He’s making a list.
He’s checking twice.
Bankers will get their bonuses whether they are naughty or nice.
But if French President Nicolas Sarkozy and Alistair Darling, Britain’s Chancellor of Exchequer, have their way, paying big bonuses will be very taxing proposition.
Sarkozy and Darling are considering one-time levies on 2009 bonuses that could be as high as 50 percent. In France, bonuses exceeding 27,000 euros ($38,900) would be subject to this tax. British banking bonuses above 25,000 pounds ($40,000) would be hit with a similar tariff.
Politicians throughout Europe, like Sarkozy and Darling, are trying to assuage voter anger after governments in the region provided $5.3 trillion of aid to banks during the credit crisis. Now the two European leaders are looking across the pond, hoping President Obama will stand in solidarity with them against the banks.
They can ask. But the President won’t answer the call. The President knows that a similar tax is not in his best interest, and that a punitive tariff of this nature will do more harm than good.
Cutting a Wide Path
This one-time windfall tax would affect not only British banks but also the London subsidiaries of Wall Street giants. The French tariff would have a corresponding impact.
As a result of the rapid recovery of financial firms on both sides of the Atlantic, the anticipated year-end bank bonuses could rival those paid during the height of the bubble.
These tolls on excessive bonuses may slake taxpayer animus. But they will do little to stop the practice.
In response to domestic anger, the President hired a Pay Czar, Kenneth Feinberg, to oversee the compensation packages for firms that still have not repaid the government for the federal aid they received. The companies under Feinberg’s jurisdiction include Citibank and General Motors.
Even though American taxpayer outrage may equal that of their European counterparts, this type of tax will not work in the United States. The President understands that any attempt to impose a similar tax burden would be political suicide.
The only thing most Americans hate more than the French is taxes.
In March, a more severe version of the British tax was passed by the House of Representatives following a public uproar over $165 million in bonuses paid to A.I.G. employees after the company received a huge government bailout. But the proposal, which called for a 90 percent retroactive tax on awards of $250,000 and above, never made it to the Senate floor.
Bankers are a clever lot. It won’t take long for them to figure a way to beat this tax. Many already are taking steps to avoid it.
Some major banks in Europe and Asia seem prepared to defy their governments by paying the tax in addition to paying employees their full bonus. Several banks in Asia, fearing the imposition of a parallel measure, have reportedly paid double bonuses. It is rumored that one subsidiary of Britain’s Barclays Bank has trebled it basic salaries to beat the bonus tax.
The ultimate option for banks and bankers is to relocate their operations to safe havens abroad. This is precisely what several U.S. financial firms did to avoid the transparency and disclosure requirements of the Sarbanes-Oxley act. To circumvent Sarbanes-Oxley, dozens of firms shifted their operations from New York to London where similar accountability measures were not in effect.
So What if They Move?
Critics of the super tax in the European banking community are already threatening to move to other financial centers like Frankfurt and Zurich where similar levies would not be imposed. Given the portability of their operations in a business primarily conducted in cyber-space, such moves would be quick and seamless.
This financial meltdown and subsequent recession did not happen as a result of bank bonuses. Bonuses were just a highly visible by-product, an easy target.
The answer is not more taxes, but rather greater transparency and more enlightened regulatory oversight.
When Congress repealed the Glass-Steagall Act, the firewall between commercial depositor banks and investment banks was removed. The repeal of this Depression-era law led to the rise of multi-faceted financial giants like Citibank that had their fingers in every aspect of the industry from mortgage-backed securities to insurance.
With the collapse of Bear Stearns and Lehman Brothers along with the near failures of A.I.G. and Citibank, we know these firms are not only unmanageable but almost impossible to regulate. Instead of penalizing these firms for doing what they do best – making money for their executives – Congress and the President should be looking at ways to reorganize the industry to prevent future failures.
Taxes like the ones being levied in Britain and France may quench our bloodthirst, but in the long run, they will do nothing to prevent future financial crises from recurring.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
