No Bonuses = No Contract Law
Over the last few days Washington has been denouncing AIG for paying out retention bonuses to employees in its financial-products division—the same division responsible for much of the company’s recent losses.
Relegated to the background is the fact the bonuses are a lawful contractual obligation. While bonuses are normally discretionary, in this case, presumably to retain key personnel at an uncertain time, AIG chose to make binding commitments. Now that AIG is failing, President Obama argues it's unfair that AIG should have to fulfill its obligations under those contracts.
But what is it exactly that Obama is claiming is unfair? Since AIG is contractually obligated to pay the bonuses, the object of Obama’s criticism can only be contract law itself. To say the bonuses shouldn’t be paid is to say that contracts as such should be ignored. (This, of course, is exactly what Obama is arguing, in as explicit terms as you’ll ever hear from Washington.)
One little problem: contracts are the medium of production and trade. Contracts are the crucial moving part by which the economy functions. But contracts do not function unless they are inviolable. If they don’t operate in principle, then they don’t operate—and neither does the economy. The moment companies or the government arbitrarily choose which liabilities they will honor, contract “law" becomes a lie, and production and trade become a game played at the whim of government bureaucrats.
If AIG is a bellwether, then America is about to take another big step down this road. The wind in Washington is blowing us toward the death of contract. From multi-million dollar mergers, to your supermarket purchase of a loaf of bread, to supplier contracts, employment contracts, loan agreements, home purchases, bank accounts, insurance—soon all of it will function, not by right, but by the permission of government.
Of course, it was inevitable in a failed company propped up by 80% government equity and a government appointed CEO that this kind of controversy would arise. The government can't have it both ways. Either AIG is a failed company, in which case it goes into bankruptcy and accesses the opportunity to renegotiate with all of its creditors, or it continues the pretense that it is a viable, functioning business, in which case law and justice require that it honor its contractual agreements. This is true regardless of whether Obama or the American taxpayers think that the creditor in question morally deserves the benefit of his contract. At least, if this is still America.
AIG's reincarnation as the half-breed bastard child of freedom and statism paves the way for all kinds of through-the-looking-glass absurdities. It is only because we, the tax-paying public, have been forced against our will by the government to bear the burden of AIG's failures that we assume the quasi-moral-power to object to AIG's binding contractual decisions. Even so, were we true shareholders, we would have no legal right to retroactively invalidate them. It is only because Washington has fully committed itself to a pragmatic, anything-goes policy that it even pretends to the legal ability to toss AIG's contracts out the window.
This direct attack on contract rights is highly significant as a signal of things to come. Let Obama protest all he likes that he is pursuing "legal" means of snuffing the contracts. There can be no legal means of annihilating freedom of contract as such, the sine qua non of all other economic freedoms. This is the subordination of law to populist politics.
Open your eyes America: this is another slow, sad step to the gallows. But we are beginning to pick up the pace.
(Photo credit: Gene Hunt)
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I was aware of the fact that many of the AIG execs had little to do with the problem. Were they all on the $1 salary agreement?
My main issue is whether Obama is 1) actually seeking to destroy private contractual agreement or is 2) just a short-sighted Leftist pragmatist (SSLP) — as opposed to the previous short-sighted Rightist pragmatist President. I think the SSLP is more the case, although the consequences Ms Knapp names will be the same.
The giant hypocrisy in all of this, is that Obama's Presidency is a contract!
Of course, a monarch or dictator needs no such thing, and it seems Obama's presence in the White House is viewed as the Second Camelot after JFK —another handsome, sweet-talking, socialist.
Richard, keep in mind that these were retention bonuses, not performance bonuses. These executives' annual salaries were $1 a year, which they agreed to on AIG's request. To deny them these "bonuses" is to deny them any compensation for the work they have done throughout the year. This is exactly what Obama wants, for them to have none of this money, even though they are contractually obligated to receive it. This is the same as denying someone's salary contract because you don't think that person has "earned" it.
It is not the government's job to determine who has earned what. The government should be protecting individuals' rights to engage in voluntary contracts and then it should protect those contracts. Obama is not doing that in any form.
Furthermore, while some of the executives might have aided in AIG's financial problems, some of them certainly have not.
Here is a letter written by one of the AIG executives describing his situation: http://www.nytimes.com/2009/03/25/opinion/25desantis.html?_r=4&pagewante...
I am not sure I can agree that "the object of Obama’s criticism can only be contract law itself". The very fact that the contractual bonuses are named "bonuses" implies that they are discretionary rewards for service excellence. This means there is a significant conceptual error occurring.
The view that bonuses are discretionary is what is driving the outrage against the executives who, it is quite reasonably argued, have not earned such a reward.
I think it credits Obama with too much (wicked) understanding to suggest that his real motivation is to destroy contract law. Rather, he thinks discretionary bonuses should be earned, and believes it pragmatic to override these particular contractual bonuses by his 'better' judgment. These contracts are pretty poor business thinking in many respects (unconditional bonuses are not bonuses), but should not be illegal.
I suggest that improper terminology, prior government interventions (handouts) , and political pragmatism may be opening a crack in the economic principle of the inviolable contract, but I doubt the crack is a *principled* attack on contracts.
There is another element to the government's response to the AIG bonuses that is troubling as well. The government itself, and in particular Congress, has stirred up popular anger against AIG-FP, and has encouraged mob action (ACORN paid for busses to bring protestors to the homes of AIG executives)in order to deflect attention from the sins of Chris Dodd and Barney Frank. Also, the Attorneys General of New York and Connecticut have promised to use the tactic of "name and shame" those execs who wish to keep their rightfully earned bonuses. They, the supposed guardians of the law in their respective states not want to us mob-rule tactics in place of law.
And we are only a little while into this wild ride into socialism.
[...] perspective. Rebecca Knapp posted her first entry after a three year hiatus from the site on AIG’s bonuses and how they should be allowed, since they were promised in a contract and contracts are legally [...]
The retention contracts issued by AIG are similar to those contracts made between manufacturers and advertisers. Advertisers agree only to market a product if the manufacturer agrees to sign a contract promising to pay the advertiser, regardless of whether the product is a success or a flop.
Business retention contracts work the same way. They are meant to pay individuals ex ante in order to attract the best and the brighest.
[...] continuing AIG controversy is a textbook example of blaming the market for the sins of government. Rather than allowing a [...]
I guess we now know why AIG, of all failed companies, was picked to receive government loot.
"Rule of Law", is what distinguishes a civilized nation from a dictatorial regime or other despicably mutilated versions of a "Attila", whose interaction with other men is solely by brute "Force" coupled with the shallow concept formation and his "for the moment decisions" without concern for the consequences or outcome following the actions.