From the Daily Beast …

An employee who worked in Madoff’s legitimate brokerage operations, described by the fraudster in his plea agreement as being “successful and profitable,” has told The Daily Beast that they were in fact money losers that acted as a front for his Ponzi scheme.

He said that the legitimate businesses, the proprietary and market making arms on the eighteenth and nineteenth floors of Madoff Securities were designed to lure investors in, especially highly-placed figures in society and to fool the SEC into thinking that he had a large and impressive galaxy of businesses.

I had heard this AIG bonus bill described as being more or less narrowly tailored to claw back AIG’s bonuses. That in fact was why some people were saying it might amount to some sort of unconstitutional action since it focused on a narrow class of individuals. But that’s not what this is about at all. Unless I’m misunderstanding this, it applies to the entirety of the concentrated financial sector — all TARP recipients talking over $5 billion.

If you have a household income over $250,000, and you receive a bonus, 90% of that bonus would be taken back in taxes — through a mix of income and excise taxes.

This strikes me as pretty ill-advised on a couple levels.

First, what’s to stop the companies from just folding the ‘bonuses’ into straight salary income? In which case, the whole thing goes out the window?

Second, this cuts a pretty broad swathe. You don’t want CEOs who drove their companies into the ground pulling down multi-million dollar bonuses from companies that wouldn’t even exist any more without big taxpayer handouts. And the folks at AIGFP who played a big part in driving the whole economy into the ditch with their reckless and possibly criminal behavior shouldn’t big reaping big rewards of taxpayer money.

But it’s not clear to me why a couple, both of whom work in the financial services industry, and make $150,000 each should essentially have their entire bonuses taken back in taxes.

This seems like just another example of perverse outcomes from the ‘worst of both worlds’ approach we’re taking to the whole finance industry bailout — keep the same people in charge of the institutions, keep effectively insolvent institutions afloat, but throw a lot of federal dollars in their direction and put in place fairly draconian tax provisions for money that’s spent in ways we find either wasteful or offensive.

Late Update: A number of readers have written in to say they’re not shedding any tears for a couple making a combined income of $250,000 who face a huge tax hit on the income they make over that amount. But I’m not either. It’s not a fairness issue in my mind. I think it’s too broad a brush, probably too destabilizing to a financial sector we’re already trying to stabilize. Of course, I was figuring we should have ushered a lot of these companies through some sort of managed restructuring or bankruptcy, in which case a lot of this would simply be moot. But as long as we’re doing it this way, as I said, this just seems like the worst of both worlds.

Late Accountancy Update: One reader points out that there are big tax benefits to the companies to paying compensation in the form of bonuses as opposed to ordinary salary income, which is no doubt the reason why, for many in the finance industry, the bonuses totally dwarf the base salaries.

Even Later Accountancy Update: Tax attorney TPM Reader JN adds the following: “This is only correct with respect to the CEO and the other 4 most highly paid officers of a company (there is a limitation on deductibility of compensation over $1,000,000 paid to these people except for certain incentive-based compensation – the TARP bill has additional limitations that aren’t relevant here). For ordinary employees of a company there is no tax difference to the company between paying straight salary and a bonus (although I imagine there could very well be accounting benefits of which I am not aware).”

From TPM Reader JM …

With regards to Geithner, I have been thinking a lot about this whole AIG mess and one of the things I keep coming back to is that Geithner is basically a one man band right now because neither the Dep Secy nor key Asst Secy positions at Treasury have been filled. That is not highly unusual at this point in an Admin and most Secys just struggle along until they can fill the positions. The problem Geithner has is he is dealing with multiple crises while not having a core team in place. At my day job I run large projects for my company and when you get stretched for time and resources you end up prioritizing what seems most important. 90+% of the time you get it right but when you don’t it is usually bad.

The Obama Admin will never say this publicly but I would not be surprised if what happened here is that Geithner saw the AIG bonuses as a secondary issue and prioritized the bank stress tests, TARP money, the auto bailout, etc. Having no key team members in place he didn’t delegate it to the staff in his office or to the careers who are filling in temporarily while the subcabinet positions are confirmed. And now you have a mess.

I know a lot of people are calling for Geithner’s head but I think you have to give him a chance to get staffed up and see what he can do. If he is still struggling 9 mos from now, get rid of him.

In the meantime, I think Obama needs to lean on Paul Volker more. He is the only person in his Admin who has dealt with anything close to this kind of crisis and he has a ton of credibility.

TPM Reader TR points to one of the key issues in the whole ‘bonus’ debate.

I’m certainly no expert on the financial wheelings and dealings of Wall Street (how many times have you heard THAT caveat the last few days?), and I actually think that contributes to the overall problem so many people are having with this whole bonus issue. For much of the middle class, the term “bonus” is something you earn at the end of the fiscal year when you’ve done particularly well and/or your business division has turned a nice profit for the company overall. It’s a reward for out-producing expectations; it’s a
thank-you from the bosses for doing your job so well that the executives and the shareholders get more in their pockets, too. These AIG execs aren’t getting bonuses; they’re getting guaranteed income called something else for tax purposes. Everyone who is flipping out (and I was certainly one of those) is reacting so strongly because it feels like these bozos are getting rewarded. To us working stiffs, it’s a message of “great job!” when in fact we want to beat them all with rubber hoses. We’re incensed not just because of the money going back into their pockets, but because it feels like we’re being forced to congratulate them with our own tax money while our own bonuses flew the coop (along, quite often, with their associated jobs).

