Why I support the AIG bonus clawback

The House has voted a 90% tax on AIG bonuses (.pdf) in an effort to clawback bailout money that simply lined the pockets of those responsible for blowing up the financial system. While the bill is not perfect, I support it.

The financial services industry gamed capital requirements by using that now famous derivative soup: CDO, MBS, SIV etc. The only way to combat regulatory evasion is to create and apply new rules retroactively. This is not the first time that the financial services industry has gamed regulations -- they have a history of it, and each chapter contains a massive boom (where bankers get rich) followed by a massive bust (where the Government steps in and pays bankers). Additional regulations are a coda to stop the last incident from happening again, but bankers, understandably, keep coming up with new incidents. Retroactive regulation stops the absurdity. If you don't like retroactive regulation, then stop all financial innovation (which I am also OK with, btw. I just want this cycle to stop).

Another argument against the clawback is that the bonus money is small fries compared to the size of the actual bailout. This misses the point that it is not small fries to the recipients of the money. Bonuses are about creating the right incentives, and giving massive bonuses for awful performance to the employees of a firm that only exists as a ward of the state sets the wrong incentives.

There is also the fact that some principal bad actors at AIG have already flown the coop. This is a good reason to go after them as well, but not a good reason to now clawback current bonuses.

Finally, some argue that the real scandal at AIG is how the bailout money has simply made the counter-parties (Goldman Sachs, et al) whole when they should be taking big haircuts. I agree, but the Treasury bailed out AIG so they could, stealthily, make the counter-parties whole. There is no political will for a TARP 2, so the Obama administration is being actively deceitful about their continual transfer of taxpayer money to wealthy bankers. Those ludicrous non-recourse loans are one channel, AIG is another. If you don't like that, you should be asking for Geither's head on a platter (I'm also OK with this), not blocking the clawback.