This issue is of profound importance to real estate investors. Please read every word of this article right now.
The current front page news is the bonuses totaling around $165 Million received by executives at the huge financial services company AIG. The reason there’s such an uproar is because AIG has received approximately $170 Billion in bailout funds from the federal government, and so it seems unreasonable that anybody at AIG should receive a bonus of any type.
To be clear, I think that the execs at AIG should “man up” and give back the bonuses. I can’t imagine how it’s reasonable to receive bonuses for a company that has been so poorly managed that it needed to take $170 Billion to keep it in business. But the reality is the AIG Executives are contractually entitled to what they’ve received, so the bonuses themselves are not the real issue. The real issue is how the government is responding to this.
This is the real issue:
U.S. Representative John Dingell (Democrat from Michigan) has proposed that these bonuses be taxed at a rate of 95% as a way for the government to recoup some of the bailout funds given to AIG.
That might appeal to you on some level. After all, AIG received $170 Billion in bailout funds, and now the AIG executives are receiving about $165 Million in bonuses. So in some way, it feels “right” for their bonuses to be taken from them.
But that’s the problem…
I need for you to follow me closely in this explanation, because this can have direct effects on the real estate investing business if we stand by and let it happen.
Here’s the problem: Congress is headed in the direction of deciding to take away money from a group of people who received that money legally. And let’s be clear about this: The bonuses received by the AIG execs were 100% legal, despite the incredibly distasteful nature of the bonuses. Here’s why:
- Each of those AIG executives had contracts in place prior to AIG’s receipt of the bailout funds.
- Senator Chris Dodd (Democrat-Connecticut) personally took action to make sure that nothing about the injection of bailout funds into AIG would ever effect the existing employment contracts. (This makes Chris Dodd an absolutely deplorable human, as he’s now leading the charge about the “inappropriateness” of the bonuses, even though he personally guaranteed that those bonuses would be paid.)
So what we have is the government deciding what they think is right or wrong in a specific circumstance, and using the power of taxation to penalize the people who they think have “gotten away” with something, even though absolutely no laws have been broken, no charges have been made, and certainly no convictions have occurred.
HERE’S THE CONNECTION TO REAL ESTATE INVESTING: Right now, the real estate market is front-and-center on the national stage. While the news has been very bad about the real estate market in past months, we all know that the greatest profits are made in bad rather than good markets because there are more opportunities to buy at great prices.
Presently, we have the government sticking its nose in the private real estate market by propping up mortgage lenders financially. Additionally, the government is literally paying off lenders and servicers to accept loan modifications that make no sense whatsoever.
Where I fear this leads is to the government deciding that it should have influence over how much money that you and I as real estate investors can make, and then taking aim against us specifically later on by taxing our profits at confiscatory levels.
Here’s one way it could play out: Let’s say that you pick up a property with distressed owners. These owners have taken advantage of every government program they can to keep their property. After all, the owners originally paid $250,000 for it and they think they should keep it. So they do a government-induced loan modification and maybe even refinance the property using the U.S. government lender (Fannie Mae).
And, of course, things don’t work out for them. The property drops in value to $150,000 and you are able to get it for $120,000 through a short sale.
Good for you, right?
And then things get better – the market recovers over a couple of years, and the property is suddenly worth $250,000 like before.
Again, good for you, right?
Maybe not. What if that lying, thieving and disgraceful Senator named Chris Dodd decides that the government has more rights to your income than you do? His justifications would be simple and plausible (but 100% wrong):
- The property was propped up by the government.
- The short sale was probably approved as a result of one of the government bailout programs
- The fact that Fannie Mae was involved might give the government some claim to a portion of your profits also.
- The government stimulus program was responsible for the recovery of the economy and the increased value of your real estate.
And based on that, the criminals in Congress could create a new law to retroactively tax people who behaved wisely, legally and opportunistically during an economic recession. People like you.
Do you think it couldn’t happen? Why do you think that? Remember: former Democrat President Bill Clinton instituted retroactive tax increases, so there’s precedent for the current occupant of the White House.
