House Prescription for AIG Outrage Could Have Painful Side Effects for Subsidiaries

Lawmakers bellowed with outrage last week following revelations that AIG was paying millions in bonuses to employees at a rogue division based in suburban Connecticut. 

But the restrictions House members prescribed in response -- a 90 percent tax on those bonuses -- could have painful side effects for the subsidiaries of other bailed-out financial companies, including one located just a few miles away from the troubled AIG unit. 

Phibro, a commodities trading company located in Westport, Conn., potentially could be hit with the 90 percent tax on bonuses since its parent company, Citigroup, has received $45 billion in bailout money. 

Phibro, though, has not actually taken federal rescue funds and is considered a relatively stable and profitable subsidiary of Citigroup. 

The subsidiary side effect is just one example of the complications the House-passed bill could create if such a measure clears the Senate and heads to President Obama's desk. 

U.S. Rep. Jim Himes, D-Conn., who represents the district where Phibro is based, said the bill is "undoubtedly replete with unintended consequences" -- the product of what he called "hasty work." 

Himes, who voted for the bill, said hefty taxes on subsidiaries of bailed-out firms are one such consequence. 

"Phibro is to my understanding a profitable entity that employs a lot of people," Himes said. "We need to be careful, as this legislation winds its way through Congress and to the White House, that we don't dis-incentivize or harm groups that are profitable and doing well." 

Himes said Andrew Hall, head of Phibro, "did express some concerns" to him about the bonus tax bill during a recent conversation. 

But the Connecticut Democrat said he expects the Senate to work up an entirely different bill to address excessive bonuses. He said the House version was a "signal" to taxpayers that Congress is paying attention to the issue, but not a final product. 

"This is the first move in a much larger chess game," he said. Himes is working up new legislation that he says would require compensation for bailed-out firms to be performance-based. 

The bonus tax bill was met with widespread disapproval on Wall Street. 

Citigroup would not comment on the possible repercussions on subsidiaries. However, Citigroup CEO Vikram Pandit, in an e-mail to employees Friday, warned about the potential negative side effects of the taxation bill. 

"The work we have all done to try to stabilize the financial system and to get this economy moving again would be significantly set back if we lose our talented people because Congress imposes a special tax on financial services employees. It would affect countless number of people who will find it difficult, if not impossible, to pay back the bonuses that they earned," Pandit wrote. 

Pandit wrote that the "tide of negative sentiment" in Washington regarding compensation is in some cases warranted. 

"But I take exception when there is a discussion about spreading the blame to each and every employee in the financial services industry," Pandit wrote. 

The White House has already expressed its reservations about the tax bill, with administration officials suggesting it may have to be modified in the Senate. 

"I think the president would be concerned that this bill may have some problems in going too far -- the House bill may go too far in terms of some -- some legal issues, constitutional validity, using the tax code to surgically punish a small group," said Vice President Joe Biden's economic adviser Jared Bernstein said on ABC's "This Week." "That may be a dangerous way to go." 

Obama, in a "60 Minutes" interview broadcast Sunday, also signaled opposition to the bill, saying he would not "govern out of anger." 

Himes said lawmakers on Capitol Hill took careful note of the president's comments. 

Lawmakers have already raised concerns that the bill is constitutionally questionable, since it appears to target a select group of executives. 

However, the impact could at the same time be broader than intended. 

Gordon Joseloff, the first selectman for Westport, said financial industry employees in his town have complained to him that lawmakers are "damaging the companies (they're) trying to rescue." 

He said Westport, a hub for financial industry employees, has already taken a big hit from the ongoing market turmoil. 

"All these people directly or indirectly could be impacted by any legislation that deals with salaries, bonuses," he said. 

But Rep. Charlie Rangel, D-N.Y., who sponsored the House bill, defended the legislation as a necessary signal to Wall Street and a tool to restore public faith in government. 

"We as a government have the responsibility to make certain that people have confidence in government. And the taxpayer did not have confidence in the system," Rangel told "FOX News Sunday."