Breaking bad contracts

Will Bunch yesterday on the AIG Theft-By-Bonus obscenity:

This will go down as the weekend that America collectively screamed "AIGGGGG!!!!!" For a long time, outrage over the multi-multi-billion dollar black hole that was once a powerful insurance company AIG simmered rather than boiled because a) other bailout recipients like Citi and Bank of America are more visible and b) most average people have a hard time wrapping themselves around what AIG did (although blogger John Marshall has been quite good -- as always -- on this.

But news of large bonuses to AIG execs -- especially in the unit that lost all the dough -- has changed that. Now everyone is talking AIG...

The new CEO of AIG says he had no choice but to pay the bonuses.  A contract is a contract, he says.

Jane Hamsher will have none of that:

The White House is worried about backlash over AIG's payout of $450 million in bonuses to the executives in its high flying Financial Services Group, the out-of-control derivatives trading arm that looted the company, destroyed its stock and contracted for huge bonuses even after they saw the risk of collapse.

Robert Reich says that the administration's failure to stop this is a sign that "our democracy is seriously broken," and it is. When the story was initially leaked by a "senior government official," this was the excuse for the administration's impotence in what can only be characterized as a grand theft:

The administration official said the Treasury Department did its own legal analysis and concluded that those contracts could not be broken.

This is difficult to accept at face value -- there would be no AIG if the US government wasn't shoveling cash into it at a furious pace, and the idea we have no leverage in the situation is absurd. It becomes even more risible when Larry Summers jumps into the fray:

We are a country of law. There are contracts. The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system.

As Glenn Greenwald notes, this argument is patently absurd. We forced auto workers to break their contracts with the US automakers and accept wage cuts as a condition of receiving TARP funds.

But this isn't quite right, is it?  Another way to say this is that the contracts weren't broken, they were re-negotiated.  The parties most affected agreed to set aside the old contracts and replace them with new ones.  They were forced to do this as a condition of accepting the bailout.  If the UAW had refused to go along, the automakers would not have gotten the money.   The automakers and the autoworkers came up with a new contract between each other and together entered into another contract with the Government.

As Jane goes on to explain, the scandal of the banking industry bailout, and the reason it shouldn't have gotten through Congress, is that there were no conditions.  No contract.  Congress handed over the money to Hank Paulson and said, "Make them promise they'll use these billions to save the economy not to line their own pockets," and Paulson snorted and said, "Yeah, right."  Then he went to the banksters and said, "Promise you'll use this money to save the economy not line your own pockets," and the banksters snorted and said, "Yeah, right," and crossed their fingers, and Paulson backed the armored cars up to their doors and said, "Dig in!"

Individual autoworkers have a right to feel they've been played for suckers, but collectively they're not squawking because they have a contract with the UAW that allows the Union to negotiate, and re-negotiate, contracts on their behalf.  There is no United Thieves in Corner Offices Union.  AIG had contracts with of individuals, each and every one of whom could sue if AIG tries to make them cough up their bonuses.  So, let them, right? 

The Government can, and as I read it I think is sort of hoping out loud, that AIG will do just that.  But Tim Geithner's floundering around has a lot to do with the fact that he can't convince the banksters to agree to any serious conditions for taking the money.  He can't get a contract.

Josh Marshall:

Secretary Geithner found out about the bonuses. He told AIG CEO Edward Liddy it wouldn't fly. And Liddy, in a curiously imperial letter, tells Geithner that much as he is pained by the situation -- to blow it out his ass.

AIG, like all the other beneficiaries of the bail-out, figures that the Government can't really do anything.  The money was handed over without strings as a gift.

Or a gift certificate.

If you give me a fifty-dollar gift certificate from Barnes and Noble and I go blow it all on mysteries and romances and Venti lattes, you can't come ask for it back on the grounds you were hoping I'd use it to buy Will Bunch's book and the new Cheever bio.

This seems to be what Larry Summers is saying.  Ain't nuthin we can do.

Roger Simon thinks there is.  Time to send in the lawyers, he argues, and he doesn't mean contract law specialists.  He means prosecutors.

