Bonus-Tax Stocks Get Whacked

Yesterday our brilliant House of Representatives rushed through another bill that was created because they failed to notice something in a prior bill that was rushed through. Note to House: Read what you try to write into law, please.

Yes, AIG (AIG) was bailed out and would never have been able to pay the bonuses had the government not bailed them out. Congress has a case to want the bonuses back. But for them to tax bonuses 90% going forward only puts these companies at a huge disadvantage, which will make it much harder for the taxpayers to get their money back. Companies like JP Morgan (JPM), who would fall under the 90% bonus tax, were pretty much forced to take money from the government, and for the government to now put them at a competitive disadvantage to non-bailout firms is astounding. Jamie Dimon must be furious.

Below we highlight the performance over the last two days of the 20 largest non-bailout global financial firms along with firms that would fall under this 90% bonus rule. We excluded AIG, Fannie Mae (FNM) and Freddie Mac (FRE), since they're essentially already gone. As shown, the non-bailout firms are down an average of 1.38%, while the 90% bonus tax firms are down an average of 14.02% (including AIG, FNM, and FRE would make this figure even worse). While the companies that would fall under this bonus tax rule are heading lower, their competitors are probably licking their chops for the top talent to come their way. And the government still hopes to get the taxpayers their money back. Good luck with that.

Comments

[IB groupie:]

It is a shame that Mr. Dimon, as the lone CEO left standing with any dignity in tact, is being lumped in with the rest of the losers (or as they were formerly known "My illustrious colleagues”) since he was the only one who a) didn't need the bailout money b) could have facilitated the BS rescue and c) has not misused or misspent money (government-issued or otherwise). But as that age old adage states, you are only as good as the company you keep. Mr. Dimon, unfortunately, is in the company of scoundrels and thieves who went hog wild when they saw how easy it was to steal and cheat and are now getting their comeuppances.

My humble advice to him (and I’m no superstar) is pay back the money “loaned” to JPM and get back to business as usual. The economy is enough of a headache without having to worry about people screwing with your compensation.

Mar 20 02:09 PM

[Marcap:]

Unfortunately this is quite often what happens when politicians get involved in the economy. While their actions many indeed fix one problem, if only temporarily, they lack the ability (or desire) to see their actions though. As a result, more often than not such actions bring on problems far greater than the ones they tried to fix.

Sure there should be full accountability for any and all money which government pays out. But in my opinion, the best solution to that problem would be to not provide bailout money in the first place, but rather let the marketplace decide on what happens to companies, which either through decreased interest in their products, or through poor management, cannot make it on their own. If anyone disagrees with that, perhaps they would like to try and explain to a dying woman who cannot afford her prescription drugs, that there is will be no help for her because her tax dollars went to pay AIG, GM, and others such poorly run companies, hundreds of billions of dollars so that they can continue to enjoy their million dollar salaries and bonuses, lavish lifestyles, vacations, parties, etc. This is completely wrong, and it must be stopped. Wake up America! It's time for a revolution.

On Mar 20 01:23 PM ED K wrote:

> I totally agree with your thoughts,this is just the start of another
> distraction from the real issue of solving our economic woes.I can
> only hope that this proposed legislation does'nt in some way discriminate
> or violate any rights of the bonus reciepients,if it does, expect
> a legal response from the financial sector and it could get ugly.

Mar 20 03:19 PM

[HonestTrader:]

This concept that America is hostage to continuing to pay bonuses to the scumbags who sold, marketed, and pushed these toxic assets is ridiculous. So far, the morons at the head of these businesses who absolutely proved that they are incapable of managing a safe level of calculated risk of assets, have been given an advantage over the companies that were better at managing their business, and thus didn't need a government bailout. If doing the right thing means that we lose some of the government bailout money, I think I speak for the American people in that we are ready to accept that. This mantra of "good people have to deal with the devil to recover from the mess created from greed and ignorance" is sickening.

Mar 20 04:25 PM

[William Cowie:]

The message to failing banks is becoming clear: if you thought the government is just going to bail out your mess-ups and:

(a) this is free money
(b) you can return to life as usual
(c) there are no further consequences

think again.

