This Theater of the Absurd is not Amusing

Witnessing the actions of Congress on the news is like watching some kind of sick, twisted circus. The absurdity is beyond belief yet there it is, playing out right before our eyes. All the while President Obama, who took an oath to uphold the Constitution of these United States of American has jetted over to California to appear on the Tonight Show. At least we know where his priorities are.

The House just passed an unconstitutional bill imposing a 90% tax on bonuses given to current and former employees of firms who receive more than $5 billion in taxpayer funds. The 90% tax is in addition to existing income taxes!

“These people are getting away with murder,” Ways and Means Chairman Charles Rangel (D., N.Y.) said Thursday during debate on the House floor. “They’re getting paid for the destruction they’ve caused to our communities.”

Who is he talking about? Himself? Congress? Tim Geithner? President Obama? Maybe we can tax all of them at 90%.

Thank goodness cooler heads prevail in the Senate. The bill they’re working on will only tax bonuses at 70%!

The Senate bill is much broader than the House version — taxing bonuses at any company that received federal assistance, not just the largest ones. It would tax bonuses at 70%, split evenly between the company paying the bonus and the employee receiving it.

If these politicians had bothered to read the CRAPulus bill or stopped playing God, deciding which firms are too big too fail, perhaps we wouldn’t have this mess on our hands. And their actions aren’t going to do anything to shore up the banking system or financial markets. They’re only making things worse.

One consequence will be that every bank executive in America will try to repay his Troubled Asset Relief Program, or TARP, money as rapidly as possible. The political punishment for accepting public money is becoming higher than the benefits of the extra capital cushion. According to Wells Fargo Chairman Richard Kovacevich, “If we were not forced to take the TARP money, we would have been able to raise private capital.” On Tuesday, Bank of America CEO Ken Lewis joined the rush for the TARP exits, saying he hoped to pay back the $45 billion BofA has received by 2010 if not sooner. It’s hard to argue with the sentiment.

For the larger banking system, however, this is exactly the wrong time to be shedding capital. The main point of the TARP was to backstop the financial system against systemic failure. Treasury botched the roll out and the execution, but with the economy still in recession and housing prices still falling, banking losses will surely grow. Mr. Geithner has projected the need for more than $1 trillion more in public capital, and the FDIC has asked Congress to increase its credit line to as much as $500 billion.

If we’re lucky, the banks will be able to use today’s steep yield curve to earn their way out of this mess, but no one can be sure and before this is over the FDIC and Treasury are going to need more public capital to protect depositors of failed institutions. The last thing we need is for this year’s political panic to recreate the circumstances for another financial panic like the one we had last fall.

If you’re sitting there thinking “What do I care, those bankers and executives deserve it” you might want to think again.

AIG’s managers may be this week’s political target of choice, but the message to every banker in America, indeed every business in America, is that you could be next. At least we haven’t yet seen the resolution that was proposed in the English 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. But it’s still early days.

This entry was posted on Thursday, March 19th, 2009 at 3:44 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed.