Surya Sripati

On Mar 19, House of Representatives passed a bill to tax bonuses received by executives at AIG and other large bailed-out financial institutions – To me, it sounded as a very short sighted strategy. Yes, agreed that in these troubled times paying out bonuses to executives (AIG paid some $165 Million) looks ridiculous and it is understandable why an average American (tax payer at that) is angry but people at the helm should have considered the implications of 90% tax strategy more comprehensively rather than resorting to ‘popularistic politics’.

Let me elaborate as to why I think this is a short sighted strategy:

Cleaning up the financial mess is beyond government – All those who understand how complex the system/products have become in the last few years would agree that it requires smart finance/investment guys to understand what is inside, leave alone cleaning up. Sort of instruments that were created, sold and traded over the last few years are beyond comprehension of many congressmen and, I might add, beyond comprehension of many typical finance/banking/investment guys.

No smart guy comes cheap and so does a smart finance guy. Why should he come? After all!

Now, if you put a new law that says we will tax 90% of bonuses one makes – what will be the incentive for these smart guys to come and work. National pride? What is this and how does it look & feel like.

If, for a moment, we were to agree that no smart person comes on board to clean up the mess – tax payers will eventually lose in excess of $700 Bn. I think I’m better of losing few hundred million in bonuses than risking $700 Bn loss.

It can also cause the remaining people at these troubled firm to leave – One might argue that where will they find jobs but here is my two point counter (1) Smart people will always find jobs and (2) What worth is the job which takes away 90% of what you have made?

Troubled firms may not even seek federal aid – I know this is an extreme view that I’m taking but I still would like to go ahead. With US government taking such strong views on executives making money and changing laws or bringing laws overnight, it does sent signals that anything can happen tomorrow and few congressmen on the back of public ire take a stance that every enterprise should be controlled and run by government and then go further and define what everyone in the company should make as pay.

They can easily think ‘Is it worth the trouble?’ ‘What if I simply file for bankruptcy?’

Shoot yourself in the foot – First you announced 90% tax law and then the Treasury Secretary says he is putting together a public-private partnership plan to rescue troubled banks in which he says Private Equity player and Hedge funds will not only contribute up to $30 Bn in money but more importantly manage the entire plan. He goes on to say that these PE & Hedge funds will want to participate because they have an incentive to make money when asset values recover – Again, If I’m a smart finance guy, I will not believe this given that laws are getting changed and made overnight. What is the guarantee that I manage this plan and turn it around and then you come and put a spanner and say that I will tax your bonus by 90% or 100%. Why should I take the risk of putting my money and also run the risk of you coming and telling me that I can’t take bonuses for my performance?