I know a number of people who work or in a few cases worked at the big investment banks here in the New York. And while the size of the bonuses would float to some degree with how well the bank did in a given year, and presumably how well they performed, to a great degree it was locked in income. And the great bulk of these people’s incomes came from their bonuses.

So in some respects, the people getting nicked here can say, hey, I’m losing two-thirds of my salary. In other ways, though, it’s just a trap of the industry’s own making since over the years they’ve increasingly used this redefinition as a tax avoidance mechanism — only now it’s coming back to bite them.

Ex-Rocky Mountain News reporters prepare to launch web-only ‘Denver Times‘. More here.

Everything you need to know about the DC journo establishment, from ABC News White House correspondent Jake Tapper’s Twitter feed:

Breaking- PrezObama on Leno jokes about being a bad bowler- says it’s “like the Special Olympics or something” http://tinyurl.com/bholeno
about 12 hours ago from TwitterBerry

Am trying to imagine the reaction if President Bush joked that his bowling skills recalled the Special Olympics. 3 am- we just landed in dc
about 6 hours ago from TwitterBerry

Preparing for day of hypocrisy: conservs who would normally defend the SpecOlymp joke acting offended, liberals saying lighten up. Sigh
about 3 hours ago from TwitterBerry

Late Update: Tapper gets his revenge: He has “blocked” me from following him on Twitter.

Later Update: Seems to be a trend.

Later Update: In an apparent peace offering, Tapper started following my Twitter feed this afternoon. And I have been unblocked from following his. Peace is at hand — although I’m unsure about the others who were blocked.

Longtime reader checks in:

There are all sorts of accounting reasons that firms hand out much of their compensation in the form of bonuses, but those incentives, like the bonuses themselves, stem from historic practice. Most Wall Street firms began as partnerships, not as publicly-owned corporations. Partnerships apportion their profits at the end of their fiscal year; that practice has remained the norm, even though shareholders (or, in the case of AIG, taxpayers) now own these corporations.

And that’s really the nub of the problem. Most Wall Street firms have gone public; at the same time, many public banks have entered the Wall Street game. But corporate governance, compensation, and accountability haven’t kept pace. In essence, these firms offloaded most of their risk to shareholders, but continued to be run in an insular fashion, and to divert the great bulk of their surplus revenues to their workers and executives. In the bubble years, enough cash rolled in that the complaints were muted – executives and traders took it home in wheelbarrows, and the share prices still went up.

But those working on Wall Street have come to regard their bonuses – their traditional share of the profits – as guaranteed compensation. They want the rewards of ownership with the security of employment. And that’s just unsustainable.

When it comes time to sort through the wreckage, and to erect a more sustainable model, I hope we pay a little more attention to corporate governance. That those who own the corporation – shareholders – have long had little say in its operation is a scandal. It’s been driven home this week by the realization that simply substituting ‘taxpayer’ for ‘shareholder’ does nothing to change the locus of corporate power – in either case, it rests less with the owners than with the board and executive suite. And, all too often, those groups pursue interests divergent from those of the ownership. Levying a tax on undeserved compensation is a bromide – it makes us feel better, but neither solves the problem nor prevents its recurrence. The real solution lies in ensuring that corporations are run in the long-term interests of their owners, not to line the pockets of their executives.

In new video, President Obama makes a direct pitch to the Iranians for reconciliation. That and the day’s other political news in the TPMDC Morning Roundup.

Lucian Bebchuk, “AIG Still Isn’t Too Big to Fail,” from the Journal.

I lack the technical knowledge to evaluate the question fully. But we should be asking the question. Is AIG really too big to fail?

That’s the big question: because that, unlike the bonus drama, is where the real money is. AIGFP’s potential derivative exposure stands at $1.6 trillion. And unlike the case with the big banks we’re backstopping, the obligations we’re covering are not what was supposed to be super-safe corporate debt.

These are derivatives, in many cases high-stakes bets on underlying assets the purchasers did not themselves own. So, you insure your house for fire damage. And I insure it too, even though it’s not my house. Your house burns down and you get the policy payout to rebuild your house. But I just want my money because a deal’s a deal. I have no problem with old-fashioned gambling. And if people want to play with their money this way, I’ve got no problem with that. But if the casino itself goes bust, don’t come to me and talk about having moral claim on your winnings that I need to cover.

The policy question is whether not paying off these obligations will upend banks or other financial institutions we have an interest in keeping afloat. But perhaps there’s a way to evaluate the different claimants through some sort of organized process or possibly pay off the money in the form of TARP infusions that at least get the taxpayer some equity in the company.

I’m not saying it’s a simple issue. It’s not. But under the current framework we could still end up giving AIG tens, even hundreds more billions of dollars.