The AIG bonuses: what matters more than what’s legal?


President Barack Obama’s worst moment on yesterday’s Jay Leno show came, not when he made that bowling gaffe, but when he airily suggested a distinction between what’s legal and what’s moral.

In case you didn’t catch it, here’s what the President said about the decision to honour what were evidently legally binding agreements to pay bonuses to AIG employees:

“In fairness, I think that part of the calculation they were making was the way the contracts were written said, if you don’t pay us immediately, then we can claim three times as much as we were owed under the bonuses.

“And so they were making a legal calculation, and their legal judgment was not necessarily wrong. But there’s a moral and an ethical aspect to this, as well. And I think that’s what has gotten everybody so fired up.”

In other words, withholding the bonuses would have been an unlawful violation of contract rights, and so carried with it a penalty. Does Obama seriously believe some nebulous “moral and ethical” considerations might trump the rule of law in this case?

His chief economics adviser, Larry Summers, apparently has a firmer grasp of fundamental principles. Here’s what Summers said when was pressed on the AIG bonus mess by George Stephanopoulos on ABC’s This Week: “We are a country of law. There are contracts. The government cannot just abrogate contracts.”

You would think that point is beyond dispute. But Summers was commenting way back on March 15. Since then, public outrage has driven every American politician I’ve heard pronounce on the issue, including the President, to choose rhetoric somewhere on the continuum that runs from empty pandering, through cheap populism, to ugly demagoguery.

It’s been a disgraceful display. No matter how hard it is to face angry people, elected politicians in democracies must first affirm the law.

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The AIG bonuses: what matters more than what’s legal?

  1. John, I agree with your logic wholeheartedly. This is my position as well. We sat through 8 years of toleration for bending (and breaking?) the law. People were outraged. The Patriot Act! “Unconstitutional!” they cried. This is no different.

    As president, I would have said “We are a country of law. There are contracts. The government cannot just abrogate contracts. But I find this reprehensible. As President, I am calling on all AIG bonus recipients: Do the right thing. Return your bonus to the people of the United States.”

    • Abrogate contracts ? Air traffic controllers ?

    • As president, I would have said: “Brace for impact.”

  2. I’m not sure I understand the correct interpretation for “bonus”
    One would assume that “bonus” means: an extra payment for value received from an employee above and beyond the ordinary expectations for that employee.
    Question 1: what extra value did these AIG employees give?

    If my interpretation “for bonus” is incorrect, what is AIG’s interpretation? What is the wording of these legally binding contracts. Would those contracts be enforcable if AIG went bankrupt??

    • “But so far, no one’s stopping AIG from paying millions to some employees in its new retention program. The company has told 168 employees they’ll receive between $92,500 and $4 million per individual if they stay with the company for one year.” CBS, Dec 11 ’08

  3. Ordinarily I would agree with you that contracts should be left alone but once your firm has been nationalized than all bets are off, as far as I am concerned. And it’s all well and good for government to argue that contracts are sacrosanct but it doesn’t hold up after they made UAW rewrite their contracts and cramdowns are on their way. This is just bankers helping bankers and the backlash is coming.

    For Obama to be talking about “moral and an ethical aspect” is a bit cheeky when it was his stimulus bill that enabled these bonuses to be paid in the first place. Obama and Congress could have stopped payment a few times but refused and they are only taking the populist route now because people are pissed and the pols are trying to save their own arses.

    • But… all bets aren’t off. Governments and government owned entities are still responsible for the contracts they sign.

      If you want to abrogate contracts, file for bankruptcy. It gives you the legal entitlement to void your obligations. The government decided that it was more important to take over than to let these companies go bankrupt and restructure. It also has to live with the decisions it makes.

      Of course, XKCD has better perspective on this: http://www.xkcd.com/558/

      Also, I already feel foolish for even posting this: http://www.xkcd.com/386/

  4. For those who did not go to law school and never took a contract law, there is something that Courts can take into consideration and guess what, it has to do with moral, ethical and social arguments.
    It’s not outside the law and I’m pretty sure that as a lawyer, President Obama is fully aware of this.
    In the meantime, people should perhaps go to law school, get a good education and find out the many many ways of interpreting contracts. Or, for those who can’t afford it and don’t have the brains for it, pick up Mr. Waddam’s book, the Law of Contracts, as a starting point.

    • How about those that don’t have the time to spend several years studying contract law?

    • If you are arguing that the moral, ethical and social arguments Obama supports in this instance are going to carry the day in contract law, I suggest you revisit the sources you’ve just mentioned.

