spent elsewhere.
Oh. My. God. Someone might file a lawsuit. So we shouldn't legislate. World to Mr. Cox: People file lawsuits all the time. Always. Over lots of stuff. Contrary to Mr. Cox's implication, though, there is no serious division among us legal folks about whether a tax on AIG bonuses (or on bonuses more generally) would be unconstitutional. Larry Tribe, as quoted in the Wall Street Journal (here) provides pretty authoritative and compelling explanations for why the ex post facto, and bill of attainder clauses (as well as the contracts clause) are not a problem for taxing the AIG bonuses. Of course it beggers the imagination to think that the legal fees for any litigation over these bonuses could even come close to the amount of the bonuses themselves (contrary to popular belief, lawyers aren't paid nearly as excessively as bankers have been). And, of course, the government's lawyers are already on the people's dime, whether they are defending a lawsuit over bonuses or doing something else. So the marginal cost to the taxpayer of defending a suit on this issue would be minimal. Of course, the cost to the recipients of the bonuses, if they sued, would be big, and they would be stuck with hefty legal fees; but I'm not going to cry over the idea that they might have to pay a lot to defend their ill-gotten gains.
Score: Taxpayers 1. Cox 0
Number 2.
Financial institutions that accepted government funds as part of an effort to shore up confidence but now say they didn’t really need them would be unfairly punished. The $165 million in guaranteed bonuses paid out to the dunderheads in A.I.G.’s derivatives group may have sparked the legislation, but it will snag profitable banks like JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley, along with others, like Citigroup, that are admittedly more deserving of a government crackdown.
Sorry. No. It's hard to see how it would be unwarranted to expect anyone who took taxpayer funds to forego a bonus, whether the institution needed the money or not. There is an easy way out for these folks: They can pay back the treasury and then go their merry way. I know that there was a big argument about whether only institutions that were in trouble or all the big guys should take taxpayer money. But the dirty little truth here is that of the large banks, none is really in good shape; and the failure of AIG (as with Lehman) leaves them all tottering and uncertain. The infusion of taxpayer cash has left them all better off, whether they needed it at the time that they took it or not. Cox's sympathies may lie with the fat cats, but what possible reason is there to let "good guys" who took taxpayer money and then lavishly rewarded themselves at the taxpayer's expense any differently from "bad guys" who took the money. This is not a morality play, Mr. Cox. The issue is simple: Don't pay yourself a bonus with my money. Finally, given the rampant, pervasive corruption in the financial services sector, can anyone seriously say that there are still good guys? The more we find out about these folks, the clearer it becomes that "good guys" are just bad guys who haven't been busted yet.
Score: Taxpayers 2. Cox 0
Number 3.
A rush to pay back government funds — a possible consequence of the legislation — would remove capital from the banking system when it needs it most. Many of the banks that received money under the Troubled Asset Relief Program, known as TARP, don’t technically need it. They could repay enough to exempt them from the strictures of the bills wending their way through Congress. But unless they replace the Treasury Department’s money by raising equity, that will reduce their Tier 1 capital, and thereby their willingness to lend and investors’ confidence in their cushions to handle future bad loans on their balance sheets.
The gist of this one is that if we tax their bonuses, they'll all rush to pay us back and empty their balance sheets. Sorry. That's bullshit. Not that if they pay is back they'll be in trouble (of course they would), but that they'd rush to pay us back. If they really need the money, they won't pay the bonuses. Any financial institution that would rather pay bonuses and go under than be limited in it's ability to loot its investors, shareholders, bondholders, and clients by paying out bonuses deserves to go under. Period. In otherwords, if they'd rather pay bonuses and impair their tier 1 capital, the people running them need to be fired, pilloried, and held accountable for financial recklessness.
Score: Taxpayers 3. Cox 0.
Number 4.
By rushing bills through the House and Senate, legislators have undermined government efforts, and especially the Treasury’s. Castigating the effort of Timothy F. Geithner, the Treasury secretary, to persuade A.I.G. to withhold bonuses within the confines of the law has also damaged confidence in the administration’s point man in finance and will make it even more difficult to recruit talent to the shockingly undermanned Treasury Department. The pragmatic Mr. Geithner was no doubt trying to give bigger issues the majority of his attention. The A.I.G. debacle may have shown him to be a novice political operative or orator — but that’s not what he was hired for.
Um. This just doesn't follow at all, and reeks of the Unitary Executive (tm) theory of governance. The basic idea is that if Congress legislates, it will undercut Geithner's authority (although where his authority comes from, if not from Congress, is beyond me... but hey, I'm just a lawyer). Of course, that presumes that Congress must never, ever visibly disagree with the Executive. And that if Geithner's authority is undermined he won't be able to attract talented people to Treasury...
