Financial services sector analysts panned a House bill that would impose a 90% tax on bonuses for bank executives making more than $250,000 a year, saying the measure is misguided and could have unintended consequences. The House on Thursday overwhelmingly passed legislation that would retroactively tax bonus payments to the employees making more than $250,000 at companies that have received more than $5 billion from the Troubled Asset Relief Program, or TARP. The measure came after it was discovered that American International Group ( AIG - Get Report) made over roughly $165 million in bonus payments to employees, even as the troubled insurance firm accepted billions in bailout funds. Congressional members, regulators and investors have been critical of other firms that doled out bonus payments to their employees in the wake of the financial crisis. NY State Attorney General Andrew Cuomo is probing Merrill Lynch's accelerated payments of bonuses late last year, just prior to its sale to Bank of America ( BAC - Get Report). But the analysts say that executive pay packages are the least of the worries for financial regulators these days. Nancy Bush, in an industry note titled "Animal House," says that the "unintended consequences" of the House's actions will result in well positioned banks to "rush to exit TARP." Banks like JPMorgan Chase ( JPM - Get Report), Wells Fargo ( WFC - Get Report) and others "will seek avenues to get out as quickly as the stress-tests results allow," she writes. Already several smaller banks have stated their intentions to exit TARP including TCF Financial ( TCB) and Iberiabank Corp. ( IKBC), among others.
Those banks that are strong enough to exit the TARP program "should do so and trumpet that fact to the world, as it will be seen as an act of strength," Bush writes. The banks should then shrink their balance sheets, deal with their credit problems, start raising dividends, and "never, ever sign an agreement with the U.S. government again," she says. "And for those who can't, like
Citigroup ( C - Get Report) CEO Vikram Pandit -- hasta la vista, baby," Bush adds. "Perhaps the lack of public and industry confidence that will now likely be shown toward the worst-positioned banks ... will finally force a resolution of the fates of these zombie banks, and that would be to the good of everyone." Not surprisingly Pandit issued a memo to employees opposing the bill late Friday. "The work we have all done to try to stabilize the financial system and to get this economy moving again would be significantly set back if we lose our talented people because Congress imposes a special tax on financial services employees," Pandit said in the memo. "It would affect countless number of people who will find it difficult, if not impossible, to pay back the bonuses that they earned." Rochdale Securities analyst Richard Bove believes the "desire to simplify the crisis to terms that 'everyman' can understand has led to a broad-based attack on financial services industry personnel," he wrote in a note over the weekend. "The driving concept is that everyone who works in the financial sector in the United States must be punished," he wrote.
Bove worries that Congress may believe that the tax legislation will solve the financial crisis, but "it will be very mistaken," the analyst writes. He suggests congressional members focus on other regulation issues in the financial industry such as greater transparency in the derivatives markets; establishing exchanges for all financial products; and improved "reporting functions." In a "60 Minutes" interview on Sunday, President Barack Obama suggested the tax is unconstitutional and said he would not "govern out of anger." He declared his determination, nevertheless, to make Wall Street understand it must shed "the old way of doing business." While questioning the legality and constitutionality of the House measure, Obama said he expected the Senate would produce a much different and more acceptable version of the bill -- one he could sign. "I think that you've got a pretty egregious situation here (bonus payments) that people are understandably upset about," he said. "And so let's see if there are ways of doing this that are both legal that are constitutional -- that uphold our basic principles of fairness, but don't hamper us from getting the banking system back on track."