      Unless there’s something missing from the coverage of this issue (which isn’t impossible), contract law itself won’t save the bonuses from being paid out. But if the lawmakers really want to stop them, they can probably draft a law which would retroactively make the transactions illegal and the amount forfeitable. It’s very extreme and it isn’t usually done (with good reason), but I strongly suspect that with carefully worded drafting it’s possible.

      • For Heaven’s sake, this is 21st America, not 18th C England. If the USG wants to get the money back, all they have to do is kidnap the AIG executives off the street and hold them incommunicado in the brig of an aircraft carrier. So much more efficient than a lot of wrangling in the courts.

        • As always, Mr. Mitchell cuts directly to the chase!

          • I can’t even believe this is a discussion. Obviously, the contract must be honoured in a country that values the rule of law. As Jack cleverly points out, that is a debatable point in this case with the whole torture stuff. But let us assume for the moment that the United States is a country that values the rule of law, therefore the contracts must stand. That only means the executives get the bonuses. What happens immediately after they are paid is now wide open to possibility. If a law can’t be drafted that requires all executives of any corporate entity receiving tax dollars to repay any and all bonuses received within two? three? five? years of the government cash injection, how about a class-action lawsuit? How about firing for cause, thereby doing away with the cushy pensions? If none of those avenues work, how about a reporter publishing names, job descriptions and bonus amounts? (I don’t advocate that unless said executives thumb their noses at the other avenues–have you seen the increase in gun purchases?)

          • We don’t enforce contracts in courts because of the rule of law, we do it for business efficacy. If the law allows you to break contracts in certain circumstances, the rule of law isn’t threatened. The only question is as to circumstances.

  5. Seems to me that while the employees had a contractual right to the bonus, it was wrong for them to take it. Their firm failed utterly, and only continues to exist because the government deemed it would be too harmful to the rest of the economy to allow it to fail. Perhaps it should have been allowed to fail, with the government instead choosing which obligations to take on.

  6. Oh please. When your failing business is being propped up by billions of tax dollars, it’s time to readjust your expectations. If it weren’t for the unwilling generosity of the taxpayer, all of these people would be looking for new jobs. And I hear Wall Street isn’t exactly the best place to be seeking employment these days.

    So, yeah, if the people’s representatives decide to tax those bonuses at 100%, that’s legal, too.

    Besides, who made this argument for the auto workers? There were contracts there, too. But it was made absolutely clear that if they weren’t willing to make concessions, their employers’ businesses would be left to fail.

  7. If we are to say that morality should apply to contracts, should it not apply legislating as well?
    If it is not illegal (unconstitutional), then it should be immoral to pass ad hominem laws against citizens of your country that have broken no laws.

    I know their actions are distasteful, and that people are rightly angered. I am angered as well. But since when is anger a an appropriate basis for changes to a tax code?

    It is worrying how quickly and completely this gripped the lower house. It does feel a bit like 2001, where anger is the new fear.

    • That’s an interesting point, should laws be made to prevent heretofore legal actions after a specific example of distateful behaviour comes to light. I think that probably happens all the time, doesn’t it? We don’t know we need a law that states, say, grabbing hold of a car’s bumper while skateboarding down a road is illegal, until Marty tries it and gets into a serious accident due to excessive speed. In fact, don’t they often name new laws after victims?

      Anger is as appropriate as any emotion to change tax codes, I would think. And there’s a lot of emotion in changing tax codes! It would be a nice change from the emotion of greed, at any rate.

      I think it’s mind-boggling that, as Dave says, only blue collar workers must be made to see the light. Presumably, the politicians involved just assumed white-collar workers wouldn’t need to be told.

      • I agree that blue collar workers have been treated differently by comparison. I don’t think that it is right. I just think that the responsibility for that decision should fall on the elected members and especially committee members.

        Instead of defending an unpopular decision – to move on financial rescues quickly, but slowly structuring the auto bailout, congress is attempting to sidestep the fact that the decisions made leave a bitter aftertaste.

        Marty’s law would be fine. It just unlikely that it would apply to Marty. All future skitchin’ could be dealt with using the Marty amendment though.

        • I think there’s plenty of anger to go around, and the politicians are well deserving of their fair share of it. But if I hear you correctly, everyone else should pay for this mess, except for the ones who not only caused it, but profited by it as well. I think that’s ridiculous.

