The hasty legislative response to the understandable outrage over AIG ( AIG) executives' $165 million in bonuses could do more harm than good.

The House of Representatives on Thursday passed a bill that would impose a 90% tax on all bonuses paid to executives making more than $250,000 at companies that have received more than $5 billion in government aid. The Senate is expected to debate a similar bill to the one the House passed.

The bipartisan support for the House legislation came as AIG has endured heavy fire from the public and Congress for paying the bonuses to executives in AIG's financial products unit, which had sold the derivatives that brought the giant insurer to the brink of collapse last fall.

It certainly is objectionable that 73 AIG employees -- 11 of whom no longer work at the company -- were paid bonuses of more than $1 million apiece by a company that has received more than $170 billion in federal bailout funds. While AIG has argued that it is contractually obligated to pay the bonuses, if the federal government had not saved the company in September, those employees would most likely be out of luck.

The response from lawmakers, however, goes too far.


Do you support hefty taxes on bonuses paid to some executives at companies who get government aid?

Yes
No

Eight banks have received more than $5 billion in federal aid through the Troubled Assets Relief Program: Citigroup ( C), Bank of America ( BAC), JPMorgan Chase ( JPM), Wells Fargo ( WFC) Goldman Sachs ( GS), Morgan Stanley ( MS), PNC Financial Services ( PNC) and US Bancorp ( USB).

All of those banks were compelled to accept the government's investment of TARP funds, as then-Treasury Secretary Henry Paulson did not want any kind of stigma attached to banks accepting an investment to boost its capital reserves. Only Citi and BofA, like AIG, have had to go back to the government and request more funds. Some of the others, including Goldman, Wells Fargo and PNC, have even talked about paying the money back.

So why would Congress impose a punitive tax on these companies? While one hand of government asks them to accept the money for the good of the country and its banking system, another is going to slap them for doing so?

The consequence could weaken the overall banking system, if companies like Wells Fargo follow through with their threat to pay back the government money to get out from under the restrictions. The Wall Street Journal reported on Friday that if Wells pays back the $25 billion government investment, its Tier-1 capital ratio would fall below 6%, the level at which regulators consider a bank well capitalized.

Plus, if some TARP recipients bail from the program, it could create the stigma that Paulson had sought to avoid.

In the initial bailout, JPMorgan, Citi, BofA and Wells each received $25 billion. If Congress enacted the bonus tax for companies that have received more than $25 billion, most institutions would be exempt, except for the more troubled ones that have had to go back to the government for more aid: AIG, Citi, BofA and Fannie Mae ( FNM) and Freddie Mac ( FRE), the mortgage giants the government placed into conservatorship in September.

That would be a lot more fair than punishing companies that have not asked for any handouts in the first place. After all, no one on Capitol Hill is clamoring to give back campaign donations AIG and its employees made to the likes of Sen. Chris Dodd (D., Conn.), Sen. Charles Schumer (D., N.Y.), Sen. John McCain (R., Ariz.) and even President Barack Obama.

"Virtually all the contributions were made over five years ago, and nothing has been contributed since taxpayers needed to step in and save this company from itself," Schumer spokesman Brian Fallon told the Journal in its Thursday edition.

In other words, AIG hadn't done anything wrong when Schumer accepted that money -- just like most of the banks impacted by the House's tax bill hadn't done anything wrong when they accepted TARP money.
Gannon joined TheStreet.com in March 2007, after spending more than six years as a reporter and editor for The Journal News in Westchester County, N.Y., most recently as an assistant metro editor. He earlier covered several political and government beats as a reporter, including the city of Yonkers. Earlier in his career, he covered venture capital, private equity and the IPO market for Thomson Financial?s Venture Capital Journal and advertising for Sales-Fax, a small, independent trade weekly. He earned a B.A. in history from the College of the Holy Cross and an M.S. in journalism from Northwestern University?s Medill School.

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