Hidden Cost of AIG Bailout

Congress moved at record pace today. After a 40 minute debate, the House of Representatives passed a bill to tax 90% of the $165 million in bonuses paid to AIG executives over the weekend. None of them are even trying to hide the intention it was aimed squarely at AIG employees.

The details of the bill include a stipulation which include any company that has received more than $5 billion in bailout money.

Of course, the next question will be what about who AIG had to pay more than $5 billion? Since AIG used the bailout money to pay obligations to Goldman Sachs and dozens of other banks, will their executives be subject to the tax? After all, they indirectly received a good helping of bailout money.

It doesn’t stop there. House Speaker Nancy Pelosi stated, “We want our money back now for the taxpayers. It isn't that complicated.”

Which begs the question, is it Congress’s money or the taxpayers’ money? It certainly sounds like the former from that statement. But I’m not trying to ignite some political debate, I want to look at the impact of this emergency tax bill. In this case, the impact will be popular with constituents but another net cost to the economy.

Looking For a Fall Guy

As the politicians play the blame game, they’re missing the bigger picture.

I think Senator Dodd passed it to the Obama Administration who blamed the Bush Administration which the Republicans have turned into Secretary Geithner’s mistake because he was a key player in the bailouts as head of the NY Fed.

So, is Geithner the fall guy here?

It might be shaping up that way. At Intrade, a web site that allows you to place bets on practically everything, the odds Geithner will either be fired from or quit by the end of 2009 surged to an all-time high today of just over 41. Basically the “market” is giving Geithner 3 out of 5 odds he’ll last throughout the year, down from 3 out of 4 earlier in the week.

Although it may seem small in the bigger picture of $750 billion bailout, a “placeholder” for more to come, and a $787 billion stimulus package, it just adds to the “rule changing” climate which will only slow any recovery.

The Hidden Cost

Back in October we start talking about the tremendous negative impact of uncertainty on the markets and economy. Now with the Dow off another 10% or so, even after the recent rally, it’s becoming an even bigger problem.

Whitney, who really made her mark by rightfully putting a “Sell” recommendation on Citigroup back just as the current mortgage mess started to unravled, laid it all out pretty simply in a recent edition of the Charlie Rose Show. Whitney said:

“If the rules are constantly changing, you’re going to have a freeze in commerce. You’re going to have a freeze in spending…and people are going to be too scared to act. A lot of companies have already behaved that way. They’re too scared to act because the rules are changing on them constantly.”

“The math [shows] the worst is ahead of us…you continue to have credit pulled from the system and until it stabilizes, you have nowhere to go but down.”

In the end, I look at this as just another rule change which is preventing businesses from making decisions to spend, invest, and hire. All of which will have a negative impact in the months ahead and help stunt the current stock market rally.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing