The People's Republic of America: See What Congress Is Doing?

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 |  Includes: AIG, XLF
by: Vernon Hill

As the ongoing financial panic unfolds, no event has been more staggering—or dramatic---than the collapse of AIG.

This was once one of the world's great companies, not just in financial services, but in any industry, anywhere. At its peak, the company had a market cap of $190 billion and assets of $1 trillion.

Now AIG has become the poster child for Wall Street’s excesses. Cost to taxpayers so far: over $150 billion, with no end in sight.

But the latest controversy surrounding AIG—those $165 million in retention bonuses that seemed to have gotten everyone in Washington up in arms last week—actually reveals the absurdity of what happens when government tries to play an active role in managing a for-profit enterprise.

Let’s review what happened. Soon after its bailout, AIG decided, sensibly, to shutter the source of its problems, its Financial Products unit. In order to retain key people who suddenly knew they’d soon be out of a job, AIG offered retention bonuses to traders and others, as an incentive for them to wind down their positions as efficiently as possible. The CDS traders, who were the ones the caused all the company’s problems in the first place, were already long gone and not included in the deal.

So all that sputtering in Washington aside, the deal made perfect economic and commercial sense. Which is one reason, presumably, there was no uproar when the retention plans were first announced last November, and why key members of the government signed off on them.

But once word emerged last week that the bonuses have actually been paid, every politician in Washington suddenly got a convenient case of amnesia, and started hollering. Politicians from the President on down vowed to move heaven and earth to get the money back—money, recall, that was paid according to a contract freely entered into by both sides, and publicly disclosed.

But to the politicians, such legalities don’t matter. They want blood, from individuals who haven’t done a single thing wrong. Congress’s latest tactic is to retrospectively tax the bonuses at 90%.

And so the destruction of free markets accelerates.

This is outrageous. If the government can tax these legal payments at 90%, after the fact, they can arbitrarily tax any of your income, regardless of when you earned it, at whatever rate it chooses.

If it can take back these AIG bonuses, it can do anything it wants, whenever it wants. In the process, our free market system would collapse, and be replaced by a system where the government, in all its arbitrary majesty, would essentially be in control of everything.

And you think the economy is having problems now. .