If Congress would take action to steal $165 Million – a relatively small amount of money – back from AIG executives, you can be sure that the real estate market would be a great target for them. After all, if only 50 investors in each of the 50 states were to experience a real estate profit of $100,000 or more during the recession, that would be $250 Million – significantly larger than the size of the AIG executive bonuses.
And you can be damn sure that there will be far more than $250 Million in real estate profits created by smart investors during this weak market.
My friend, this is a serious matter. The notion that Congress would target a tiny group of people for confiscatory and unjustified taxation is really scary.
I’m thinking that the Tea Party thing that’s happening all over the country is sounding like a really good idea.
Thank you for reading RealEstate.BryanEllis.com. Your thoughts and comments are welcomed.
Man I agree 100%+. If we allow congress to tax the bonus money, it’s just another nail in our coffin. Folks we have got to stand up to congress. Bryan is right. If we allow congress to tax this group, they can do it to anyone.
I am going to take part in the tea party on April 15. At least it may be a start of citizens of this country showing congress we are getting tired of their incompetence.
Richard
I believe the Bonus uproar is just a smoke screen to cover up & distract from, all the money, from the AIG bail out , that went overseas to foreign countries. The mainstream media won’t report this or look into what Democrats Dodd & Frank had in the start of all this, by forceing banks to make NINJA loans. If a Republican had done this there would be cries to step down.
Bryan, I really liked your webinar about creating videos to drive organic traffic to a real estate website. THAT was really useful.
But, Bryan, I think you are reaching on yhour blog again today. Yesterday you blogged about “unreasonably low” earnest money deposits. Definitely provocative, but I disagree with your judgment that real estate investors will be singled out for a thrashing.
First of all, bonuses paid to AIG executives is an EASY subject for the media to comment on and about which to create sound bites. It’s EASY to confuse the executives who CREATED and SOLD the “Credit Default Swaps” (already terminated from AIG and DIDN’T receive bonuses) and other exotic (read “risky”) investments from the executives of the trading desks that have to UNWIND in an orderly manner the transactions their departed comrades created. Approximately $1.5 TRILLION or so I heard today.
Besides, for every investor who attempts shortsale or REO investing and earns your suggested $100,000 of profits, there are probably many more who try and fail and LOSE money and time. That’s ESPECIALLY true if they use a “reasonable” earnest money payment of MORE THAN $5.00 or $10.00 as you recommended in an earlier post, and then the investor can’t perform at closing. And MANY more who lose money purchasing course after course and NEVER BUY ONE PIECE OF INVESTMENT PROPERTY. Your comments about the “gurus” who teach outdated methods and charge high prices are right on.
So, if your assessment re: real estate investors suffering in the future is correct, what do you recommend the RE investors DO in response to your post, now that you have successfully made us aware of this latest bugaboo? Should we write our Congressional representatives? Take to the streets? Sounds like fear with no way to mitigate the causes.
The REAL story that’s not getting out is the high rate of re-defaults of modified mortgages, historically over fifty percent after six months, right? THAT is likely going to go front and center. I don’t mean refi’s, I mean “incentivized mortgage modifications.”
And, if you want to post to your blog two or three times per day to get the attention of the search engine bots, great. Post away. Maximum emails sent to your list regarding your posts? No more than one per day, please. Today and other days I’ve received two or possibly more emails, I don’t remember. Thanks!
Bryan – I totally agree with your assessment of the facts. Chris Dodd is at the root of many of the financial problems this country faces today. He and his cohorts, including B. Franks, are the ones who started the problem. Yet they act like they have no knowledge. It is interesting that Obama got $100K donation from AIG. Convenient that his administration, under his leadership, has bailed them out (again and again and again). If they tax AIG bonuses, not that I think they are a good thing, they can and will tax anything that is making money legally.
How do we stop them from stealing our profits after taking the risks and working hard at contributing to the economy? I don’t know.
Brian,
Stop with the political commentary. I appreciate your internet business marketing savy, but the constant political commentary and
banter is unsolicited, is coming way too frequent and unwelcome.
Regards,
Thanks for your comments. I value you as a reader, but with all due respect, I have no intention of ceasing my commentary on political matters that have relevance to the business of real estate investing. Nobody else does it, and the debates we hold here are valuable. — Bryan Ellis
Good analysis, Bryan.This has nothing to do with Republicans vs Democrats.
