Lawrence Cunningham in the NY Times:
If the government is serious about finding a legitimate basis for abrogating these payments, officials must look to basic legal principles. And if A.I.G. is serious that it is legally bound to pay these bonuses, it must do more than say nonpayment would expose it to damages or penalties. Nor is it enough to invoke the sanctity of contracts, because our legal and business system recognizes plenty of valid excuses from contractual duty and even justification for breaching.
And look what just happened in California:
In the first ruling of its kind, a bankruptcy judge held the city of Vallejo, Calif. has the authority to void its existing union contracts in its effort to reorganize, holding public workers do not enjoy the same protections Congress gave union workers at private companies.
Municipal bankruptcy is so rare that no judge had yet ruled on whether Congressional reforms in the 1990s that required companies to provide worker protections before attempting to dissolve union contracts also applied to public workers’ union contracts.
Not sure why Liddy wants to pretend his contractual obligations are so sacred.
aimai
Excellent cross referencing by baloon juice. It was a good essay in the Times. We need more like that.
aimai
Corner Stone
I think we all know why he’s pretending these contracts are sacred.
It’s all kabuki.
Just like the Republicans scream about the 2% of a spending bill that could arguably be considered "pork", and are desperate to distract us from looking at the other 98% – we’re hearing a bunch of fauxrage from congresspeople over these bonii when we’ve given AIG $170B.
Kabuki.
Wile E. Quixote
Someone should have McMegan read this. She’s been had her panties in a twist and has been hyperventilating for months now about how we can’t really punish anyone at any of the banks receiving bailout funds because, well, because she’s the world’s tallest female econoblogger and because shut up damnit.
I think that at the very least a certain amount of shame should be attached to these bonuses. If they are paid then everyone who received them should be required to testify before congress as to exactly why they feel that they deserve this money. Also the names and addresses of the employees receiving bonuses, along with the amount of the bonuses, should be made a matter of public record. If the idiots at AIG don’t like it tough shit, they’re public employees now and public salaries are a matter of public record.
thomas
The bonuses are public money. In Illinois every public employee has his name and pay (actually it’s the pay scale, not the exact pay) published annually, along with the municipal budget. If these thieves want the public’s $$ they should dance to the tune.
Screw that. Don’t give them a dime.
Is it only in finance (if that’s what you wanna call it) that bonuses are guaranteed? I thought bonuses were given for successful work. That’s how it happens where I work.
Dennis-SGMM
Rep. Brad Sherman (D-California) just dropped a bomb on AIG. He made the point that AIG’s insurance and banking arms would actually be in better shape if AIG went into receivership and those two arms were spun off. Both are sound and healthy. Rep. Sherman suggested that the real reason for AIG’s resistance to going into receivership is that the company is hoping to siphon off money from its two healthy components to shore up its financial products component.
Makes sense to me.
Rick Taylor
The difference between the AIG bonuses and the union contracts is that the AIG contracts are for work that was already completed, while presumably the union contracts are for future work.
Back at the beginning of 2008, the AIG management decided that it needed to keep employees from jumping ship. So to entice them to stay, it made promises of millions of dollars to employees if they would continue to work for a certain time period. The employees in question did the work, and now presumably they expect the money they were promised in return for the work they actually did.
Many have pointed out that if AIG had gone bankrupt, employees wouldn’t have gotten any bonus money. I’m not sure if that’s even entirely true; presumably it would have gone to court and they would have had to have gotten in line with AIG’s other creditors; I have no idea what their priority would have been. But regardless, AIG did not go bankrupt, and that is fundamentally the problem.
If understand things correctly, then under the law AIG can be a functioning company, or it can be bankrupt. The government can’t take it into receivership the way it can a bank, there’s no legal mechanism for it. There is no legal framework outlining the obligations of a company that is in business only because it’s being fueled with hundreds of billions of tax payer dollars. We need to make one, but that’s not easy, and if considering Republicans have been calling Obama socialist for allowing the Bush tax cuts to expire, can you imagine how they’d respond if the administration pushed for a framework that allowed it to take control of failing financial institutions?
At the same time, the administration has taken pains to avoid admitting AIG and other companies have been effectively nationalized. They’ve made philosophical statements about how things function better under private ownership, and how America is different than Sweden. Geitner refused to refer to AIG as a zombie institution, and tries to push the fiction that these are viable companies we are giving temporary aid to. As a result, AIG is standing behind all of its contractual obligations, not just those due to its employees, as we would expect any solvent company to do. It’s paying billions of dollars to companies who bought insurance on risky securities: 100%. Companies that bought toxic waste and ensured it with uncollateralized guarantees are being paid in full, and I find that to be far more scandalous and certainly far more expensive than the bonuses. Until recently, they wouldn’t even tell us where those tens of billions of dollars were going to. Perhaps there are speculators out there who bought insurance on securities they didn’t own, essentially betting the toxic paper would tank, who have made billions out of this economic disaster? I hope that’s not happening, but I have no confidence in Geitner’s oversight. Wouldn’t AIG have to pay off such speculators betting on an economic meltdown just like it honored its bonuses to employees? A contract is a contract.
