The Bailout Bonus Recovery Tax

It was recently reported that AIG, which has received close to $200 trillion from the government, is about to pay out $165 million in bonuses. This is truly disgraceful and an excellent reason why the company should go into government receivership. The government already owns 80% of AIG and has injected it with capital far in excess of its worth.

Hope to stop the bonus payments seems slim. According to AIG, they are contractually obligated to pay these “bonuses”. If AIG can't stop itself from giving away tax payers' money, the government should move quickly to recover it.

My suggestion is that Congress moves quickly to pass the “Bailout Bonus Recovery Tax.” It would be a one-time tax increase this year only. It would be a 90% tax on any bonus over $50,000 from a company which had to be bailed out by the government. I feel a limit of $50,000 will make sure the tax only affects the traders and managers which made the bad decisions and ruined their companies. It seems only fair that if companies are using tax payers' money to pay huge bonuses, that the government should impose huge taxes on those bonuses.

Truth About Value

Members of the media are artificially distorting the debate about bank nationalization. Recently articles have claimed that discussions about possible bank nationalization are depressing the stock prices of several troubled financial institutions. While technically correct, this view point is very misleading.

Several big banks (Citigroup, Bank of America, etc...) are currently in terrible shape. Even after huge capital injections from the federal government they are still in trouble. If the government had not used TARP and other tools to prop up some of the worst-managed banks, they would have gone bankrupt months ago. Without a new round of bailouts (through direct capital injections or indirect injections by purchasing toxic assets for more than they are worth) most of these banks will go bankrupt.

As a result, the stock from these banks are currently worthless. The companies are insolvent. Their debt is greater than the value of their assets. The only reason these stocks are currently worth anything is that some traders are betting that the government will provide them with billions of more dollars. It is not the talk about nationalization which has sent prices down, it is the lack of talk about more bailouts. In fact, it was only earlier talk about massive bailouts which has kept prices artificially high.

Would Nationalize By Any Other Name Not Sound So Scary?

Never have I seen an idea move so quickly from the fringe to the mainstream. While three months ago only a few people were even discussing the possibility of nationalizing some of the failed banks, it is now getting serious coverage. Some Republican lawmakers and publications like the Economist and Newsweek have started to openly talk about the possibility.

The fact that at least a few of the worst banks will be nationalized now seems inevitable. Already some banks have received more TARP money than they are now worth. President Obama has even acknowledged that Sweden's nationalization of their banks in the 90's is so far the best model for how to deal with the problem.

It seems that the greatest obstacle to nationalizing the banks is the term nationalization. For decades, the right has turned both socialism and nationalization into four letter words in American politics. This means that Obama's most important objective in dealing with bank crisis is to invent a new name for nationalization. Below is a list of my favorites. Do not be surprised to see one of these names (or something similar) picked up by the White House in the coming weeks:

Structured Bankruptcy
Managed Bankruptcy
Managed Restructuring
Receivership
FDIC Takeover
Temporary FDIC Directorship
Temporary FDIC Management
FDIC Directed Reorganization
FDIC Restructuring
Reorganization
Managed Reorganization
Forced Reorganization
Managed Liquidation
Directed Management Reorganization

Nationalize to Save Capitalism

We are experiencing an unprecedented man-made world financial disaster. There is a lot of blame to go around. Congress shouldn't have pushed laws to try and make it easier for the poor to buy homes. The government should have stopped China from manipulating its currency and flooding the world with cheap capital. The average American shouldn't have taken out loans they couldn't afford. But the vast bulk of the blame rests with the big banks and investment institutions. Your average American can't understand the complexities of these new mortgages. The banks should. It is up to banks to determine who to invest loans in. It is this important skill which justifies bankers' huge salaries and bonuses, and they failed completely.

