Congress threatens to tax back bonuses to AIG executives

McClatchy NewspapersMarch 17, 2009 

WASHINGTON — The Obama administration and members of Congress scrambled Tuesday to find ways to rescind $165 million in bonuses paid to employees of bailed-out insurer American International Group as constituent ire grew.

At the White House, spokesman Robert Gibbs said "there are certain provisions" that could be used to get the money back, though he cited nothing specific.

At the Capitol, members of Congress proposed using the tax code to take back the money. However, it was unclear whether, or how quickly, Washington could act to reclaim bonuses paid to 73 executives of AIG, which so far has received $170 billion in federal aid.

By late afternoon, Baucus and Sen. Charles Grassley, R-Iowa, said they intended to introduce legislation that would slap a 35 percent excise tax on excessive executive compensation.

The measure would apply to all bailout recipients and companies in which the federal government has taken an equity interest, including Fannie Mae and Freddie Mac, senior Senate Finance Committee aides said.

Under the proposal, retention bonuses — the type that AIG paid out — would be subject to the tax and would have to be paid both by the offending company and the bonus recipient.

"If it was a million dollar payment to the employee, AIG or the employer will pay a $350,000 excise tax, in addition, the individual recipient will pay a $350,000 excise tax as well," according to a senior committee aide.

The Baucus-Grassley proposal would also go after non-retention bonuses — year-end bonuses, performance bonuses, and others — if they exceed $50,000, committee aides said.

Democrats in the House of Representatives, meanwhile, took steps write a bill that would require Attorney General Eric Holder to recoup certain bonus payments, presumably like those paid by AIG.

The provisions would apply to all recipients of TARP money, plus companies where the government holds an equity interest, such as Fannie Mae or Freddie Mac. They would apply to bonuses earned or paid starting on Jan. 1 and lasting through the period when the company had TARP money.

The administration and Congress are looking to gain momentum on Wednesday, when Edward Liddy, AIG's chairman and chief executive officer, will be among those testifying before a House subcommittee.

Lawmakers promised a tough, lively hearing.

Rep. Carolyn Maloney, D-N.Y., wants to know: "Did they attempt to renegotiate the contracts? They say they can't alter contracts . . . but they're altering contracts for workers at GM (General Motors) and Chrysler."

Maloney introduced a measure to tax bonuses at 100 percent for employees of AIG and any other institution in which the government owns a majority stake. Rep. Gary Peters, D-Mich., would impose a 60 percent surtax on bonuses of more than $10,000 from any firm in which the government has a major interest.

Lawmakers said that their constituents' anger had erupted in recent days as rarely before. The public has been unhappy about bailouts since they first emerged last year, polls have found, and the AIG news may have been the last straw. The message, said House Majority Leader Steny Hoyer, D-Md., was that "These guys ought to give the money back."

He and others warned, however, that getting tax legislation passed quickly is a rare feat.

Some experts thought the executive branch could act on its own.

Douglas Kmiec, constitutional legal counsel at the Justice Department during parts of the Reagan and George H.W. Bush administrations, said it wasn't unusual for contracts to be altered because of changing circumstances.

Kmiec, who's a professor of constitutional law at Pepperdine University in California, said that the Office of Management and Budget could issue an opinion outlining how unforeseen circumstances, as well as other factors, had changed the nature of AIG's mission in recent months.

"No one could have anticipated the allocation of public funds" to the ailing insurer, he said. The White House legal counsel or the Department of Justice also could offer a ruling, Kmiec said.

AIG could challenge such an opinion in federal court, but it would be up against the people of the U.S. In addition, the government could argue that without the federal bailout "the reality is the AIG executives would have received zero, or amounts subject to multiple claims in bankruptcy," Kmiec said.

However, John Lapp, an economics professor at North Carolina State University and an expert on the Federal Reserve System, said that there was little that the Obama White House could do legally to recoup the bonus money.

"I think it would be difficult, because these are specified contracts," Lapp said. "There's a serious problem when the government decides what contracts are valid and which ones aren't. If you start cherry-picking . . . that would reduce productivity, enterprise and risk-taking, when the government intervenes."

Tim Blessing, the director of the presidential performance study at Alvernia University in Reading, Pa., agreed that there was little that the White House can do to retrieve the bonuses.

"They could allege the contracts on which the bonuses were based were improper or fraudulent — collusion or something like that," Blessing said. "But my guess is these are straightforward contracts."

Other avenues also faced potential roadblocks. At a Senate Finance Committee hearing, Internal Revenue Commissioner Douglas Shulman said that he couldn't add a lot to what the president had said. Obama has denounced the bonuses and instructed Treasury Secretary Tim Geithner to pursue every legal channel to get them back.

"The IRS will do what it can to assist in the exploration with the committee and obviously the Department of the Treasury," Shulman said, offering no specifics.

The White House also is looking at whether it could use a change in bonus policy that was included in last month's economic stimulus plan. Top executives at firms that received money from the Troubled Asset Relief Program, aimed primarily at bailing out banks, will be barred from getting bonuses that are more than one-third of their annual salaries.

Other restrictions would apply, notably that the treasury secretary would review past compensation paid to the top 25 employees of TARP beneficiaries, which could be reimbursed if the payments were "contrary to the public interest" or "inconsistent" with the purposes of the bailout plan or the stimulus plan.

While AIG got bailout money, the bill appears to apply only to contracts that were in effect after Feb. 11, and AIG's predate that.

ON THE WEB

Geithner letter to lawmakers

Outline of Grassley and Baucus proposal

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