INKS | Botched bailout
Much attention has been given to the $165 million of bonuses to executives at American International Group. The fact that the executives who drove AIG into the ground are getting bonuses has angered many people, especially since the government "owns" 79.9 percent of AIG.
Well, the American people are right in being outraged; however, the government does not own 79.9 percent of AIG. Exactly what the government does own is a point of confusion among many people.
During an interview with CNN, U.S. Rep. Barney Frank, D-Mass., said, "We own this company, in effect, and ... as the owners of the company, we do not think we should be paying bonuses or should have paid bonuses to people who made mistakes, who were incompetent."
Here is the problem: those bonuses are written in the executives' contracts, so if AIG refused to pay them, AIG could be sued by the executives.
U.S. Rep. Gary Peters, D-Mich., formerly the Griffin Endowed Chair, introduced a bill (H.R. 1527) that would impose a 60 percent tax on bonuses paid to executives if "the ownership interest of the Federal Government" is at least 79 percent, meaning that if the government owns at least 79 percent of a company's stock, it can tax bonuses on that company's executives at a rate of 60 percent.
But there is a problem with Peters' legislation. The federal government does not own 79.9 percent of AIG's stock shares. What the government owns is equity participant warrants for 79.9 percent of AIG's equity, meaning that government has the option and right to own 79.9 percent of AIG's stock shares; however, the government is not exercising that option now.
The federal government would have to choose to exercise its right to own those shares, but doing so would significantly reduce the value of the shares owned by common citizens. New shares would have to be created and given to the government, until the government's ownership level reached 79.9 percent of the shares, and doing so dilutes the value of the stock shares.
That would not sit too well with the people who currently own AIG stock, and it really would not do much for the government other than allow them to tax executives' bonuses and give the government more control over the company.
Yesterday, U.S. Rep. Charlie Rangel, D-N.Y., introduced H.R. 1586, which would allow for the taxation of bonuses at a rate of 90 percent for any companies who received money under the Troubled Assets Relief Program. The problem with this bill is that it's a rash decision being made to justify a wrong. Two wrongs do not make a right. The constitutionality of the bill is being debated. Even if it is constitutional, the bill significantly increases the intrusion of the government into the business world.
But there is a glimmer of hope: AIG CEO Edward Liddy has asked employees making more than $100,000 a year to give back half of the bonus money. So far, it seems as if most employees will honor his request.
By this point in time, it may be futile to advocate for less government intervention in the business sector, but the government needs to be careful here. Taxing bonuses because the government feels they are undeserved or claiming ownership over something that the government does not yet own are dangerous movements toward the realm of extreme government control of businesses.
That said, the House on Thursday approved Rangel's bill. The government needs to be careful not to do anything rash under the auspices of doing good.
Nathan Inks is chairman of the College Republicans.
