Financial Services News & Information : Blank Rome Government Relations Lobbying Firm : Government Relations, Corporate Governance : Financial Reform Watch Law Blog

Congress took the first major step yesterday in levying heavy taxes on bonuses paid to executives of AIG and to institutions who have been recipients of significant (more that $ 5 billion) assistance from the Troubled Asset Relief Program (TARP) in recent months. In a move best described as spasmodic, the House voted 323-93 to place a 90 percent tax on the bonuses of TARP-recipient executives with adjusted gross incomes over $250,000.

Senate Majority Leader Harry Reid (D-NV) moved to bring the legislation to the floor yesterday, but Sen. Kyl (R-AZ) blocked the attempt, saying the Senate needs more time to consider the ramifications. Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Chuck Grassley (R-IA) introduced a bill late yesterday that would impose a 70 percent excise tax—35 percent on the TARP recipient companies and 35 percent on their executives—on excessive bonuses, defined as anything exceeding $50,000 in a calendar year.

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There was plenty of activity in Washington this week but none of it enough to settle the roiling stock market, which keeps sinking like a rock. Is there too much activity or not enough of the right kind of activity?

From the White House and the Treasury—The Obama Administration released the details of its “Making Home Affordable” program, which was introduced in February. With incentives for mortgage holders and servicers, audit and documentation requirements, and qualification limits, major industry players such as the Mortgage Bankers Association and the American Bankers Association reacted positively to the new details.

From the Treasury—Secretary Tim Geithner was on Capitol Hill most of the week defending and explaining the president’s budget proposal, especially the $250 billion “contingent reserve” amount in the Treasury budget to support up to $750 billion worth of asset purchases. Geithner assured the Senate Finance Committee that the $750 billion is not an estimate of future rescue efforts, but rather “just a recognition of reality that it’s possible we’re going to need to do this with more resources.” The Secretary promised to provide more details in the coming weeks on future bailout efforts, including plans for the remaining $300 billion of TARP funds, and the eagerly anticipated public private partnership to take on troubled assets.

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On the first full day of the Obama Administration, key federal officials outlined a potential strategy for managing the government rescue of the financial sector. At his confirmation hearing today, Treasury Secretary-designate Tim Geithner told the Senate Finance Committee that the Obama Administration is considering the establishment of a “bad bank” or an “aggregator bank” that would take over the toxic asset-backed securities currently corroding the U.S. banking system. Several lawmakers have suggested the concept of a federally-operated entity modeled after the Resolution Trust Corporation, which, from 1989 to 1995, took over and liquidated 747 failed thrifts with assets of $394 billion. An aggregator bank would cost several trillion dollars according to various experts, including former Federal Reserve Chairman and current Obama economic advisor Paul Volcker.

Today Geithner assured the Senate panel that President Obama “will come before the Congress in the next few weeks and lay out to the American people a comprehensive plan to help stabilize the core of the financial system so that banks, which are so critical to our economy, are able to provide the credit necessary to get recovery going again.” He also promised to reform the TARP program with increased taxpayer protections, transparency, foreclosure mitigation for homeowners, and access to credit for small business owners.

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The Senate returns to work today and the House is scheduled to convene on Wednesday. In the past several days, it has become clear that neither significant economic stimulus nor aid to the auto industry is likely to be approved during this "lame duck" session of the 110th Congress. The sticking point appears to be the inability of Democratic leaders to attract sufficient Republican support for either measure.

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