Even though the message is indirect, distorted and difficult to understand, this much is clear: if you fail, you will pay, one way or another.

Mar 20 05:26 PM

[Marcap:]

It is indeed very sickening. But we are only hostages if we choose to be. We are the people. We too have a voice. We need to come together now and make certain that our voices are heard by making them much louder than those of politicians and lobbyists, who sadly while we were sleeping, are now reshaping America at the expense and detriment of this and future generations. It is time to stand up, and speak up.

On Mar 20 04:25 PM User 380030 wrote:

> This concept that America is hostage to continuing to pay bonuses
> to the scumbags who sold, marketed, and pushed these toxic assets
> is ridiculous. So far, the morons at the head of these businesses
> who absolutely proved that they are incapable of managing a safe
> level of calculated risk of assets, have been given an advantage
> over the companies that were better at managing their business, and
> thus didn't need a government bailout. If doing the right thing
> means that we lose some of the government bailout money, I think
> I speak for the American people in that we are ready to accept that.
> This mantra of "good people have to deal with the devil to recover
> from the mess created from greed and ignorance" is sickening.

Mar 20 05:29 PM

[Tony Petroski:]

We've learned this week why the bums on the Hill must be thrown out. The economy and market are just showing signs of life and the financial system has some good news to report, and the politicians use this brief respite from the relentless bear market as a chance to return to bashing bankers, Wall Street, and anyone who makes a profit in America.

Fascinating set of figures. It renews my hope in "efficient" markets that there is recognition that not all the banks will go out of business despite attempts by the U.S. Congress to hasten their demise.

Mar 20 07:15 PM

[Tetrapod:]

I think this whole bonus business is a gigantic red-herring. First, it is such a tiny piece of the big picture that it's ludicrous for our politicians to be wasting their time on it. Its like worrying about scratches on the paint job after your car is totalled.

Second, we use the term "bonus" for several different things and by not clarifying what we're talking about, we just get everyone all excited. Bonuses include:
- Contractual pay for production (e.g. commissions). If an employee is told that he will be compensated X for doing Y, then it is wrong for the government to interfere in that. If the compensation plan is not a good one, then it should be fixed going forward, not retroactively.
- Discretionary bonuses based on a combination of company, departmental, and individual results. These clearly should not be given at all when the company has been driven into the ground.
- Stock options that get treated as bonuses when they vest, or when they are exercised. These have already been destroyed by loss of value in the company's stock.
Which kind are we actually talking about with regard to AIG and Merrill? Does anyone even know?

Lets let our politicians spend their time fixing the trillion dollar problems rather than fixating on the million dollar problems.

If we're going to break contracts, lets invalidate the trillions of dollars of uncovered CDS contracts that the taxpayers are paying to gamblers who bet against the house (i.e. AIG). That's the sink-hole into which $180 billion of our money has already gone and into which unknown future billions will follow. But no one even seems to care about that.

We're obsessed with picking up the nickels and dimes that were dropped, while huge stacks of $100 bills are burning.

Mar 20 08:59 PM

[Marcap:]

"We're obsessed with picking up the nickels and dimes that were dropped, while huge stacks of $100 bills are burning."

You are absolutely right, Tetrapod.

Sadly enough, I suspect that some of our politicians actually believe that we are all gullible enough to believe that if they go after even a tiny percentage of those abusing the system, then they can't be all that bad. Nonetheless, I equate what they are doing with a fleeing bank robber (no pun intended) who stops to toss a few coins to a beggar on the street, in the hopes that his good deed will somehow overshadow his crime.

Mar 20 09:51 PM

[reality chk:]