This is what scares me about the path we’ve chosen. Instead of taking over and reorganizing failed institutions, we’re funneling money into them, and keeping up the pretense they’re still viable businesses. If they’re still viable businesses, then they’re on the hook for the bad decisions they’ve made, including bonuses for work already completed or guarantees on toxic derivatives. The current scandal is a direct result of this philosophy, disdaining and disavowing any hint of nationalization, trying to prop up the system and hope the parties do what we want. The bonuses have gotten peoples’ blood boiling, but its peanuts compared to what could be going out there. We desperately need to open up the books and comb over all of AIG’s financial dealings; who are they giving money to and why, and is this how we want it spent? Otherwise the next scandal will dwarf the current one.
Cap'n Phealy
I used to think it was cool when my hometown made the national media. Now, not so much. I think I liked it better when we were known for churning out third-tier rap.
Rick Taylor
@Dennis-SGMM:
Is it possible for AIG to go into receivership? I was under the impression that mechanism was limited to banks. I’ve heard the argument that AIG ought to have been split up as you describe, and the counter-argument this would be illegal, that creditors who did business with AIGFP could sue. In general a business can’t say, oh I’m sorry, we can’t pay you, you were doing business with what we’ve now decided is the insolvent branch of our company, while the solvent branch doesn’t have to honor it’s obligations to you.
Certainly splitting up AIG sounds like the right decision if it’s legal, and if it’s not legal arguably congress should pass laws to create a framework for it (again, expect Republicans to scream socialism).
These are just my opinions. I don’t really know what I’m talking about, and would love to be corrected by those who do.
someguy
Section 7001 of the stimulus bill, HR-1, encoded at 12 U.S.C. sec. 5221, states that executives of corporations that receive TARP money shall not receive bonuses, except that:
12 U.S.C. sec. 5221(b)(3)(D)(iii). In other words, TARP didn’t abrogate bonuses required under contract and specifically made them enforceable, barring a contrary ruling by the Secretary of the Treasury. AIG could have chosen not to pay the bonuses, but absent a Geithner decision finding certain employment contracts not valid the contractual obligations would probably have been enforceable in court under basic employment contract law and this section specifically contemplating payment of bonuses where contractually obligated. Which specific AIG bonuses were contractually obligated is not clear, though payment to partners in financial firms is often more about nominal salary combined with big contractual bonuses and incentives, than about high base salary.
Sen. Dodd drafted the section initially but denies putting it in the bill so it’s probably a bit of Republican mischief by one of the three who voted for the bill and conferenced on it.
Rick Taylor
@Dennis-SGMM:
It doesn’t make sense to me. Except for the people who actually work at AIGFP, I imagine everyone at AIG would love to have that millstone stricken from their neck.
GR
I think Cunningham’s comments are fair. The government will set a bad precedent by finding an ad-hoc way to abrogate these bonuses, even with the caveat that AIG is essentially publically-owned at this point.
But then again, AIG arguing that they must honor the bonus payouts is equivalent to someone showing up to a restaurant, finding that is has burned down, and still demanding that they honor his 8:30 reservation and cook up the house special.
Of course, in this case, the person demanding service is the same person who burned down the restaurant earlier that day.
Brachiator
@Dennis-SGMM:
Sherm is all over the place on this issue. Yesterday on a radio interview on Southern California AM talk station, KFI, Sherman was evasive about why Democrats didn’t exclude excessive bonuses and compensation when finalizing the stimulus bill. He hinted that the banks were just too … manly … for any Democrat to resist.
This is starting to sound like a Monty Python routine:
Every contract’s sacred.
Every contract’s great.
If a contract’s broken,
God gets quite irate.
And yeah, this is making for Grand Kabuki. Democrats who let the banks play Jedi mind tricks on them are now wailing about the AIG bonuses. Republicans have been handed an issue which is right up their ideological alley, and can harp on their "principles" based on the simplistic bumper-sticker notion of the sacredness of contracts.
And most despicable of all, both the GOP and the Democrats can both scapegoat Treasury Secretary Geithner as being too unsteady to remain in his post. Because you see, boys and girls, ultimately both the Democrats and the Republicans in the Congress want to weaken Obama, and make it easier to make him more … co-operative.
Here endeth the lesson.
