The banking industry is fighting back in Washington, pressing its case that onerous bonus restrictions would be bad for the industry and the economy. But Congress remains in a "fever pitch," according to the Washington Post, about the unfortunate move by AIG to pay out $165 million in bonuses. The special taxes under consideration have spooked the industry, though some would argue that use of TARP funds for lobbying activities are untoward. The issue is boiling over at a sensitive time. The industry is arguing that the government's attempt to create more liquidity to buy more troubled assets might be thwarted if big investors balk.

A portion of the plan is set to be announced this week. Legislating pay issues is not a good idea in general, especially when it is designed and adopted quickly. But AIG really forced a knee-jerk reaction from the government. Congress felt it had to do something. Is there still time for a compromise? Yes. AIG needs to recover the money and give it back. And the industry needs to propose some voluntary guidelines governing incentive pay at all levels--retention, pay for performance, and other. This can't be business as usual. 

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