This is about Big Brother orchestrating a redistribution. And what a well-orchestrated scam it is.
Who among us believes the government handed AIG or any other FAT CAT bazillions of OUR (& our grandchildren’s) tax money only to claim later it did NOT know bonuses were contracted?
While slapping the hands of or stringing up these FAT CATS, we should be lining up these politicians.
They know exactly what they’re doing.
Do I believe for one second this economic collapse is an accident? Nope!
…especially after the 80s S&L bailout.
This is a well-orchestrated POLITICAL power move to destroy capitalism.
The FAT CAT greedsters have made it so easy for politicians to divert attention from their “plan.”
Unfortunately, the American people are too freaked out over job, home, pension & 401K losses to be thinking straight about “whodunnit.”
This is exactly how government further erodes a Republic and our rights.
Bryan, thanks for thinking beyond the party line…the same line of crap the government wants people discussing.
Make those AIG execs the “whipping boy” while this whole charade (tragic charade) has been orchestrated by the “Republicrats”.
I’m mad as hell and I (don’t want) to take it any longer.
Mike
There’s a storm abrewin’. What happens when good, responsible people keep quiet? Washington has forgotten they work for us. We don’t work for them. Throwing good money after bad is NOT the answer. I am sick of the midnight, closed door sessions to come up with a plan. I am sick of Congress raking CEO’s over the coals while they, themselves, have defaulted on their taxes. I am sick of the bailed out companies having lavish vacations and retreats on my dollar. I am sick of being told it is MY responsibility to rescue people that, knowingly, bought more house than they could afford. I am sick of being made to feel it is my patriotic duty to pay MORE taxes. I, like all of you, am a responsible citizen. I pay my taxes. I live on a budget and I don’t ask someone else to carry the burden for poor decisions I may make. I have emailed my congressmen and senators asking them to NOT vote for the stimulus package as it was written without reading it first. No one listened. They voted for it, pork and all.
O.K. folks, here it is. You may think you are just one voice and what you think won’t make a difference. Well, yes it will and YES, WE CAN!! If you are disgusted and angry with the way Washington is handling our taxes. If you are fearful of the fallout from the reckless spending of BILLIONS to bailout and “stimulate” without accountability and responsibility then we need to become ONE, LOUD VOICE THAT CAN BE HEARD FROM EVERY CITY, TOWN, SUBURB AND HOME IN AMERICA. There is a growing protest to demand that Congress, the President and his cabinet LISTEN to us, the American Citizens. What is being done in Washington is NOT the way to handle the economic free fall.
So, here’s the plan. On April 1, 2009, all Americans are asked to send a TEABAG to Washington , D.C. You do not have to enclose a note or any other information unless you so desire. Just a TEABAG. Many cities are organizing protests. If you simply search, “New American Tea Party”, several sites will come up. If you aren’t the ‘protester’ type, simply make your one voice heard with a TEABAG. Your one voice will become a roar when joined with millions of others that feel the same way. Yes, something needs to be done but the lack of confidence as shown by the steady decline in the stock market speaks volumes.
Will you
This was not my idea. I visited the sites of the ‘New American Tea Party and an online survey showed over 90% of thousands said they would send the teabag on April 1. Why, April 1?? We want them to reach Washin gton by April 15. do it? I will… Send it to; 1600 Pennsylvania Ave. Washington , D.C. 20500 ….
Forward this to everyone in your address book. Visit the website below for more information about the ‘New American Tea Party’. I would encourage everyone to go ahead and get the envelope ready to mail, then just drop it in the mail April 1. Can’t guarantee what the postage will be by then, it is going up as we speak, but have your envelope ready. What will this cost you? A little time and a 40 something cent stamp.
What could you receive in benefits? Maybe, just maybe, our elected officials will start to listen to the people. Take out the Pork. Tell us how the money is being spent. We want TRANSPARENCY AND ACCOUNTABILITY. Remember, the money will be spent over the next 4-5 years. It is not too late.
