Wall Street executives are mounting a frantic rearguard action to protect the finance industry's bonus culture, as the US Senate moves to impose tough new pay curbs.
A showdown on the issue is expected on Capitol Hill in the next few days, amid continuing fury over the $165m (£114m) in bonuses paid to employees at the financial products group of collapsed insurer AIG.
Already the lower House of Representatives has voted in favour of a tax plan that will seize 90 per cent of all large bonuses paid by Wall Street firms which have received $5bn of tax- payer funds – that is, AIG, Goldman Sachs, Morgan Stanley, Bank of America, JPMorgan Chase and Citigroup.
Members of the Senate will this week take up an even more wide-ranging proposal, which would impose a 70 per cent tax on bonuses paid by any firm taking more than $100m in government money, which runs to almost 500 banks. Half of the tax would be paid by employees and half by firms.
The White House has refused to say whether President Barack Obama would sign any tax Bill, but he repeatedly attacked AIG's bonuses last week and ordered the Treasury to pursue all legal means to get them back.
Industry lawyers are examining ways to mount a legal challenge if the Congressional tax proposals make it to law. Even some political supporters have worried aloud that the Bill could be unconstitutional if it is seen as unfairly targeting individuals for punishment, or if it is rushed through without due process.
Lobbyists have swung into action to argue that using the tax system in effect to cap pay could backfire if staff desert in droves. That would damage the very institutions the government needs to restore to health.
In a first attempt to turn the PR tide, Citigroup released a memo to its staff written by Vikram Pandit, chief executive. "The work we have all done to try to stabilise the financial system and to get this economy moving again would be significantly set back if we lose our talented people because Congress imposes a special tax on financial services employees," he said.
AIG has received $173bn in government money since being saved from bankruptcy last September. The US government took over 80 per cent of the company after deciding it was too enmeshed in the financial system to be allowed to fail. The AIG financial products group sold insurance contracts, called credit default swaps, on trillions of dollars of complex mortgage derivatives and other financial instruments – contracts it did not have the money to honour.
The fury over the bonus payments has shown no sign of abating, and state-level politicians are starting to get involved. In Connecticut, where the financial products group had its US HQ, a number of bonus recipients have been subpoenaed to appear before the state legislature on Thursday.
"Now living off supersized taxpayer-paid bonuses, these AIG employees have a moral and legal obligation to appear at this legislative hearing and disclose details about corporate compensation," said Connecticut attorney-general Richard Blumenthal.Reuse content