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Monday, March 23, 2009

Burning Down Your Own Neighborhood

The bill passed by the House last week, to tax ninety percent of bonuses for any employee making over $250,000 who works for a financial institution receiving more than $5 billion in bailout funds, will be a self-imposed financial disaster that will increase the chances of a deep economic recession becoming a depression. It may make the demagogues in Congress feel good, and the legions suffering in this economy may jump for joy that they are sticking it to the bankers, but all of us will wake up the next morning amid the burning ruins. Let me count the ways.

1) The legislation does not only penalize the tiny fraction of AIG employees in the financial products division, mostly in London, who took on enormous risk and have brought AIG to its knees; it also penalizes tens of thousands of employees from at least eight major U.S. banks who had nothing to do with this mess.

What are those employees doing? They are not spending because of their fear of what Congress will do next; they are leaving the banks we badly need to be healthy; they are taking fewer appropriate risks in their businesses, like making mortgages to individuals and loans to companies, because they don’t know what the idiots in Congress will do next.

2) Many banks will be forced to return the TARP money, to avoid being burned at the stake by Congress. Nancy Pelosi will be happy- we get the taxpayers' money back! But these same banks, the ones that can survive returning the bailout money, will restrict lending to save capital, just at the moment when we need for them to do the opposite. The banks that don’t return the bailout money will be targeted as weak banks, and expect many of them to fail and fall further into the clutches of the government. Anybody remember what a run on the banks looks like? It isn’t pretty.

3) The House legislation rewards foreign banks with a competitive advantage. Deutsche Bank isn’t a U.S. company targeted by the House legislation, but it operates a big investment banking unit in New York City. Guess where all the best bankers from Bank of America, Citibank, and Goldman Sachs are sending their resumes? Instead of keeping the best bankers to clean up the messes of a few, we are driving away the talent, and decimating our American banking system. Why doesn’t Congress focus on why AIG bailout funds made whole foreign banks that exploited loopholes in European legislation on derivatives? Oh, I forgot. That requires thinking, and actually being productive, not just livid.

4) The U.S. government owns AIG, we lent AIG most of the bailout money (yes, that’s true: it’s mostly a loan), and the vilification embodied by the House legislation destroys the value of AIG. Who in their right mind would now buy the assets of AIG? Yet selling AIG’s assets is the primary way in which taxpayers will get their money back. Killing AIG, rhetorically and financially, is only hurting ourselves again. It’s stupid.

5) The House legislation will hurt New York City the most. Many of the tens of thousands of employees of major U.S. banks targeted by the House bill work in New York. Bonuses are the way people in the financial industry have been paid for years, from high profile bankers to analysts out of college to secretaries. If anything like the House bill becomes law, expect NYC to teeter that much closer to bankruptcy. New York sponsors of the House bill, Charlie Rangel and Steve Israel, and Senate supporter Charles Schumer, you should be ashamed of yourselves. Maybe some good ol’ boys will be secretly thrilled at the prospect of watching these Yankees suffer, but remember the 1970’s: the nation stagnated, and what happened in NYC was mirrored in the rest of the country.

The ways in which the House legislation will hurt all of us do not stop at five. You can’t run any business with Congress changing the rules every week. You don’t inspire confidence in foreign investors of U.S. Treasury securities when you have a Congress legislating out of revenge, instead of focusing on new, tough, permanent legislation to regulate the financial industry so that these problems do not happen again. You do not turn the corner in the bear market in stocks by attacking everyone who makes money.

Even if our anger is justified, even if it is wild, we should focus on why we allowed trading in certain derivatives to go unregulated, why the SEC was not aggressively enforcing current laws and investigating financial fraud, and what legislation creates new, tougher rules for banks and other financial institutions while allowing them to do business that will help our economy prosper.

Or, we can burn down our own neighborhood, watch the flames in the night, not caring who is in the burning buildings, or whether they had anything to do with our justifiable anger. But remember, we will all wake up tomorrow morning, more sober and perhaps less angry, and we will have to walk through the smoky rubble to buy our groceries. If the grocery store is still standing.


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