Pat Dollard

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Financial Times:

Banker fury over tax ‘witch-hunt’

Bankers on Wall Street and in Europe have struck back against moves by US lawmakers to slap punitive taxes on bonuses paid to high earners at bailed-out institutions.

Senior executives on both sides of the Atlantic on Friday warned of an exodus of talent from some of the biggest names in US finance, saying the “anti-American” measures smacked of “a McCarthy witch-hunt” that would send the country “back to the stone age”.

There were fears that the backlash triggered by AIG’s payment of $165m in bonuses to executives responsible for losses that forced a $170bn taxpayer-funded rescue would have devastating consequences for the largest banks.

“Finance is one of America’s great industries, and they’re destroying it,” said one banker at a firm that has accepted public money. “This happened out of haste and anger over AIG, but we’re not like AIG.”

The banker added: “It’s like a McCarthy witch-hunt…This is the most profoundly anti- American thing I’ve ever seen.”

Vikram Pandit, Citigroup’s chief executive, told employees in a memo that some anger about executive compensation was “warranted”. But he hit out against the idea of a special tax. “The work we have all done to try to stabilise the financial system and to get this economy moving again would be significantly set back if we lose our talented people because Congress imposes a special tax on financial services employees,” he wrote.

Some policymakers expressed concern that banks may try to break out of the government’s embrace by paying back public capital even if the price is a more severe credit squeeze.

They also fear that financial institutions may decide not to take part in public-private partnerships to finance credit markets and acquire toxic assets.

The outcry followed Thursday’s approval by the House of Representatives of a bill that would impose 90 per cent tax on bonuses to employees whose gross income exceeded $250,000 at bailed-out firms.

Next week the Senate will also consider a hefty tax on bail-out bonuses amid calls for an investigation into who was responsible for allowing the pay-outs. Some senators are calling for a committee hearing on a bill that would impose a 70 per cent tax at bailed-out institutions, half paid by employees and half by companies, arguing that a delay would help cool political anger.

“There are three big industries where the US has global leadership: financial services, media and technology. Introducing this 90 per cent tax is like taking one of those industries out the back and shooting it,” said a top Wall Street executive.

In Frankfurt one employee at a US investment bank said the new tax measures would “send [the US] back to the stone age”.

“Commodity traders are already moving to companies like BP where they can make as much money as they used to,” said another banker at a US firm.

Bankers at Deutsche Bank said it could benefit from the proposed legislation by poaching its US rivals’ most talented employees.

Bloomberg:

Courts Unlikely to Strike Down AIG Tax Law, Legal Experts Say

By Greg Stohr

Courts probably will uphold Congress’s effort to tax employee bonuses at American International Group Inc. and other companies receiving federal bailout funds, several legal experts said.

The House yesterday voted 328-93 in favor of a 90 percent tax on bonuses, including the $165 million insurer AIG paid last week after receiving $173 billion in bailout funds. The Senate plans to vote next week.

The measure raises a number of legal questions, and New Hampshire Republican Senator Judd Gregg yesterday said the legislation was unconstitutional. Still, any legal challenge will meet a significant obstacle: the historic reluctance of the Supreme Court to second-guess Congress on tax issues.

“Given the state of the law, it will be unlikely that the Supreme Court will strike down this legislation,” said Edward McCaffery, a University of Southern California tax-law professor who says he questions the wisdom of the proposal.

Gregg said the legislation would violate the constitutional ban on bills of attainder, or laws that single out individuals for punishment. “It’s basically targeted on a small group of people,” he said.

The House took several steps to shield the measure from that argument, said Laurence Tribe, a constitutional law professor at Harvard Law School.

General Language

The measure doesn’t single out employees at AIG and instead uses general language affecting all companies receiving more than $5 billion in federal bailout money. Bonuses for employees at Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley would be affected.

Tribe also pointed to a provision in the measure exempting executives at companies that repay enough bailout funds to reduce the government’s investment below $5 billion.

That provision “makes it clear that the goal is not to punish corporate executives generally, but is simply to ensure the appropriate use of government funds,” Tribe said in an e- mail.

The bill-of-attainder clause is one of the Constitution’s least-invoked provisions. The Supreme Court in 1946 cited the clause in striking down a law that barred three specified federal employees from receiving their salaries. Congress had concluded that the three engaged in subversive activities.

In 1977, the Supreme Court said Congress didn’t violate the bill-of-attainder clause when it passed a law taking control of tapes recorded by former President Richard Nixon.

Telecommunications Law

More recently, the high court in 1999 rejected two appeals that said a 1996 telecommunications law was a bill of attainder because it barred regional Bell phone companies from providing long-distance and other services.

“Courts have been fairly deferential to Congress if the language is written in sufficiently general terms,” said Jonathan Adler, a law professor and director of the Center for Business Law and Regulation at the Case Western Reserve University School of Law in Cleveland.

McCaffery, who teaches at USC’s Gould School of Law in Los Angeles, said opponents also would be able to press a legitimate — if not ultimately successful — argument against the measure based on the Constitution’s due-process clause.

That argument would bear similarities to those based on the bill-of-attainder clause. Opponents would have to show that Congress imposed punishment, bypassing the criminal court system.

That argument would pass the “laugh test,” McCaffery said. Even so, he said, “you’re swimming upstream because of the general tendency of the courts to stay out of tax legislation.”

Senate Finance Committee Chairman Max Baucus, a Montana Democrat, said yesterday he believed the legislation would pass constitutional muster. “We’ve pushed the constitutional question pretty hard with constitutional experts and we think it’s okay,” he said.