Can Washington get our money back from AIG?

Politicians from both parties are pushing plans to rescind the $165 million in bonuses the company paid out recently.

Published March 18, 2009 2:15PM (EDT)

If, in the years to come, AIG CEO Edward Liddy thinks back to Mar. 18, 2009, there won't be any fond memories. Even before the news his company had paid out $165 million in bonuses, Liddy was scheduled to testify before a House subcommittee today. Now, with outrage at AIG dominating the news and showing no signs of diminishing, its chief executive faces a very rough few hours at the hands of committee members eager for time in the spotlight and willing to turn him in to a human piñata to get it.

The subcommittee members aren't the only ones in Washington right now who want to be seen taking some sort of action against AIG. Whether they're trying to avoid blame for the bonuses or trying to get credit for having done something about them, it seems like every politician in the city, from the White House to the Capitol, has something to say about the issue, their own suggestion for how to get the money back from its recipients and into taxpayers' pockets -- or at least the government's coffers.

With all these plans floating around, it's hard to tell which, if any, will ultimately be implemented. Nor is it clear whether the solutions proposed so far would be successful, or even legal.

Treasury Secretary Tim Geithner, who's been taking a lot of fire over the situation, outlined his own plan in a letter to House Speaker Nancy Pelosi Tuesday night. Geithner told the speaker that the Treasury Department, together with the Justice Department, is going to explore ways to recoup the bonuses from the employees who received them and return the money to the government. There's a catch, though: The Obama administration has essentially said already that it doesn't believe, legally, that this can be done. (They also reportedly decided last weekend that a legal battle over the matter could end up costing the government three or even four times the $165 million at issue.)

In the letter, though, the Treasury secretary gave himself -- and AIG -- a convenient out. "We also want to insure [sic] that taxpayers are compensated for any monies we cannot recover," Geithner wrote. To that end, he said, "as part of our provision of recently announced taxpayer funds, we will impose on AIG a contractual commitment to pay the Treasury from the operations of the company the amount of the retention awards just paid. In addition, we will deduct from the $30 billion in assistance an amount equal to the amount of those payments."

In other words, if administration lawyers -- in talks with AIG and the employees in question -- decide that, legally, they can't recoup the bonuses, or if they happen to negotiate the return of only a very small percentage, then the White House will still be able to say its team got all of the money back, and more. And AIG has every incentive to play along. Really, Geithner just offered the company a sweetheart of a deal: Stay quiet and swallow $330 million in losses, at least for now, in exchange for the $169.67 billion in government funding you've received so far, plus the possibility of more down the line.

Several members of Congress have stepped up to fill the holes in Geithner's plan, offering various ideas for legislation that would use a change in the tax code to recoup the money. At least three different bills are floating around the House, but so far, the proposal with the best chance for passage is the one that Sens. Max Baucus, D-Mont., and Chuck Grassley, R-Iowa -- the two highest-ranking members of the Senate Finance Committee -- announced late Tuesday.

The Baucus-Grassley legislation, as proposed, would impose excise taxes on all retention bonuses and any other bonuses over $50,000 paid out by companies that have taken money from the Troubled Assets Relief Program (TARP). The corporations would be subject to a 35 percent excise tax, and a separate 35 percent excise tax would be levied against the individual recipients as well. Normal income taxes would, presumably, take care of the rest of the money.

Though a number of congressional leaders, including Pelosi and Senate Majority Leader Harry Reid, have supported the general idea of taxing away the bonuses, there are still a number of hurdles that would have to be overcome for the Baucus-Grassley proposal to be successful.

First, there's some opposition to the plan coming from Democrats in the House of Representatives, or at least one Democrat whose support could be vital, New York Rep. Charlie Rangel. Rangel, who chairs the House Ways and Means Committee, which is responsible for writing tax code, came out against the idea on Tuesday, saying, "It's difficult for me to think of the code as a political weapon." (Some House Republicans haven't been wild about the idea either, but as the vote over the stimulus showed, their support isn't necessary even for the biggest pieces of legislation.)

Then, there's the issue of whether a tax like this would pass constitutional muster. The Constitution prohibits bills of attainder, which former Supreme Court Chief Justice William Rehnquist defined as, "a legislative act that singled out one or more persons and imposed punishment on them, without benefit of trial." Harvard Professor Laurence Tribe, who participated in one of the more significant bill of attainder cases in recent memory, has dismissed this concern. Congress, Tribe says, can draft the law in such a way that -- even if it's obvious it's specifically aimed at AIG and its employees -- it's general enough to be constitutional. "The fact that the individuals subject to the tax in its retroactive application would in principle be readily identifiable would not suffice to doom the tax either from a bill of attainder perspective or from a due process perspective," Tribe wrote to the Atlantic's Conor Clarke. "Moreover, the fact that the aim of such a tax would be manifestly regulatory and fiscal rather than punitive and condemnatory, and that the tax would be part of a measure that would be prospective as well as retroactive in its operation, would serve to blunt the force of any bill of attainder challenge."

Finally, there's still a question of whether the current and former employees who received the bonuses are even subject to U.S. taxes. The division of AIG that's at the heart of this mess does have an office in Connecticut, but its headquarters are in London, and presumably some of the people who worked there were not American citizens, and so do not have to pay American taxes. The Baucus-Grassley proposal gets around this, to an extent, by requiring the company to pay the individual's share of the excise tax in that case. Still, that's somewhat contrary to the spirit of the tax ideas, which are intended to recoup the bonuses from the recipients, not just from the corporation, and it sets up a rather perverse system in which the government punishes its own citizens while foreigners get to keep their money.

It's not known how many employees involved in this latest round of payouts would not be subject to a new tax. Staffers for New York State Attorney General Andrew Cuomo, who got information about the recipients from AIG on Tuesday, didn't respond to requests for comment, and a spokesman for Baucus told Salon he'd look into it but, as of this post, had not yet come back with an answer.

By Alex Koppelman

Alex Koppelman is a staff writer for Salon.

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Max Baucus D-mont.