Punitive Damage

Congress is in a lynching mood over bailouts and bonuses


The financial crisis has been widely interpreted as proof of the need for extensive government regulation of banks, insurance companies, and other capitalist institutions. The antics of politicians now that they have a greater role, however, are a vivid reminder of why they can't be trusted with such power.

These days, every politician assumes that because he has a driver's license and an ATM card, he must have all the necessary skills to run an automaker and operate a bank. House Speaker Nancy Pelosi and Senate Democratic Leader Harry Reid, for example, said Detroit should use its bailout money to become "a global, competitive leader in fuel efficiency."

Never mind that if we know anything from recent automotive history, it's that the Big Three's competitive advantage is in trucks and SUVs. If they had spurned that segment during the decades of cheap gas, things would have been very different: They would have reached the brink of bankruptcy long before now. But Congress' idea of a sound business plan is to build cars that suit its grand ambitions rather than, say, the tastes of consumers.

Banks getting federal money have likewise been subjected to a frenzy of finger-wagging. Politicians were shocked when Northern Trust hosted a client event featuring the band Earth, Wind and Fire. House Banking Committee Chairman Barney Frank and 17 other Democrats demanded that it "immediately return to the federal government the equivalent of what Northern Trust frittered away on these lavish events."

But Northern Trust didn't ask for federal help—it was conscripted into the bailout. It happens to be managing its money well enough to be making a profit and repaying the taxpayers.

And did anyone notice that after Earth, Wind and Fire did the Northern Trust gig, it performed at a White House dinner? Why is it OK for President Obama to host "lavish events" that are financed by taxpayers but outrageous for a bank to use mostly private funds to entertain valued customers?

Then there is the insurance giant American International Group, which unleashed bubbling torrents of outrage when it paid large bonuses to hundreds of employees. Angry lawmakers have no idea what these workers should be paid, except that it should be a lot less.

Of course, some taxpayers feel that members of Congress should forfeit their salaries in years when they fail to balance the budget. But our leaders' contempt for failure applies only to the private sector.

They demand that the bonuses be rescinded and, failing that, threaten to tax them away, at proposed rates as high as 100 percent. "Let the recipients of these large and unseemly bonuses be warned—if you don't return it on your own, we'll do it for you," thundered Sen. Charles Schumer (D-N.Y.).

No one in the lynch mob wants to admit that the amount is piddling from the point of view of taxpayers. It adds up to less than 1 percent of the $170 billion the government has poured into AIG. The prevailing reaction amounts to swallowing a camel and straining at a gnat.

AIG could have refused to make the payments, but only by violating contracts it had made with employees. Officials at the Federal Reserve Bank of New York entertained this option, reports The Washington Post, only to realize that the spurned staffers would have sued and gotten not only the payments but "punitive damages that would make the ultimate cost perhaps two or three times as high as the bonuses themselves."

Refusing to pay would also have driven away any top employees with alternatives—which would tend to be the better people, who might just be useful in restoring the company to health. Congress's approach brings to mind the sardonic workplace sign: "The floggings will continue until morale improves."

Expropriating property from people who did nothing more than accept money they were legally due sounds uncannily like a bill of attainder—a legislative measure declaring someone guilty of a crime, and imposing punishment, without trial. This weapon was expressly forbidden by the framers of the Constitution because it is fundamentally unfair, at odds with the rule of law, and driven by mass hysteria rather than dispassionate fact-finding.

Once upon a time, those were considered bad things.