Don’t people usually received bonused because they had an outstanding year and not when they have done poorly? AIG needed a bailout so therefore they did not make money. They were given money to help save the company. Just like their contracts said they would receive bonuses it probably also said if they did poorly they would be fired. If they were fired they probably would still get a severance package but then they wouldn’t have a job anymore and I could understand. They did poorly, loss money, got a bonus and kept their jobs.
When was the last time an NFL, NBA or NHL member had a poor year but received a bonus stated in their contract?
AIG giving money as bonuses was a complete abuse of the money they received.
Why not take the money and keep some of the employees they were planning on laying off or already did?
This is just a disgrace and some that some people will always be greedy!!!!
I think you’re right from a certain point of view. Screwing around with the already screwed up tax code, is not the answer, especially if the surcharges are retroactive. What the hell! Republicons and Democreeps. I’d like to know what’s in the water on Capitol Hill.
Fortunately, these guys still have to deal with sane people from their districts. Seems to be a good way to commit political suicide to me. So I’m willing to bet that they are smart enough (or fearful enough) to realize that RE investors EARN their money by doing good things for profit and the derivatives wizards STOLE their money by doing bad things for profit.
“We have seen the enemy and they is us!”
– Pogo
GuyO – the problem is that you’re dead wrong. The executives at AIG did not steal anything, nor have they broken the law in any way. Senator Chris Dodd admitted today that he put language in the bailout terms that guaranteed that employment contracts would not be changed on the basis of the bailout, so you’re incorrect to say that these guys stole anything. To think that is intellectually lazy, and I suspect you’re not actually intellectually lazy. The real issue here is how Congress is reacting. That’s where the real crime is taking place. — Bryan Ellis
There is a large number of people who are gathering against big brother as we speak… We Surround Them is but one… When in the world are we going to get rid of the Dodd’s and Pelosi’s and Franks?? How can they still be elected?? Oh boy… big IDEA.. tax 95% of the earnings… based on what they have already earned wouldn’t you think that is enough?? They shouldn’t get ANYTHING… 99.9% of us get up and go to work every day and don’t really appreciate Sharing the Wealth.. If we don’t have positive results, we certainly don’t get paid several million dollars. How many AIG executives does this money get divided by?? 1? 100? Obama puts on a good show… as he watches his ratings start to slip.. he is a master Politician thats for sure.
GuyO— your quote is right on… “We have met the enemy and he is US”
Hi Bryan,
thanks for your dedication to us.
I propose a question…
Do you think that are government can get “to big” and if so do you think it can burst like the real estate bubble ?
Hi folks
A couple things should be considered here. Everyone’s upset about people getting paid bonuses for a company that is receiving bailout money. At one level, yeah, I guess, but WHY ISN’T ANYONE UPSET AT THE PEOPLE WHO GAVE THE BONUSES? Everyone is falling over themselves getting angry at people who accepted a bonus according to terms of their contracts, not the people who offered those bonuses.
I’m not worried about their being targeted by Congress for taxing their bonuses. It’s unconstitutional for Congress to target an individual in such ways, and even if Congress did pass a bill, it would never survive the Supreme Court.
Just follow the shiny bouncing ball, and don’t notice that the same Congress fatuously pontificating about how awful it is (I’d tell Barney Frank to suck it, but …). Chris Dodd wrote the bonuses into the legislation. Geithner knew about it. Barney Frank, Obama, Dodd, and their unctuous sleazoid ilk caused this entire mess.
I want to see Frank and Dodd doing the perp walk in orange jumpsuits. Obama has claimed responsiblity–he should join them. He’s already lied more in 60 days than Clinton did in 4 years.
Couldn’t agree with you more Bryan. This isn’t a political issue .It’s a taxation issue. Congress is telling us that if we tax what we don’t like “NOW” then we can tax what we don’t like “LATER”.
And I also agree that we , as a country, need to send a message to those morons in D.C. “NO TAXATION WITHOUT JUSTIFICATION” Tea bags on the first it is as a start. Taxing those bonuses, although it is deplorable that AIG gave them, is unjustified and shouldn’t be done. PERIOD.
Find another way to get it back.
As 80% owners, shouldn’t we control who gets bonuses? Yet again blame Dodd for saying it’s OK, we don’t want to hurt your executives feelings,they can keep there bonuses. I only hope that the execs, Dodd and Frank invested with Bernie Madoff. At least then they’ll know what it feels like getting bent over.