When a business fails completely it needs to go bankrupt. If bad businesses aren't allowed to fail, we cease to be a capitalist country and become a corporate welfare state. Unfortunately, because of FDIC insurance and the need for people to access their accounts, we can't allow the big banks to go bankrupt. This leaves us with the only logical option: nationalize the banks, fire all the managers, and wipe out the shareholders. The goal should be to break up and try to sell off the banks as quickly as possible.

The argument against nationalization is that the government would do a bad job of running a bank. This is correct. I don't think the government could do a good job of run the banks, but I know for a fact the current CEOs have done a spectacularly horrible job of running the banks. They managed to turn trillions of dollars in stock into worthless paper.

The only alternative to nationalization has been to create a government "bad bank". The bad bank would buy up all the worthless assets from the banks at an above market value. It would be like bailing out the auto companies by having the government pay for hundreds of cars at a million dollars each. People who support the bad bank idea claim it was successful during the Savings and Loan crash in the 80's. The problem is that now, 25 years later, the same people want the same massive bailout--just larger. I promise you this: If we buy up the bad assets now, it will only be 15 years before they come back wanting an even bigger bailout.

40 Years in the Wilderness?

The Republican party until recently has been a three-piece coalition. The first piece is the cultural conservatives-- primarily evangelicals who support "family values." They are the pro-life, pro-heterosexual marriage, anti-gay marriage voters. This is the Sarah Palin branch of the party and still the most loyal.

The second piece of the coalition is the muscular neo-conservative wing. They are pro-military voters. Since 9/11, they have been willing to create massive increases in government power to combat terrorism. They not only believe that America should use force to promote democracy around the world but that we have a moral imperative to. The Iraq war has completely discredited the neo-conservatives. The fast, cheap war of liberation we were promised never materialized. Instead we got a long, bloody, and expensive occupation. After 5 years and nearly a trillion dollars, we may be able to leave Iraq as a highly divided semi-stable country.

Finally, there are the small-government fiscal conservatives. Over the past eight years the Bush administration has managed to turn a budget surplus into a huge deficit. Two expensive foreign wars have drained our treasury. While these moves have bothered the fiscal conservatives, they could be explained as necessary consequences of 9/11. But in the past few days the Bush administration has destroyed the Republican moral authority to small government and sound fiscal policy. The federal reserve just spent $250 billion to nationalize our banking industry, along with another $500 million to be spent buying up bad loans from large financial institutions. A president which only a year ago claimed we couldn't afford to (or just shouldn't) spend $35 billion to provide health care for kid is willing to spend a trillion dollars bailing out AIG, Bear Stearns, Fannie Mae, and the financial sector.

The Republican party has not just failed independent and moderate voters but its own party faithful as well. Many planks of its platform have been discredited or abandoned. While evangelical voters remain loyal, they are neither numerous enough nor geographically diverse enough to support a national party on their own. It is known that the Republican party is headed for its second straight election of huge losses. What is not known is how long the Republicans will be lost wandering in the minority party wilderness. The Republican party needs a Moses to create a new coalition to lead them into the promised land. Who their Moses will be and what commandments he will bring will be the political question of the early 21st century.

The Only New Regulation We Really Need

Clearly the current financial meltdown has proven that our set of business and banking regulations are horribly broken. A new set of modern, well-executed regulations are needed to prevent or at least mitigate the impact of future market failures. That being said, I believe that with only one new regulation we can dramatically reduce the need for taxpayers to bailout poorly run companies.
I call the regulation the “you broke it, you pay for it” rule. The rule is simple: If any business needs to be bailed out with taxpayer money, all top executive (CEO, CFO, President, Vice President, Etc...) must pay to the government every single dollar they earned from their failed company. The rule will affect any top executive who ran the company in question during the 3 years leading up to the bailout. If an executive is unable to pay back all the money he or she earned, they must forfeit all their assets. I'm not a monster-- executives who can't pay should be left with a net worth no greater than $500,000. That is more than generous. With this rule in place I picture a dramatic reduction in the number of companies the federal government needs to bail out.