Huh? What?? I'm lost here. I can see lots of consequences if Treasury and Congress are at odds on fiscal and tax policy. Slows down response time; cut's into Congress' willingness to authorize another bailout; sends mixed signals to the market, and so on and so forth. But the idea that talented people won't want to join the staff at Treasury beacuse Geithner doesn't have the full confidence of Congress isn't one of them. Besides, whether Congress taxes these bonuses or not, it's pretty clear that a lot of folks on Capitol Hill, and elsewhere, have strong reservations abotu Geithner. (Just look at Paul Krugman's column in the NYT today for a dose). Whether Congress passes specific tax legislation or not doesn't change that.
Score: Taxpayers 4. Cox 0.
Number 5.
The Congressional action also endangers other efforts to shore up the financial system and the economy. The government is urging the private sector to participate in programs intended to invigorate the securitization market (the Term Asset-Backed Securities Loan Facility) and remove dodgy assets from the banks (the Public-Private Investment Fund). Potential participants are now worried that Congress could use the taxpayer financing of these initiatives to impose greater regulation on the programs after the fact, as it has now done for TARP recipients.
Well, first off. This particular idea is only a real concern if you believe that the Geithner/Summers plan to attract private capital to buy toxic assets will work. Krugman, and others, think it won't. (Link to here). Well, if you take seriously the idea that the Geithner/Summers plan is not much more than a new heads-Wall Street wins-tails-taxpayers lose-deal, then it would be entirely appropriate to have participants in the new plan worry that they may be subject to future regulation.
But let's look at the premise here a little more closely, shall we? Because it is very, very pernicious. Cox is saying that Congress shouldn't ever act to correct a problem with the financial bail-out because that would cause people to lose faith in whether they can exploit taxpayer bailouts with impunity in the future. And that is supposed to be a bad thing. In other words, this is nothing more than a plea for Congress to issue yet another blank check, and to abdicate it's continuing oversight responsibilities. It is Congress' job to legislate, Mr. Cox, and to correct problems as they arise. It is not Congress' job to issue blank check after blank check to the Treasury with no oversight.
I'm sorry, Mr Cox, but I had hoped that the days of "Fool me once, shame on you... Fool me twice... Um, You can't get fooled again!" were behind us. But apparently not, at least in your view.
Score: Taxpayers 5. Cox 0.
Number 6.
Foreign banks and bankers will benefit at the expense of United States banks and bankers. Deutsche Bank, Credit Suisse, UBS, Barclays and Nomura have wanted for decades to grab market share on Wall Street. Because the tax rules will not affect them, they can now dangle huge retention bonuses and guarantees to the best bankers and traders in the business, from New York to San Francisco to Shanghai. Banking employees based in the United States — and any United States taxpaying employees elsewhere — would be sorely tempted by such offers. That could leave the American banks in even worse shape to pay back the government, create credit and generate tax revenue.
I just don't know what to say. First off, the US can tax US source income wherever it is received. So idea that the US can't recoup a bonus paid to a banker in London or Hong Kong from a US company is a bit flawed. It most certainly is the case that if a foreign company, like UBS, is operating on Wall Street it must comply with US tax law on the salary and other compensation it pays out here in the US. Finally, if US persons receive foreign source income, they are still subject to US taxes on that income. The US taxes income based on world-wide income, not just US source income. So the idea that imposing a US tax on bonuses will force US workers aborad or give foreign banks a competitive disadvantage on Wall Street itself is silly, and it betrays a fundamental ignorance of the way tax is levied by the federal government. Moreover, the idea that foreign banks will just snap up all the "good" US financiers and whisk them abroad with the lure of huge salaries and compensation is absurd. With the exception of Japanese Banks (which have been excluded for the most part from the present bubble beacuse they are still working off their headaches and balance sheet problems from the "Lost Decade" most financial institutions around the world are not in better shape than US banks. This is a global financial slump, not solely a US problem. Everyone is hurting.
Score: Taxpayers 6. Cox 0.
So who is Rob Cox anyway? We'll he's not a regular at the NYT (I suppose that is a good thing). He's with an outfit called www.breakingviews.com.
And here is what they have to say about him.
Rob Cox heads up the New York bureau and edits breakingviews’ US edition. Rob joined from Bloomberg News in London, where he oversaw European finance coverage. As South Europe bureau chief, he led Bloomberg’s editorial operations in Milan, Rome, Athens, Istanbul, Lisbon and Madrid from 1995 until 1998. Before coming to Europe, Rob covered Wall Street and US banking and the stock market for Bloomberg and for American Banker. He is a graduate of Columbia University’s Graduate School of Journalism and the University of Vermont.
Well, so far so good. Except what is breakingviews.com?
According to its website its board of directors is made up of financial journalists and the very people who are the subject of the news it covers. That is, folks who were with Goldman or other M&A outfits. Hmm. In other words, what some of us might term something that looks a lot like a close and cozy relationship that could give rise to conflicts of interest.
In short: Rob Cox is just another hack shilling for the money folks who own his company and his job. Oh dear. No wonder he takes the view that they shouldn't have their bonuses taxed.
But there's a bit more here... Why didn't the NYT disclose that it had taken a piece from a for profit outfit that has close ties to the financial industry? Shoddy work, Grey Lady.