March 19, 2009 / 9:17 PM / 10 years ago

Banks may see brain drain if bonus tax becomes law

NEW YORK (Reuters) - A bill passed by the U.S. House of Representatives to tax employee bonuses at companies getting $5 billion or more in government bailout funds could send bank employees rushing to the exit sign if it becomes law.

The largest banks in the United States would be affected by the legislation, approved on Thursday, which would add a 90 percent tax on bonuses for people earning more than $250,000.

The result of public and government outrage over $165 million in bonuses paid to employees of American International Group Inc’s Financial Products unit, some sources said the legislation would have repercussions far beyond the insurer, which is getting up to $180 billion in public funds.

“It’s terrible public policy with respect to trying to bring institutions back to health,” said Robert Sedgwick, head of the executive compensation practice at law firm Morrison Cohen in New York.

“These institutions are under siege and their primary asset is their people,” Sedgwick said, explaining that adding taxation to shrinking compensation for bankers will drive people from the business.

Under the bill, banks including JPMorgan Chase & Co, Bank of America Corp, Citigroup Inc, Goldman Sachs Group and Morgan Stanley could struggle to retain staff, bankers said.

The U.S. government injected billions of dollars into banks in October under the Troubled Asset Relief Program (TARP) and lawmakers have already placed restrictions on how much compensation these banks may pay top executives.

“I’ll be surprised if anyone’s here tomorrow,” joked one senior equity salesman at a bank that received TARP money, adding more seriously that the bill “penalizes the people that are trying to earn their banks’ way out of the industry’s problems.”

Banks are unlikely to be able to contest the bill, said the salesman, who asked not be named because he was not speaking on behalf of the bank. He added that lawmakers were unwilling to listen to an industry viewed as the driver for the United States’ recession and for costing taxpayers billions in bailout funds.

“At this point, it’s like the French Revolution — the mob has got the banks’ heads in the guillotine,” he said.

Spokesmen for Morgan Stanley and Goldman Sachs declined comment, and a spokeswoman for Wells Fargo said it was too early to comment. Officials at other banks did not immediately comment.

The bill could provide a new impetus for banks to try to find ways to repay TARP funds as soon as possible. Already Goldman Sachs, which received $10 billion from the program, has said it was aiming to repay the bailout funds as soon as possible.

Bank of America Corp has a bonus headache caused by $3.6 billion in bonuses paid by its newly acquired Merrill Lynch unit in December. The bank has indicated it wants to repay government funds by the end of the year or early next year.

Reporting by Elinor Comlay; Additional reporting by Jonathan Stempel and Joseph A. Giannone; Editing by Toni Reinhold

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