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ByStander

WASHINGTON -- The Obama administration wants to soften the impact of bills speeding through Congress that would impose heavy new taxes on Wall Street bonuses. But some potential allies in the Senate are reluctant to cooperate, fearing the political consequences of watering down the legislation.

Financial-industry officials launched a campaign Friday to fight back but are finding their hands tied: Anti-Wall Street sentiment following the American International Group Inc. bonus payouts is making it difficult to reach once-friendly lawmakers to make their case. Key senators and their staffers, nervous about appearing to support the industry, are refusing all meetings, and, in some cases, turning away phone calls. "Unless you have a pitchfork and a noose nobody's listening to you" on Capitol Hill, said one financial lobbyist.

The White House has yet to publicly criticize the bonus tax proposals. But administration officials say privately they are concerned the House and Senate bills could lead to an exodus of employees or whole companies from the Troubled Asset Relief Program, known as TARP, as well as other government-sponsored financial rescue efforts.

No company has announced a departure, but Bank of America Corp. has said it is watching the legislative action closely.

The House overwhelmingly passed a measure Thursday that would impose a bonus surtax of 90% on large firms receiving federal bailout money. The Senate is expected to vote on a similar measure by the end of next week.

Management at AIG's financial products unit has asked employees to let the unit know by 5 p.m. Monday if they plan to return all or part of the bonuses they received under a retention program, according to a person familiar with the matter.

Meanwhile, Obama aides are focusing on recrafting the Senate bill so, at the least, it won't discourage firms from participating in a separate federal effort to unlock credit markets -- a consumer-lending program known as the Term Asset-Backed Securities Loan Facility, or TALF. They also fear scaring off investment firms they need to help in a future public-private partnership to purchase from banks mortgage-backed securities and other toxic assets.

White House spokesman Robert Gibbs said the legislation would ultimately be judged by two standards: whether the bills appropriately reflect "taxpayer anger and frustration," and whether they maintain "our ability to stabilize the financial system and ensure that credit flows from banks and lending institutions to families and small businesses and big businesses."

Federal Deposit Insurance Corp. Chairman Sheila Bair also raised concerns about imposing new compensation limits. "You need to have flexibility to reward people who add value," she said. "Some talent is better than others, and some people do need to be better compensated."

But efforts to ease the bonus-tax legislation face a thicket of political hurdles. The White House is having a hard time making its case, even to normally sympathetic Democratic lawmakers. Several lawmakers and staffers say they believe the White House stood by too long while Senate Banking Committee Chairman Christopher Dodd (D., Conn.), took the blame for watering down executive-compensation legislation, which came at the behest of the administration.

If anything, Congress is facing pressure to do more. The umbrella union group, Change to Win, asked lawmakers Friday to also go after $3.6 billion in bonuses that Bank of America allowed the failing investment bank Merrill Lynch to pay employees before the firm's federally backed merger. The current versions of the bills wouldn't touch those payments.

The bonus-tax bills are developing into the first big test not only for President Barack Obama's financial-rescue program but also for his ability to control his own party. The president may be running into the consequences of a week's worth of missteps: by not moving fast enough on the bonus issue, fanning the flames of rage, and then allowing an ally, Mr. Dodd, to be pilloried for changing legislation after the president's economic aides objected to its legality.

For most of the week, the shell-shocked financial sector stood by silently as Congress rushed to respond to popular anti-AIG outrage. On Friday, the industry started crafting a strategy to fight back, in Congress and in the courts.

Lawyers for a number of the affected firms have discussed a joint legal challenge. The financial services industry's biggest lobby group, the Securities Industry and Financial Markets Association, is studying the House-passed bill, and considering its own legal challenge, said a person with knowledge of the review.

James Dimon, chief executive and chairman of J.P. Morgan Chase & Co., told about 200 of the bank's most senior managers on Friday that the company was "very focused" on the legislation, which he described in a conference call as unfair, according to a person who listened to the call. The bank's head of government relations encouraged employees to reach out to their local elected officials and was providing them with the contact information, this person said.

Citigroup Inc. Chief Executive Vikram Pandit, in an email to employees, said: "The work we have all done to try to stabilize the financial system and to get this economy moving again would be significantly set back if we lose our talented people because Congress imposes a special tax on financial services employees....I want you to know that we are working in every appropriate way with policymakers in Washington, and with other financial institutions and industry associations, to come to agreement on a constructive industry compensation system."

Separately, Edmund Tse, the 71-year-old chairman and chief executive of AIG's Asian unit, American International Assurance Inc., has decided to retire, according to an internal memo from AIG Chairman and CEO Edward Liddy. An AIG veteran of nearly half a century who sits on the insurer's board, Mr. Tse was at one time a top contender to succeed former Chief Executive Maurice "Hank" Greenberg.

The memo named Rodney Martin as the new chairman of international life and retirement services, in charge of AIA as well as AIG's operations in Japan and Taiwan. Mr. Martin has been AIG's chief operating officer world-wide for life insurance since 2006.

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