Tap Wall Street staff to pay back TARP

(breakingviews.com) -- Wall Street firms desperate to pay back government funds could now have an extra source of capital - their employees.

Many of them face having to hand over 90% of their bonuses to Uncle Sam if Congress's ill-considered tax bill becomes law. That means they have at least as big an incentive as their employers to free their banks of government aid and its growing list of restrictions.

Relatively healthy firms like Goldman Sachs (GS, Fortune 500), JPMorgan (JPM, Fortune 500) and Morgan Stanley (MS, Fortune 500) might be able to turn that to their advantage. Let's say they persuade their bankers to invest a good chunk of their bonuses for 2008 - perhaps half - in a new equity capital-raising by their employer.

That wouldn't be enough to raise the entire amount needed, though. Goldman, for example, paid less than $5 billion in bonuses last year yet owes the U.S. Treasury $10 billion - as does Morgan Stanley. JPMorgan, meanwhile, would have to fork over $25 billion.

But it would bolster any funds the firms have at their disposal, be that cash or assets they can sell - Goldman, for example, is reportedly considering selling part of its stake in Chinese bank ICBC.

And if they need more, roping in staff would be a canny way to attract investors to a larger equity offering. It would also, depending on the terms, tie employees' longer-term prospects more closely to the bank and make it harder for rivals to poach them.

Of course, there's one big question: If the bill is passed and firms do pay back Troubled Asset Relief Program capital soon, will bonuses still be taxed at the punitive rate? And if so, for the full year or pro-rated?

The bill passed by the House of Representatives offers no guidance. But if freeing themselves of government aid early offers any kind of tax relief, banks and their bankers may jump at the chance.