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Why you'd be crazy to let the government invest in your business

March 18, 2009

The self-righteous feigned outrage of our congresscritters over the AIG bonuses is enough to make a grown man barf. Coming from 535 men and women who waste more money every day before they brush their teeth than the AIG executives got, it's just not very convincing.

These folks were so frantic to push through the bill that provided the cash for these bonuses -- and that in fact specifically protected them -- that they refused to wait an extra day to let anyone read the bill that was written in secret in Congressional back rooms.

Now Iowa critters Harkin and Braley want to impose a 100 percent excise tax on the bonuses, while Senate taxcritters Grassley and Baucus merely want to impose two 35% taxes on "excessive" bonuses paid to companies getting government cash.

Nothing could demonstrate better why government should never invest in private businesses. Can you imagine anyone less qualified to set private compensation levels than Congress? Nobody is even asking the obvious questions: will the companies, and the government, be worse off if these taxes pass (leaving aside the question of whether the retroactive taxes are even constitutional).

Just looking at AIG, these bonuses don't just cover the "bad guys" that wrote the swaps. They presumably cover the best people at the company, the ones who are trying to hold the company together and minimize the taxpayer's losses in AIG. These are also the ones most likely to be able to find jobs elsewhere. These guys will get screwed by these taxes just as much as the "bad guys." The Tax Rascal points out:

So what are those AIG employees thinking right now? Their first thought is probably something along the lines of “Who’s hiring?” Many of them won’t be able to get jobs. The ones who can demonstrate that they’re good at what they do will be able to get jobs. If AIG doesn’t do something to keep them on board, the company will be reduced to a pile of liabilities managed by mediocre employees, and constantly hoovering up your tax dollars.

The impact will extend far beyond just AIG. The Grassley bill will put all executive compensation of TARP recipients under political scrutiny -- even recipients like Wells Fargo who didn't want the money in the first place. These companies were forced to take TARP money so there wouldn't be a stigma to TARP funding. If only bad companies got TARP money, the reasoning goes, you could trigger bank runs by the very act of trying to help a struggling bank.

Now every executive of a TARP company will move heaven and earth to give the money back as soon as possible, and companies that retain TARP funds will end up branded, fairly or not, as welfare cases. Megan McArdle explains:

I think it's safe to assume that if this passes, any banks that possibly can will rush to return bailout funds to the Treasury. And perhaps this is a good thing. But the attempt to shield shaky banks behind a general distribution of funds will be over.

I suspect that it would also not do any good things for whatever future plans Treasury has. All of the plans I'm currently aware of involve substantial voluntary participation from sound financial institutions. I don't think you'll get much voluntary cooperation from banks if you declare that any acceptance of government funds will involve substantial risk that they will appropriate your paycheck.

The only good the congresscritters might accomplish would be completely accidental: they might destroy the entire bailout structure by making it almost impossible for any self-respecting company to participate. Then they might be forced to take the route they should have taken from the start: liquidate the failed institutions, place the shaky ones under close scrutiny, and leave the rest alone.

UPDATE: Now I'm perfectly happy to take back this kind of AIG bonus.

UPDATE II: Making lemonade.

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Thanks for the link!

Another thing we might see is similar to what happens in hedge funds and insurance: a group of people just take their money and leave, and then start up something new doing exactly the same stuff, but for more money. So now, the average banker knows that if he makes risky loans in the future, the outcome is either a) they pay off, and the banker gets a bonus; or b) they don't pay off, the government pays up, and the bad decisions are someone else's problem.

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