Yesterday I read about how the folks at AIG will be getting their bonuses. Like many of you, this infuriated me to no end. Once more, failed business people gaining reward for their bad decisions. The shareholder has lost most of the value in the equity in the company. The taxpayer (and also now a shareholder) has actually gotten two punches in the gut, including diminishing share value they've also had to put up billions of dollars. Frankly enough is enough.
It won't just be AIG, though they probably are the worst case. Many firms receiving government financial grants (i.e. bail outs) have stated that compensation will be pared back. That bonuses, will either be eliminated or minimized to an "acceptable size". Yet the cynic in me thinks when these financial warlocks say make these promises, you are left with a bad taste in your mouth. That bad taste is your brain screaming "bullshit", because these corrupt magicians know the right financial magic to hide things. Doubt me? Please take a look at the current situation going on with Merrill Lynch. Ok, I grant you that's a stretch, they didn't take TARP money. But this shows you that they and others have similar tricks up their sleeves.
While I think the transaction tax, proposed by Rep. DeFazio, in it's current design is flawed and should not be passed, there is another tax proposal that I think would even things out in regards to this AIG situation. We are entering a new era where I suspect these banks will not be the only ones being bailed out. Should the economy turn for the worse, other industries (like the automakers) will come with their hat in hand. The temptation to "game the system" and get those annual bonuses at the expense of whatever shareholder and taxpayer base is still great. Which is why I'm proposing a Government Investment-Linked Tariff (or GILT).
The GILT would be applied to the following situations:
1) Whereas the government (outside the Federal Reserve) has utilized taxpayer money in an equity stake agreement with a private or publicly-traded company.
2) Whereas the government (outside the Federal Reserve) has utilized taxpayer money in a debenture swap agreement with a private or publicly-traded company, where funds were exchanged for corporate bonds.
3) Whereas the Federal Reserve has utilized taxpayer money in an equity stake agreement with a private or publicly-traded company.
4) Whereas the Federal Reserve has utilized taxpayer money in a debenture swap agreement with a private or publicly-traded company, where funds were exchanged for corporate bonds.
5) Whereas the government has been given collateral for capital deployment by a private or publicly-traded company, but such capital is not deemed as an equity stake in the company.
6) Whereas the Federal Reserve has taken onto its books collateral for capital deployment by a private or publicly-traded company, but such capital is not deemed as an equity stake in the company.
7) Whereas a government agency has seized the entire equity of a failed financial institution.
8) Where the notional value of any deployed capital by the government to a private or publicly-traded company exceeds the notional value of an equity stake based on a mark-to-market basis.
When any of these things are triggered, the Government Investment-linked Tariff shall impose the following:
1) Tax at a 80% rate any cash bonus (beyond salary) given to executives in any calendar year that the government is still holding an equity stake in the firm starting in the first full calender year after the initial investment. Should the firm not record a profit from audited operations, then the tax rate on cash bonuses shall be set at 100%.
2) Tax at an 80% rate any cash bonus compensation linked to any activities that incurred the situation where taxpayer money had to be injected into the firm. Any activity claimed outside of the reason for government investment, by a compensation board or management, must face an audit to prove validity of such claim.
3) All cash bonuses shall not exceed 20% of the value of any compensation package so long as the government or the Federal Reserve hold an equity stake or collateral.
4) Bonus compensation exceeding $100k, a minimum of 80% shall be in common stock and not preferred or stock options. Sales of any common shares shall be barred until set number calendar years when a) said firm has reached a set number of profitable years and b)set number of years said management is no longer employed at the firm. Set number of years should not be less than two, but also based on industry assessment.
5) All cash bonuses prior to the initial government investment, but occurring when activities lead to such event, will be retroactively taxed at 100%. If present management's tenure is shorter than said period, and actions done by this period's management did not initiate the dire situation or make it worse, then this part shall be nullified. Previous management who did engage in activities leading to the present condition shall face an IRS inquiry where past cash bonus will come under review.
6) Previous stock option bonus arrangements shall be converted into common equity share arrangements during the time activities leading to the government entering the picture. If an exercise of options and subsequent sale of stock has occurred during this time, prior to the enactment of the GILT, then those who profited shall be taxed at 100%.
7) All sign on cash bonuses for executive job candidates occurring after the initiation of GILT shall be switched to common stock which sale of shall be restricted for three years after the first profitable year.
Salary Compensation under GILT
1) Any private or publicly-traded firm that qualifies for GILT, executive management compensation shall match that of the Government Schedule pay scale.
2) Any private or publicly-traded firm that qualifies for GILT, workers salary that is below executive management shall have salary compensation based on the Government Schedule pay scale.
3) All present executive employment termination compensation packages shall be made null and void. Should a manager be terminated and the firm is still unprofitable, than person's compensation shall not exceed one week's paycheck.
4) All prior executive employment termination compensation packages shall come under review. If the person in question has been deemed as instrumental in leading to the present unprofitable state of the business, then previous compensation for termination must be returned to the company or retroactively taxed at 100%.
GILT and outsourcing
Many firms simply could only profit due to wage arbitrage. Also, given that it is taxpayers' money going into firms requesting such, then the employment prospects for such people must be increased. Government Investment-linked Tariffs hopefully will help in this situation. Indeed, this aspect of the GILT could serve as a litmus test on whether any bailout would actually be useful.
1) If company's chance of coming out of its present situation, where government intervention was warranted, was based solely on outsourcing and/or off-shoring then such emergency action shall be nullified.
2) Unless it can be proven otherwise, regarding high skilled jobs that were outsourced where foreign labor was brought in, companies must look for a domestic source to meet that skilled job opening.
3) Any company receiving government aid/investment, in which following a full audit they see any financial gain from off-shoring, such gains will be taxed at 100%.
But is it constitutional?
Now I'm no constitutional expert. For the past several days I've been looking up the US Constitution, trying to see if this violated any amendment. Now a friend of mine, whom I appraoched with this idea dubbed it "immoral", he thought it wasn't unconstitutional.
It couldn't violate the Fourth Amendment, as it isn't "cruel" or "unusual." Indeed, it is a tariff of sorts, only instead of imports of products from overseas, it is really a tax on bonuses and profit derived from off shoring. But what about the part on excessive fines in the Fourth Amendment? Well, from what I can gather, we aren't taking away those executives salaries. It isn't like they are made to pay 100% of their wages to the government, we aren't taking away their lifestyles. What we are simply doing is applying pressure on funds they would receive in excess of their wages.
My friend said that someone could bring up the Fourteenth Amendement, which says that everyone has equal protection of the law. Once more, the Government Investment-linked Tariff only goes after bonuses. We do not go after the livelyhood of management.
Lastly, the Sixteenth Amendment grants Congress to enact such a thing as GILT:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
- excerpt from "AMENDMENT XVII, US Constitution"
At the end of the day, if we the tax payer are to be forced to become shareholders in these companies, then we should demand certain things from these managers:
1) That we see a return of our capital.
2) That we see a return on our capital.
3) That proper management be in place and respect their fiduciary responsibilities.
4) If we are to maintain old management, that they realize their financial fortunes are tied into returning the shareholders' company to health.
5) That if we, the taxpayer to have a long-term financial/equity relationship with these companies, that it becomes a viable investment for us.
These are just somethings, and I'm sure I have missed a lot. Perhaps my idea of a Government Investment-linked Tariff isn't legally viable. Please, tell me where I'm wrong. But...perhaps my idea ain't exactly a bad thing. And just maybe...just maybe we can move forward on something like this to get the accountability that has so been lacking.