An "immoral" or possibly unconstitutional proposal of sorts

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:

Bonuses
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.

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Comments

Manifesto! (and #8)

I especially like the idea of not using taxpayer money to offshore outsource or insource (bring in foreign worker replacements via guest worker Visas) as a fundamental principle.

Citigroup signed a $2 billion dollar offshore outsourcing contract after receiving TARP funds. JP Morgan Chase just increased outsourcing to India by 25%.

AIG on the technical end, is already notoriously offshore outsourced.

What is it you do not like specifically on DeFazio's transaction fees on trades? I believe he is pulling up an old transaction fee which was eliminated, used to fund regulatory agencies and so on.

Sure trades will cost more but hey man, if they can stick on $1.50 fees on unemployment compensation ATM funds, surely a sliding scale of some sort could be created to generate revenues from trades.

As far as AIG goes, I don't care what's "legal" or "contractually binding"....they basically are trying to claim "global economic collapse" if the government won't give them butt loads of money and do whatever they want.

They are trying to hold the world hostage. That's how I see it at this point. Time for Teddy Roosevelt and his big stick and letting AIG know right now who is king dog in America and that still is the government, not their ratty asses!

(I'm really sick of this entire systemic global collapse..
clearly no company should EVER be allowed to get so big, or create such fictional investment vehicles they can literally threaten contagion on such a scale!)

My response is "FU". AIG, you brought down a global economy with your fictional structured finance and you will pay. I think they need to take out that executive management right now, nationalize the damn thing, sell off the many very solid divisions (with that management intact) and get those fictional structured financial vehicles wound down, stopped, no more new issuances, maybe in some open public auction..I don't know but they need to call cash on AIG and plain rein them in!

Ya know there are surely people around in the FDIC and so on who can replace those executives....seriously, how could anyone even off the street do worse than these glorified crooks? @&*)$@&*)

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AIG CDS disclosure sheet, Federal Reserve

I put in an Instapopulist the Federal Reserve's release of AIG's payout disclosures.

Maybe I didn't amplify it enough but the link to the document is in the above.

Now this is good because it appears the Fed is responding to earlier demands from Congress on transparency, considering just how much of this is public money...

but it's also shocking at how these CDSes are the real toxic assets and payouts.

I'm sorry but where is the mathematical validity that one can issue unlimited credit default swaps on one underlying asset? Then take derivatives of those credit default swaps and trade those too?

Here's a cess pool I think us Populists need to dive into more. That is the ISDA or lobbyist organization for international swaps and derivatives association, as well as any plans or intentions to get a regulatory agency around all of these structured financial "products".

I believe we plain need to kill the shadow banking system and they also need oversight on good old fashioned financial mathematical models. Yes it's tough, but if it doesn't make sense to a good 10 mathematics PhDs....odds are it plain doesn't make sense period.

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"A" for effort.

But I say disallow the bonuses and let them sue. Maybe, a judicial proceeding can shed some light on any potential fraud or other shenanigans that these employees may have committed.

I don't think it would be unconstitutional. Federal government has broad authority to levy taxes.

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On the one hand a CDS is a

On the one hand a CDS is a commodity future inasmuch as it's
fundamentally an unfunded bet. No reserve requirements. It is also a form of insurance leveraged on 99% margin. The problem has been...who should regulate and have oversight?
AIG had no business in this. I think there's criminal liability here.

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I don't know about criminal acts

Although it clearly needs to be investigated. It's Congress, they passed legislation to make all of this legal.

I think Barney Frank called for a hearing and my immediate thought was ....is he going to call himself up in the hearing and grill himself for selling the U.S. down the river? He is part of the problem, along with Republicans...

it should not be legal. One cannot simply write up a bunch of funky math formulas and say it's a "financial product" and sell it. This is absurd.

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SEC - JPMorgan Chase Must Let Shareholders vote on Exec. comp.

Here's another one, JPMorgan Must Let Investors Vote on Executive Bonus Proposals :

JPMorgan Chase & Co. must let shareholders vote on a proposal that would tie bonus pay to the bank’s long-term performance after investors said financial companies take excessive risk to meet annual earnings targets.

The Securities and Exchange Commission rejected JPMorgan’s request to exclude a proposal from its proxy statement that would require bonuses to be paid over three years rather than as a lump sum, according to a March 9 SEC letter to the New York-based bank. If performance slumps in the period, the proposal requires the bank to cut a portion of an executive’s incentive pay.

U.S. banks including JPMorgan that have received $750 billion in aid face legislative and shareholder efforts to limit pay. In filing a proxy proposal with JPMorgan, the American Federation of State, County and Municipal Employees said the financial crisis shows what can happen when companies reward “short-term financial performance without any effort to ensure that the performance is sustainable.”

So it looks like executive compensation to line one's own pockets and especially the incentives to just hit those quarterly numbers....in order to line one's own pockets is coming under scrutiny in a variety of proposals.

It's really true and one of the worst to me is mergers and acquisitions where the executives can pocket huge bonuses for them.....even when they fire 40k workers and it doesn't make that much sense in terms of profitability going forward.

You can see it, some companies are oblivious on day to day operations and are "acquisition happy"...well, look to the bonuses and compensation per acquisition to smell that puppy out.

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I wouldn't be surprised if

I wouldn't be surprised if the N.Y. State Atty. Gen. steps in to block bonuses. During investigations they have the power to request a stay of pay-out.

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Well Now You Know

Well people now you know - the type of people that have been trashing the world economy. On the basis of this behavior it is easy to understand why the world's financial system is in such a state and dragging all of us down with it. Paying performance bonuses (even in the face of 'contractual obligations') when the company has collapsed, gone broke, etc, is morally and ethically corrupt.

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