The Claw-Back Calamity

March 31, 2009 - 7:51 AM
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The drive to “claw back” executive bonuses is waning in Washington. Lawmakers are softening a House-passed bill to tax away big-money bonuses paid at bailed-out companies. Some felt the rhetoric had gone over the top.
 
“I don’t want people to think that businesses and people who have worked hard, performed well and received bonuses are going to be painted with the AIG brush,” House Speaker Nancy Pelosi said.
 
And that’s exactly what people are thinking, largely because of the government’s ham-handed, imprudent and (quite possibly) unconstitutional attempt to retroactively tax perfectly legal bonuses. These bonuses, paid to executives at AIG, were specifically authorized by language in the massive “stimulus” bill passed in February. The bonuses are infuriating, to be sure -- but so are the actions of many lawmakers.
 
Let’s look back at how the whole mess started.
 
Last fall, members of both parties in Congress and the Bush administration decided to prop up AIG. So far, taxpayers have poured $173 billion into the insurance giant. The federal government owns 80 percent of the company.
 
In mid-March, the company detailed its spending. Not surprisingly, a tiny amount of the cash went toward routine bonuses. Yet when that news came out, first the public, then lawmakers and, soon, even President Obama himself howled in protest.
 
 “They should voluntarily return [the bonuses],” fumed Sen. Charles Schumer, D-N.Y., on the Senate floor. “If they don’t, we plan to tax virtually all of it.” House members swiftly passed a bill to do just that.
 
Unfortunately, this doesn’t appear to square with the Constitution.
 
Our government charter bars both the federal and state governments from passing what it calls a “bill of attainder.” That’s a measure aimed at punishing a specific person or group.
 
The Supreme Court long ago developed a three-part test to determine whether a law is a bill of attainder. Such legislation “specifies the affected persons (even if not done in terms within the statute), includes punishment and lacks a judicial trial.”
 
Our courts will make the final decision, of course. But it certainly seems that a congressional measure to “tax” the AIG bonuses would violate the Constitution. As Schumer (and other lawmakers) have made clear, they’re targeting a specific group of people, and taking their property without benefit of a trial.
 
Some may cheer this form of punishment. But it takes our country onto dangerous ground. Without a ban on bills of attainder, Congress could interfere freely in virtually anyone’s economic affairs. And that would have long-lasting ramifications.
 
Consider Treasury Secretary Timothy Geithner’s plan to create a partnership between Washington and private businesses to buy up “toxic assets” -- bad loans banks need to get off their balance sheets as soon as possible. To succeed, this plan would require the cooperation of the private sector.
 
Yet after watching lawmakers turn AIG executives into punching bags, why would anyone want to do business with the federal government?
 
Policymakers clearly expect to be allowed to micro-manage financial firms. As Rep. Barney Frank, D-Mass., and members of the Obama administration have said, they’d like to impose increased oversight of executive pay for Wall Street firms -- whether those firms took federal bailout money or not.
 
Furthermore, private individuals have every reason to expect that, if they invest in toxic assets and end up making those assets profitable again, lawmakers will demand they return most or all of those profits in the interest of “fairness.” So, again, why would they sign on?
 
The more the federal government tries to run the economy, the more likely it is that debacles like the attempted AIG clawback will erupt. The financial markets are sluggish, but they are functioning. It’s time to wind down the bailouts -- and get the federal government out of the way.