Monday, March 23, 2009

The larger problem with AIG

Yes, A.I.G. executives were acting like pigs when they accepted millions of dollars in bonuses to executives after receiving billions in taxpayer money to keep from going bankrupt. ‘Populist’ anger came to a head last week over the A.I.G. bonuses. But the White House said using tax law to pry bonuses from bailed-out company executives is "a dangerous way to go."

This is not the way to do it. Who is to say that after taxing those greedy AIG execs, Congress wouldn’t take aim at any citizen with which it becomes angry and tax them into the ground as punishment? The tax code should never be used as punishment.

While acknowledging public outrage over $165 million in bonuses paid by a financial firm that just months earlier had turned to taxpayers for aid, the administration's economic advisers said President Barack Obama wouldn't govern out of anger. Several GOP senators on Sunday advised against the mob mentality that has Congress "grabbing its pitchforks and charging up the hill" in pursuit of the cash.

The House bill may have some problems in going too far in terms of legal issues, constitutional validity, using the tax code to surgically punish a small group. White House economic adviser Austen Goolsbee said Sunday that Obama understands the anger and that the best thing would be for AIG executives to return the bonuses. He also indicated that the president will look at what comes out of the House and what comes out of the Senate to see what ideas are there.

Obama's economic team said the president does not embrace this legislation. Vice President Joe Biden's economic adviser, Jared Bernstein, criticized the House plan as it headed to the Senate, where it was likely to be modified with bipartisan backing. Republicans and Senate Democrats seemed to line up with the president's policy team. For example, Republican Senator Judd Gregg said, "People are disgusted and outraged, as they should be, but let's not overreact in a way that basically has the Congress abusing the authority to tax its people."

Using the tax system to punish anyone is a bad precedent to set.

But there is a much bigger issue that has barely been touched upon by Congress, the media, or the public: the way tens of billions of dollars of taxpayers’ money has been funneled to A.I.G. counterparts – at 100 cents on the dollar. It does not make sense that Goldman Sachs, Bank of America, Citigroup and every other company that bought credit default swaps from AIG should be made whole by the government? Why isn’t Congress forcing them to take a cut?

What’s worse, some of those companies are foreign banks that used credit default swaps to exploit a regulatory loophole. Should the United States taxpayer really be responsible for ensuring the safety of European banks that were taking advantage of European regulations?

The person who has made this point most forcefully is Eliot Spitzer. In his column for, he wrote: “Why did Goldman have to get back 100 cents on the dollar? Didn’t we already give Goldman a $25 billion cash infusion, and aren’t they sitting on more than $100 billion in cash?”

Mr. Spitzer also said that while “there is a legitimate sense of outrage over the bonuses, the larger outrage should be the use of AIG funding as a second bailout for the large investment houses.”

That is precisely my point. Those banks should also have to give back the money AIG gave them.