Yes “American Government” WE ARE PISSED.
Bryan, You are spot on. We are witnessing the acceleration of the creation of a truely socialist state. Students of history will recognize that many of the things we are seeing are reminiscent of how the Nazi’s overtook a country locked in economic turmoil. Some called the way Hitler and his gang took over genius. But Sire Edmund Burke called it what it was, “All that is necessary for the triumph of evil is for good men to do nothing.”
Good men and women reading this, contact you congressmen and women and your senators and the President. Question their work, question their representation. Most of all question their motives. Chris Dodd (and many others) received campaign contribution from AIG, Fannie and Freddy. Is there any wonder why our representatives have a hard time representing the fiduciary best interests of their constituents? The responsibility for this is in the way the government is acting, not in the way AIG followed it’s obligations. An ounce of prevention really is worth more than a pound of cure. Don’t give anyone any more money. Let the free market respond and repair itself with a stronger more efficient replacement.
Supporting the FAIR Tax proposal is becoming even more important. If we the people take away the ability of Congress to tax different people at different rates we then have a truly fair system. Then watch Congress try to figure out how to tinker with pandering.
Bryan this has been going since the beginning of time the government has never been about the people they are a corporation!
Two other fun facts about AIG, bonuses, etc.
1. Many of the people who got bonuses were on contract for $1.00 per year until they got their retention bonus. Now they’re being told that they get nothing.
2. And even better: AIG made its biggest election campaign donations to Sen. Dodd (#1) and Pres. Obama (#2) AFTER receiving bailout money. As such,are any of the people upset at those bonuses also upset at Dodd and Obama, or wanting them to be taxed at 95 or 100%, or hung up with piano wire, which is a threat made against those who received the bonuses?
I’m guessing that the Useful Idiots in the media will blithely ignore the issue, as they have NObama’s lies, incompetence, and complete inability to speak without a teleprompter, and dazzling lack of qualifications to do anything. None of the players involved in creating this mess have ever run as much as a parking lot, hot dog stand, or a laundromat. I doubt that they could.
Tend to agree with many of the angry people posted on this topic. The ones that don’t think this too big a deal or don’t see this as important to real estate investing or any kind of investing, you are just flat wrong.
The original “Tea Party,” while grossing misrepresented in most people minds, was about some very strong feelings surrounding taxation. If anyone thinks we have representation for taxes or much of anything else, right now they are sadly mistaken.
We have a government that is interested their own power, their own money, their own ideas. Right now if one took a light into the darkness of DC and was looking for truth, they would be ridiculed by the President, threatened by Congress and most like beaten and thrown in jail by the press secretary.
If a person wants to read some really scary stuff then read about how Mao took over China, Hitler took over Germany and the Bolsheviks destroyed the banks in Russia. If after reading about these events you are not outraged and frightened, well there isn’t much to do for you.
All of these events are Obama’s main reading as a student during his younger years so it is no surprise it is happening.
For the rest of us we truly do need to stand up! This is our last chance to make a stand and survive as a Republic before we are overtaken by the fascism being forced onto us. This is a government totally out of control, completely detached from the people of this Republic looking to cement their power through any means, legal or illegal!
The tax code is one of the easiest means for any government to control the people. The heavy-handed threats of punishment through tax code are a prime example of how the Obamas, Pelosis, and Reids plan to do it. What better way to really make the tax code more onerous than tripling the budget and deficit in less than 60 days, with no end in sight!
Bryan is totally correct about this issue. If we cannot stop this now we may have lost all of our freedoms and just don’t know it yet. This is a much more serious problem than is being recognized, we are at the key moves in a chess game where if we make the wrong move the game is lost, it is just a matter of making the remaining moves to play the game out!
Of all of Bryan’s post this is the single most important he has made, don’t ignore it!
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Chris B
Bryan,
Thanks for the eye opener. This is a bad situation for Investors. I am not a fan in no way of AIG or the other Banks/Corporations that have received Billions from the Government, but the LAW is the LAW!
Keep up the good work and keep us informed!
Thanks.
Kyree H. Shaw