Yesterday evening I was thinking that I must pen a quick blog on the AIG bonus fiasco as soon as I can, and was a admittedly a little concerned that Andrew Lilico would beat me to it. Then I remembered...he’s no longer blogging for CH! I must admit, I will miss his missives, and wish him all the best with his new role at PX.
Now, to the bonus fiasco in the US. It's very rare that when legislators pass laws with haste (especially rage filled haste), that such laws are sensible, practical or reasonable. So it was with the first reading of a special tax bill that the US House passed yesterday – which, if signed into law – will impose a 90% punitive surtax (that’s a tax on top of existing taxes) on any income above $250,000 paid to an employee of an institution that has been the recipient of US$5bn or more of government money. If there ever was a stupid law passed anywhere in the developed world since the onset of the global recession, this is it. US legislators, Democrat and Republican alike, far from behaving like representatives of a modern, stable democracy, have descended to the antics of a banana republic. It's the McCarthy witch hunt era all over again.
This law will not only impact institutions that are already on their knees like AIG, Citibank and Bank of America Merrill Lynch, but also the ones just about still standing, such as Goldman Sachs and JP Morgan. What was the point of pumping government cash into these banks, only to cripple them right after? There is no doubt that these institutions will now do whatever they can to repay the government as early as possible, instead of keeping the extra capital until things stabilised. If the legislators were going to do this, what was the point of rescuing the banks in the first place? Better to have let them gone bust, as I have argued in the past, through a pre-packaged type bankruptcy arrangement.
The impact will go far beyond these institutions, because what it tells you about America today is that retrospective lawmaking and the effective abrogation of the law of contract is OK. This will no doubt increase the risk premium of doing business in the US, as no business person can feel confident that any contract entered into day will actually be respected by the state tomorrow. Of course people feel angry at the non-discretionary bonuses of $165 million paid out by AIG, but US legislators have learned nothing about how to tackle the worst economic crisis since the Great Depression. People need jobs and homes, not rage filled revenge measures that will make things even worse.
I am sure all this has given Harriet Harman a few ideas. Perhaps she would like to re-propose the act that was put to Parliament in 1720 in the aftermath of the South Sea Bubble: that bankers be tied in sacks filled with snakes and tipped into the Thames.