          The only reason Marty isn’t charged with Marty’s Law is because he is either dead, paralysed, or missing several limbs. He has learned his lesson and the law would have no effect. That is not the case here, and there’s no reason why the law can’t be made to effect these greedy imbeciles. Here’s a better example. The laws against terrorists. There was a bunch of new legislation passed that increased the powers of the government after 9/11, right? So wouldn’t it have been painfully stupid not to use these new laws to go after the terrorists who planned the airplane attacks? That’s kind of what your advocating here.

          • But the new legislation after 9/11 was designed to prevent future terrorist acts by identifying and detaining possible suspects. This legislation, not having been in place before 9/11, could not have been used to prevent that event. Had any of the 9/11 terrorists survived the attacks, they would have been charged with crimes already on the books: conspiracy, hijacking, murder, and so forth.

          • True, but some of the awesome powers the government gave itself (rightly or wrongly) was used to detain and question others who may or may not have been a part of the 9/11 conspiracy. That is what I’m referring to. Anyway, for me its enough of a precedent to go after the actual AIG bonuses (and any bank bonuses that come to light). I also think it would be more than humorous if these executives actually try the “morality” argument in a bid to fight any legislation that is passed. But, I would be happier if this were made a criminal offence, subject to fine and imprisonment. Because it is criminal, in my view, to so abrogate one’s fiduciary duty like that. Oh, fiduciary duty is obsolete now, is it? Pity.

          • Perhaps they could go after the AIG bonuses under ‘proceeds of crime’ legislation?

  8. If I understand this correctly, the people who have been paid the bonuese are the same ones who got the company into the mess. The company must pay them a ‘bonus’ to stay around and fix the mess. Stupid me. I should have used this technique with my kids. It would have been so much easier than trying to explain the difference between right and wrong.

    • An interesting aspect of that reasoning is that 11 of the ‘retention’ bonus recipients had already left the company, but they still received their ‘retention’ bonuses. It probably wouldn’t have taken your kids long to figure that one out.

  9. You poor fools. Everything the government does is “legal”. Want to justify an act outrageous act of theft or murder? Pass a law. It’s easy – just write whatever you want on a piece of paper, ask your friends for a show of hands, and then say that it’s “the people’s will”.

    Morality is another thing entirely. It mostly involves not confiscating billions dollars from complete strangers, awarding it to yourself and your friends, and then claiming that to do so – as long as you have a piece a paper authorizing it – is not only fine and just, but is eminently practical and universally beneficial.

  10. Two points that are of interest to me, on either side of the “honour the contracts” / “stop bonuses for failure” divide.

    One, as has been pointed out, it’s ludicrous to argue that the AIG contracts are sacrosanct, while forcing auto companies to break contracts with their workers. The message there would be “White collar contracts are holy. Blue collar contracts, not so much”.

    Second though, it’s worth pointing out that in the case of SOME (a small minority to be sure, but some) of these AIG bonus cases we’re talking about people who agreed to work for annual salaries of $1. Of course, others also accepted annual salaries higher than $1, but still far below what they could actually command for their services, because they knew their bonuses would make up the difference. So, it’s worth pointing out that some of these bonuses aren’t just “prizes” on top of excellent salaries. For some people, cancelling their whole bonus means they get a cheque for $1 for their last year’s work. Even people who did a bad job probably don’t deserve that. When you hear people saying “this is how Wall Street works” of course your reaction is to say “that’s the problem!”. And it is. But “this is how Wall Street works” is also meant to convey to the public that for many on Wall Street, eliminating their “bonuses” means eliminating 50%, 60%, even 80% or more of their income. I don’t think even the automobile unions were asked to have their employees take a 50% or more pay cut.

    It’s worth keeping in mind too, that a big focus on the $165-210 million in bonuses at AIG is missing the forest for the trees. Remember that Merrill Lynch gave out over $2 Billion (with a B) in bonuses right before Christmas to get them off their books before they were sold to Bank of America.

  11. What matters more than what’s “legal” in this situation is what is fair and what is just. In a situation where the financial system and the world economy have been terribly damaged you do not give huge rewards to people were central to causing all this damage, whether or not the rewards are “legal”. Remember that AIG is being propped up by taxpayer dollars. Is it “legal” for low wage taxpayers to see their tax dollars used to pay these bonuses? Maybe it is “legal” but is it just or fair?

    I think the bigger discussion later on will be about the gigantic levels of compensation to the executive class and the players on Wall Street and Bay Street and the perverse system of incentives that caused this catastrophe.

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