Rick Taylor
@someguy:
Or Democratic mischief. Recall the administration originally argued against restrictions on executive compensation, as it might discourage companies from accepting government aid.
This has been discussed at Jane Hamsher’s, Glenn Greenwald’s, and Digby’s.
Brachiator
@Rick Taylor:
Yep, Greenwald is all over it:
The question remains why any of these people are still playing Beltway politics, fiddling while the economic infrastructure burns.
Rick Taylor
@Brachiator:
To me it seems "major push" is overstating it; at least as far as the administration’s role is concerned. All I’ve seen is a single quote without context from an administration official, that only implicates Dodd if you read it in a certain way. Of course Rush and other conservatives have gone to town with it, but I’m not convinced this was intentional on the administrations part.
But it’s certainly the case that the administration was originally leery of limiting executive compensation retroactively, that these bonuses have been known about for a long while, and that the outrage over them at this point is disingenuous.
someguy
Not sure why Liddy wants to pretend his contractual obligations are so sacred.
Because, assuming the payments were contractual and Geithner didn’t hold the contracts invalid, then AIG was going to have to pay out anyway. If the contracts were valid, then they were made doubly enforceable by the law. So the choice was 1) Pay out the contract amounts, or, 2) Don’t pay out, lose in court, then pay out the contract amounts plus exhorbitant legal fees. Breech would have been a very emotionally satisfying but fiscally unsound move.
TheHatOnMyCat
@Corner Stone:
What you said. We are talking about bonuses that represent such a tiny sliver of the money dump to AIG and other financial craters, nobody in his right mind would care.
But it isn’t about right minds, or clarity, or addressing real problems, it’s about theater, and who can steal the scene.
It’s "What did Obama Know?" versus "Tax Them at 100%!"
Bunch of crap, and a disservice to the country. What matters is whether credit will flow to the small business community and keep the unemployment rate below 15% in the next year. If that rate peaks at 10-12% and then goes down, consider yourself saved by bold action. If the GOP and the idiots and the cable tv people have their way, it will rise to 15% and maybe higher.
At this point, I seriously believe that the cable tv cabal thinks that AIG Outrage is a tv show, and that a depression would be good for ratings.
Mnemosyne
You’d be surprised — that’s exactly the tack that Pacific Gas & Electric took during the bogus electricity "shortage" here in California. They took all of the massive profits they made off California, funneled them to other divisions, and then told the state that they had to get a bailout because they were bankrupt.
All totally legal, of course.
Thoughtcrime
From TPM http://www.talkingpointsmemo.com/archives/2009/03/looking_further.php :
To give a little more background, a mix of congressional testimony, SEC filings and news reports suggest that there were concerns and suspicions going back at least to 2005 that Joe Cassano wasn’t letting AIG corporate or anyone else look at his divisions books. Remember, this is the divisions where the CDSs were written, the ones that played substantial role in triggering the global financial crisis. The auditor they installed to find out what was going on was shut out. Their accountancy, PricewaterhouseCoopers, was disturbed by what it saw and felt obliged to note what was happening in SEC filings. Employment and compensation contracts aren’t the issue here. That is a distraction. Think more in terms of RICO. Let us know more about the on-going criminal probe.
–Josh Marshall
Brachiator
@Rick Taylor:
Yesterday, I kept hearing very detailed and specific allegations of how Dodd, as Chair of the Senate Banking Committee, had deliberately inserted language into the Stimulus Bill protecting potential bonus pay. There was not a single mention about Treasury Department concerns. Later, when Brad Sherman was interviewed about the AIG bonus mess, he also pointed fingers at Dodd. GOP hacks, on the other hand, kept bloviating over the sacred nature of contracts.
While Team Obama has deftly outplayed the hapless Republicans, the White House is in turn getting out-hustled by the financial industry, and some of Obama’s supposed economic superstars are beginning to look lke rank amateurs.
Rick Taylor
@Brachiator:
That is disturbing. One of the things I hated about the Republican administration was its Orwellian habit of rewriting recent history. This isn’t on the level of "Saddam wouldn’t let the inspectors in," but it makes my stomach turn.
GOP hacks are trying to have it ways, bloviating about the sacredness of contracts while simultaneously attacking Democrats for giving taxpayer dollars away. Greenwald linked to an audio of Rush attacking Dodd on this issue.
Rick Taylor
@Brachiator:
At this point, he’s hardly even playing. Geitner and Summers are on the financial industries side, and those who condemned the administration for selecting wall street insiders to police wall street have so far been fully vindicated.
bob h
You just know that in the fine print of every contract there an exit clause which gives one party the right to abrogate based on radically changed economic circumstances. Circumstances like government receivership.