Under normal circumstances I would agree with this article. However, these are NOT normal times nor normal cirmustances.
Would AIG still be paying bonusses today without the Federal money?
The answer is NO!
The federal money was intended to keep the company afloat with it's creditors.
These people ran this company into the ground taking with them the entire US and world economies.
This in not a matter of principal, or stand up for your rights debate.
Any reasonable person would expect to share their company's success. Where is the company success here? This company was and still is one (1) thread away from falling into the abyss.
Clearly the AIG management and employees do NOT have a sense of responsibility nor accountability.
Where is the shared sacrifice?
The tooth fairy did not do this one night and we all woke up into it.
Like it or not, the federal government (the Taxpayer) now owns this company until the federal money is paid back. Remember when you take out a loan they put a lien on your property. Or AIG with their superstar employees can return the federal money and then they can pay the bonusses. no problems.
There are a lot of stink associated with this deal usualy that means there is something rotten that causes the stink. It is Self Centered, Greed, Corruption, Conspiracy, Incopetence, Coverup and lies.
These people should be in JAIL. Nothing to debate here.
Clearly these people have been isolated on this financial dreamworld island for so long they have lost their sense of reality. 73 of these superstars are getting a bonus of $1M or more. usualy a bonus is about 20% of their annual wage. That means these superstars are making over $5M/year and getting a $1M bonus on top. Yep. They are in their own little world. GET REAL... Give the Taxpayer's money back NOW, or forfeit all your rights.
They should be taxed not only on the bonus but the entire years earnings at 90%. It is unthinkable to see this kind of abuse of public trust and to watch the spin doctors at work, painting a different picture with each turn. This type of anymosity will not go away until you return the money. payback the federal loans and take your proper place in line with the rest of the reasonable people . 200 million taxpayers expect nothing less.

Mar 21 11:09 AM

[Real realit...:]

reality chk

You quote a bonus as typically being 20% of annual base salary, so that must mean a $1m bonus recipient is earning $5m base. You are just flat wrong, and clearly have no idea what you are talking about, or the economics of banking compensation.

You want to tax every bank workers annual earnings at 90%? So they should work for free, even the ones who produce good results, and had nothing to do with the credit losses? This type of rhetoric is so misinformed and poorly thought out it is amazing. You might have a long career in the House of Representatives to look forward to.

I'm curious, what do you say to the bank employee who works in the equities side of the business who made the bank good profits in 2008, and who was rewarded a bonus in February? They used the money to pay down their mortgage, and perhaps fund their children's school fees. Maybe some are a little younger and still paying off student loans they incurred to get the advanced education required to work in finance these days. Many innocent people might be facing financial ruin because they now face an enormous tax bill. All I'm saying is try, just for a second, to see the other side of the coin.

Look, a tiny proportion of AIG employees had legal agreements that were by all accounts entered into a long time ago. Under the current dynamics of that company, those agreements no longer represent market reality. But they were legal agreements. Those employees had every legal right to expect those contracts to be honored. I certainly think accepting the money was wrong in the current environment, but I have an enormous amount of sympathy for them given they entered into the contracts in good faith.

There has to be a better way to protect taxpayer money than the current approach of indiscriminately taxing bank employees.

Mar 21 11:55 AM

[Econ 101:]

congress knew about these bonuses. They are using them to distract the sheeple and make their own failings disappear. congress caused this and created a "crisis" to further erode our rights. It is congress that needs to be changed, the crooks at AIG, C or BAC are pikers in comparison.

Mar 21 12:48 PM

[WAdem:]

I think we are missing the important points of this issue. First, many of these AIG bonuses were put in place to retain certain employees in order to unwind the toxic assets. If this is so, then taxpayers are being held hostage to the same unethical people who created these financial instruments. From what I have gleaned, their initial actions were not illegal. Their implied threat to sabotage efforts to mend the World's capital markets unless they receive large bonuses is criminal and we should not accept anyone using the current meltdown for personal enrichment. Also, it seems obvious to me that Hank Paulson was part of the problem while trying to find a solution last year. He encouraged Geithner to allow these unconscionable bonuses since they are routine for Wall Street. Paulson treated LEH much differently than BSC due to his personal animosity for Dick Fuld stemming from their longstanding professional conflict on Wall Street. Allowing LEH to fail was the single largest mistake made in trying to resurrect the economy and Paulson blew it. The systemic risk was far worse than it needed to be. Paulson could have found a partner for LEH just as he did for BSC if he wanted to.

Mar 21 01:49 PM

[Paul H. M.:]

The people that are getting bashed did not make a profit. They lost many billions.

While I agree it was not great for the market, I'd rather Congress correct their mistake than allow these losers (people who run companies like JPM, WFC, BAC, AIG, and anybody else who over-leveraged) to get paid for losing money.


