Will Wall Street tax cheats provoke reform?

An outraged Congress wants blood, but the Obama administration seems to be biding its time, setting itself up for a larger victory.

Published March 19, 2009 7:30PM (EDT)

Wall Street’s villainy has gotten embarrassing lately -- more "Home Alone" Joe Pesci than "Goodfellas" Joe Pesci. Can these best-and-brightest whiz kids even cheat competently?

First, AIG pays out some exorbitant bonuses -- outrageous at the individual level though, frankly, a drop in the enormous bucket that is the $170 billion in federal money devoted to the company -- and brings the wrath of practically the entire country down upon its head. Now, a House subcommittee has announced that it caught the banks with their hands in the cookie jar again: At least 13 bailout recipients owe, between them, a total of $220 million in back taxes. As with the AIG bonuses, the sum in question here is basically trivial, at least relative to the national balance sheet. It’s the principle that counts.

"This is shameful. It is a disgrace. We are going to get to the bottom of what is going on here," Rep. John Lewis, D-Ga., who chairs the committee, said. "If we looked at all 470 recipients, how much would they owe?"

There’s a fair amount of concern out there that the public pressure to pursue these offenders will distract from efforts at systematic financial reform. It's not hard to imagine Congress scalping a few executives in order to ease the pressure and score a political victory, then call it a day without actually bothering to do anything about the larger systematic problems at work.

This is a worry the Obama administration seems to share. Despite much public discussion of the prospect that populist fury will engulf the White House, Chief of Staff Rahm Emanuel called the AIG bonuses "a big distraction" on Wednesday, and senior advisor David Axelrod followed him today, saying, "People are not sitting around their kitchen tables thinking about AIG. They are thinking about their own jobs."

Those kinds of comments may, on their face, seem like a misstep politically. It’s worth noting, however, that nobody plays rope-a-dope as well as President Obama and his people. It would be just like them to let outrage build, allow themselves to be portrayed as feckless and ineffectual, and then roll out a plan that capitalizes on public outrage, gets their priorities through Congress and leaves the president stronger than he was at the start of this whole thing. That's no guarantee, but they've pulled it off before.

By Gabriel Winant

Gabriel Winant is a graduate student in American history at Yale.

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