The 90% Bonus Tax Goes Too Far and Takes The Focus Off Fixing The Economy
As I sit here watching some very exciting NCAA tournament games, a fire still burns in my belly regarding the recent outrage over Wall St bonuses and this 90% tax introduced by the House. I think an overwhelming majority of Americans will agree that the compensation system on Wall Street needs a long overdue overhaul, and I agree with this point, but the House legislation goes too far.
On Wall St, the incentives of individual employees were not aligned with the firms they work for nor with the financial system as a whole. Traders at these firms were encouraged to “swing for the fcnces” due to lavish bonus payments and inadequate risk controls. Essentially, your employment at the firm was like an option with the maximum downside being the loss of your job and the upside being almost unlimited in terms of the amount of dollars you could be paid. Look at Brian Hunter, the Ex-Amaranth trader, who lost almost $7 billion for his firm. Do you think he loses sleep at night over the $7 billion he lost when he can sit and count his millions and drive around in his Bentley Arnage and Ferrari F430 Spider? This is exactly the type of behavior that needs to be changed. Wall St firms are already taking the steps to do so and I am hopeful that reasonable legislation and oversight will come from the government as well.
The nation’s financial system is in shambles and it will take a massive effort by the government along with the private sector to fix it and get it back on track. We can’t afford to waste energy quibbling about relatively small bonus payments when the amount of money committed by the government and the potential economic loss is in the TRILLIONS. Unfortunately, it will be hard to stabilize this nation’s financial system and revamp the compensation system on Wall St at the same time. If I could choose on issue to focus on, it would be the economy. Financial institutions cannot afford to lose its best people because the government now decides they are making too much money. The poor performance of financial shares today illustrates this point.
For President Obama, this will be a defining moment. No one is saying to not revamp the compensation system on Wall St, he needs to take this bull by the horns, reign in the anger expressed by the public and channel it in a more effective direction — fixing this nations economy. The bill passed by the house doesn’t do this.
Great post. Couldn’t agree more. Since we (the taxpayers) own 805 of AIG, do we really want to disincentive their best people by taking away bonuses after they are earned? The most productive will surely leave if they haven’t already, further eroding the taxpayer’s hope of every earning any of their investment back.
I think the 90% tax is effective as a scare tactic. I don’t believe that the Senate will pass it, or that Obama would sign it if it came to his desk. However, it sends a message to AIG and the other financial institutes who got us into this mess that the will to act against them when they commit their next outrage is alive and well in the country and in Congress.