On Mar 20 07:15 PM Tony Petroski wrote:

> We've learned this week why the bums on the Hill must be thrown out.
> The economy and market are just showing signs of life and the financial
> system has some good news to report, and the politicians use this
> brief respite from the relentless bear market as a chance to return
> to bashing bankers, Wall Street, and anyone who makes a profit in
> America.
>
> Fascinating set of figures. It renews my hope in "efficient" markets
> that there is recognition that not all the banks will go out of business
> despite attempts by the U.S. Congress to hasten their demise.

Mar 21 02:21 PM

[Paul H. M.:]

Whether it's a distraction or not, I'm still happy they're taking those bonuses back. Sure, Congress made a big errors (not the first time), but it's better to fix a mistake than let it ride. You don't want to be like Bush (never admitting you're wrong, and therefore, never fixing your errors).


On Mar 21 12:48 PM Econ 101 wrote:

> congress knew about these bonuses. They are using them to distract
> the sheeple and make their own failings disappear. congress caused
> this and created a "crisis" to further erode our rights. It is congress
> that needs to be changed, the crooks at AIG, C or BAC are pikers
> in comparison.

Mar 21 02:22 PM

[Paul H. M.:]

Bottom line: they made zero money, so why should they get bonuses with my tax-money?


On Mar 21 11:55 AM Real reality check wrote:

> reality chk
>
> You quote a bonus as typically being 20% of annual base salary, so
> that must mean a $1m bonus recipient is earning $5m base. You are
> just flat wrong, and clearly have no idea what you are talking about,
> or the economics of banking compensation.
>
> You want to tax every bank workers annual earnings at 90%? So they
> should work for free, even the ones who produce good results, and
> had nothing to do with the credit losses? This type of rhetoric
> is so misinformed and poorly thought out it is amazing. You might
> have a long career in the House of Representatives to look forward
> to.
>
> I'm curious, what do you say to the bank employee who works in the
> equities side of the business who made the bank good profits in 2008,
> and who was rewarded a bonus in February? They used the money to
> pay down their mortgage, and perhaps fund their children's school
> fees. Maybe some are a little younger and still paying off student
> loans they incurred to get the advanced education required to work
> in finance these days. Many innocent people might be facing financial
> ruin because they now face an enormous tax bill. All I'm saying
> is try, just for a second, to see the other side of the coin. <br/>
>
> Look, a tiny proportion of AIG employees had legal agreements that
> were by all accounts entered into a long time ago. Under the current
> dynamics of that company, those agreements no longer represent market
> reality. But they were legal agreements. Those employees had every
> legal right to expect those contracts to be honored. I certainly
> think accepting the money was wrong in the current environment, but
> I have an enormous amount of sympathy for them given they entered
> into the contracts in good faith.
>
> There has to be a better way to protect taxpayer money than the current
> approach of indiscriminately taxing bank employees.

Mar 21 02:24 PM

[Jeff L.:]

Not accurate Paul. JPM and WFC both earned money in 2008 and are expected to post profits again in Q1. Many of the strong banks were asked to take TARP money (which, by the way the banks pay a 5% dividend and 15% warrants on their stock) so the Fed and Treasure could help stimulate lending. Wells Fargo has already made loans well in excess of the TARP funds received (see below - $144B vs $25B) as have many other banks. The tax payers are doing very well with JPM, WFC and most of the other banks. Treasuries are sold at 2-3% and the money loaned to banks at 5% + warrants. That is a very good arbitrage for the American taxpayer and it drives the economy through lending.

Wells Fargo (WFC Quote - Cramer on WFC - Stock Picks) surrendered 9.3% to bring its two-session loss to 18.8%. On Thursday, Wells Fargo said it had extended $51 billion in loans in January and had lent a total of $144 billion over the last four months, six times more than it had lent over the same period last year


On Mar 21 02:21 PM Paul H. M. wrote:

> The people that are getting bashed did not make a profit. They lost
> many billions.
>
> While I agree it was not great for the market, I'd rather Congress
> correct their mistake than allow these losers (people who run companies
> like JPM, WFC, BAC, AIG, and anybody else who over-leveraged) to
> get paid for losing money.

Mar 21 05:48 PM