Jarred by a cool reception from the White House and fears of unintended consequences across the financial world, Senate leaders are likely to delay until late next month legislation to punitively tax bonuses at banks and investment firms that receive federal aid.
Senate Majority Leader Harry M. Reid (D-Nev.) announced last week that the Senate would move ahead with the legislation as soon as possible, and he attempted to bring the bill to the floor Thursday night. But he revised that timetable yesterday, saying that the chamber will spend this week debating a national-service bill before turning to a long-scheduled showdown over the budget for fiscal 2010. With just two weeks to go until Congress departs for a spring recess, action on the tax measure would be unlikely before late April.
Reid's shift came as senators in both parties voiced increasing skepticism about the tax approach taken by the House, echoing President Obama's admonition Sunday night on CBS News's "60 Minutes" against using the tax code "to punish people."
Finance Committee Chairman Max Baucus (D-Mont.), who introduced a Senate version of the bill Thursday, said yesterday that it is "unclear at this point" when the measure will be considered. He initially hoped to pass his legislation in a matter of days but said White House officials and other senators were offering "a lot of ideas" for modifying his proposal. But he added that no consensus has emerged on the specifics of the bill, as opposed to the unified outrage over the bonuses.
"Everybody knows you've got to address the outrage -- that's a no-brainer," Baucus told reporters.
More measured restraints?
Slow-walking the legislation would allow more time for leaders of American International Group, the troubled insurance giant at the center of the controversy, to attempt to recoup the targeted bonuses voluntarily. New York Attorney General Andrew M. Cuomo said yesterday that 18 of the 25 AIG Financial Products employees who received the biggest retention payments had agreed to return them, amounting to more than $50 million.
The delay also would give lawmakers room to consider more measured restraints on executive pay.
The AIG bonuses stirred an unusually potent bipartisan furor on Capitol Hill from lawmakers still troubled by the scope of the $700 billion Troubled Assets Relief Program approved in October, and Treasury Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke are slated to testify on the matter today before the House Financial Services Committee. On Thursday, five days after the AIG payments were disclosed, the House voted 328 to 93 to impose a 90 percent tax on the $165 million in bonuses distributed this month to employees of the firm's derivatives division, where high-risk trades led AIG to the verge of collapse and helped trigger the global financial crisis.
But the House bill would also apply to thousands of workers at major institutions such as Citigroup and Bank of America that have received more than $5 billion in TARP funding. The Senate version of the legislation, released shortly after the House vote, is even more broad, applying to firms that received less aid.
As the scope of the bills sank in over the weekend, industry leaders warned that some firms might reject government funding in an effort to free themselves from federally imposed compensation restraints, potentially jeopardizing economic recovery plans.
Obama's response to the House vote was decidedly neutral. Yesterday, on the eve of the president's prime-time news conference focusing on his administration's attempts to stabilize the economy in partnership with the nation's top financial firms, White House press secretary Robert Gibbs expressed the administration's concerns about the bill's potentially damaging downsides.
"We cannot and should not reward failure with bonuses and the message that would send," he said. But he added that administration officials "also want to make sure you don't do harm to the financial system."
Obama expressed similar reservations in a portion of the "60 Minutes" interview that was not broadcast. "We're going to take a look at this legislation, and I'm going to do so with two principles in mind. Number one, we've got to make sure that people aren't rewarded for failure with taxpayer money," he said. "Number two, we've got to keep our eye on the big picture and the fact that we've got to get our banking system lending again."
Obama's statement contrasted with the outrage he expressed early last week when he vowed to "pursue every legal avenue to block these bonuses." White House officials said the president is waiting to see what emerges from Congress before deciding whether to sign the measure into law.
While the Senate pauses, House Financial Services Committee Chairman Barney Frank (D-Mass.) is pushing ahead with a different proposal that his panel could approve as soon as tomorrow. The measure would forbid all retention bonuses at any bank or firm receiving TARP funding until the recipient has paid back the Treasury in full. Existing contracts that call for executives to receive six- and seven-figure retention bonuses would not be broken, but the payments would be delayed until the bank or financial firm had fully refunded the government.
In an interview Sunday on CBS's "Face the Nation," Frank expressed reservations about the tax approach. "I voted for the bill. I was not a major advocate," he said. "People are worried about taxation being used in this way. People are worried about interfering with contracts."
In the House, nearly half of Republicans, including Rep. Eric Cantor (Va.), the No. 2 GOP leader, voted in favor of the tax. But in the Senate, after a week of saying little, Republicans came out in force yesterday against the legislation.
"My view is that this bill ought to slow down and we ought to think about the ramifications of what we're doing," Senate Minority Leader Mitch McConnell (Ky.) told reporters.
Could bonus tax sabotage plan?
Sen. Judd Gregg (R-N.H.) said the bonus tax could sabotage the administration's plan, which Geithner announced yesterday, to court private-sector investors to buy up the toxic bank assets that have paralyzed the economy.
"I would think a lot of the private-sector folks who might invest with the government are going to have second thoughts about that, unfortunately," Gregg said, noting that firms not included in the current proposals fear that they will be targeted in later bills.
One key Democratic defection was Senate Budget Committee Chairman Kent Conrad (N.D.), who said the bonus tax raised serious constitutional questions because of its narrow focus. "Do you really want to use the tax code to go after just a handful of people?" he said in an interview with MSNBC.
But Sen. Olympia J. Snowe (R-Maine), a co-sponsor of the legislation, urged her colleagues to push forward with it. "It would be a huge mistake for Congress to retreat," she said.
Staff writer Michael A. Fletcher contributed to this report.