Zeal for battle over bonuses is waning in Washington

WASHINGTON -- From the White House through the halls of Congress, Washington is losing its zeal for an all-out fight over hefty executive bonuses, now that it wants the financial companies it blames for the collapse of the U.S. economy to help clean up the mess.

The House Financial Services Committee on Thursday adopted a milder alternative to a bill passed last week that would have taxed away 90 percent of employee bonuses from companies getting federal bailout money. The new legislation would let bailed-out companies pay bonuses as long as the government determines the compensation is not "unreasonable or excessive."

Just what is unreasonable or excessive would be determined by financial regulators and the Treasury Department, where Secretary Timothy Geithner set off a public furor by not blocking $165 million in AIG payments to its financial products executives and traders March 15.

The Senate, meanwhile, has put on hold a bill that Democrats unsuccessfully tried to advance last week. It would tax about 70 percent of the employee bonuses at AIG and other companies getting more than $100 million in bailout money.

Since last fall, AIG has received or been promised more than $182 billion of government money, much of it funneled to investors and foreign banks who held high-odds bets with the company on the U.S. housing market collapsing.

The about-face in Washington happened as it became clear that financial institutions might not partner with the government on new efforts to restore vital credit flows to businesses and consumers if it meant later being demonized for its use of taxpayer dollars.

On Monday Geithner proposed a new government program that would rely on the help of private investors to buy up to a $1 trillion of bad debt, or "toxic assets," sitting on the books of major banks, giving them more ability and incentive to lend.

"I don't want people to think that businesses and people who have worked hard, performed well and received bonuses are going to be painted with the AIG brush," House Speaker Nancy Pelosi, D-Calif., said Thursday.

The gentler approach is in stark contrast to the anti-Wall Street rhetoric that consumed Congress and the White House last week after the bonus payments by AIG, the prime example of a company deemed "too big to fail" because its collapse could create a worldwide run on banks and other financial institutions.

The bonus payouts ignited populist anger that four days later prompted the House to vote 328-93 to tax them away and Obama to declare on Jay Leno's late-night talk show the same day that he was "stunned" and would "do everything we can to get those bonuses back"

By the next day, the Senate's bonus tax plan had stalled.

Obama then warned the public against vilifying investors and entrepreneurs who are needed to keep the economy alive. Geithner said industry's help would specifically be needed to buy up the billions of dollars of sour mortgage securities.

"We cannot solve this crisis without making it possible for investors to take risks," Geithner wrote in an editorial published in The Wall Street Journal.

Now, Democrats are walking a fine line. For Geithner's bank-rescue plan to work, private investors will have to trust that the government will keep up its end of the bargain. But as the flap over the AIG bonuses showed, Congress will intervene if it thinks the rules are unfair.

"Private investors need certainty that Washington will not change the rules of the game while the game is being played," said Rep. Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, who opposes the latest committee proposal.

The latest House bill, sponsored by Democratic Reps. Alan Grayson of Florida and Jim Himes of Connecticut, directs Geithner to take into account an employee's performance, as well as the stability of a financial institution, before bonuses are paid.

"We need regulation that aligns the public's interest with the health of these institutions," said Himes.

In a sort of olive branch to industry, the committee included an exemption to the rules for firms willing to participate in Geithner's investment program involving "toxic assets."

"We do want to encourage wide participation," said Rep. Barney Frank, D-Mass., the panel's chairman.