Elana Shor reports that Congressman Brad Sherman, a senior Democrat on the House Finance Committee who voted against the bailout, says that Congress wasn't completely stupid or negligent.  There's a provision that gives the Treasury power to stop recipients from paying out excessive bonuses.  But Paulson didn't act on it, and Geithner was slow to and so, says Sherman, the Government missed its chance.  This doesn't mean there ain't nuthin we can do.  It just makes doing it harder.

The California Democrat believes that the solution to AIG's woes is outright government receivership...

But there's a but:

Sherman also counseled wariness, as the nation gives in to expend anger over AIG's bonuses and largely ignores the weekend disclosure of the large banks who benefited because of their status as AIG counterparties in credit default swaps deals.

"Arguably, this thing with bonuses is a red herring they're throwing at us [to distract from what AIG] did with the $170 billion" they've received from the U.S. government, Sherman said. "The bonuses are chump change compared with what's going to the uninsured counterparties."

Maybe this explains why the President, despite the stern lecture he delivered yesterday, doesn't really seem all that worked up about the bonuses.  As usual, he's looking at the problem as a whole.  Maybe.

Here's the problem, though, if that's the case.  The bonuses are symbolic of the problem as a whole.

Outside of Wall Street, where the rest of us work, bonuses are rewards for work well done.  You get a bonus for meeting sales goals or closing a big deal or coming up with a idea that saves the company a lot of money.  You get a bonus when you do your job better than it needs to be done.  And out here, bosses look for excuses not to pay bonuses.  One of the ironies of doing your job better than it needs to be done is that you automatically redefine the job in your boss's head so that from here on out the extra and better work you did last year is her idea of the minimum expected of you this year.  Exceed your sales goals this month and you find out that now your Christmas bonus depends on you exceeding next month what you just exceeded.

That's at workplaces where they give bonuses.

For a lot of people their yearly bonus is that they get to keep their job.

It's hard for the rest of us to swallow that AIG has a contractual obligation to pay bonuses for "running the company into the ground" and "blowing big gaping holes in the foundations of the U.S. economy."

The bonuses aren't a separate issue.  They are the most easily visualized act of theft in what is more and more looking like a gigantic swindle.

Josh Marshall again:

We're collectively taking our country's future in our hands, spending vast sums of money to keep these companies from suffering the consequences of their own folly and (in many cases) criminality. And in return we're receiving cavalier dictates about pay-outs and bonuses from executives who by any reasonable measure work for us -- dictates we promptly accede to. There's a beggars can't be choosers problem there. And the disconnect is so mighty that it fuels the impression that the whole enterprise is not what it seems, not what we've been told, that in addition to picking up the tab we're being played for fools.

If the President doesn't want to look like he's putting his hands up for these thugs, he needs to follow the example of New York State Attorney General Andrew.

People need to go to jail.  At the very least, says Will Bunch:

Fire all the morons at AIG, Citygroup, B of A, et cetera, who got us into this mess, or they don't get a dime of our tax dollars. It might make for a few awkward moments down at the Capitol Grille, but it simply needs to be done.

___________________

"The real scandal," says Robert Reich, "is that even at this late date, even in a new administration dedicated to doing it all differently, Americans still have so little say over what is happening with our money."

Comments

[Kevin Wolf]

I'm not sure I can comment on this whole mess without completely losing my shit. I left a comment over at Shakesville in an open thread re AIG and, as is clear to anybody reading it, my blood pressure was surely rising.

[Susan]

I'd be inclined to argue that this is yet another reason we need confiscatory income taxes on gigantic incomes. Back to the glorious socialist days of Ike when the top rate was over 90%, and fix it so these monsters can't weasel their incomes past the IRS by calling it "capital gains" or some other name. Clean them out, shake them down, and when they die collect 90% of what they leave.

And one more thing - we now own 80% of AIG. That means we own the company. What in the hell is CEO Barack Obama waiting for? Fire them all, strip them, throw them and their families out in the streets.

Yes, I'm that angry. We have a country with the worst social safety net in the developed world and here we are throwing money at sociopaths.

[Linkmeister]

It's a really skewed compensation structure that has year-end "bonuses" as the bulk of an employee's pay. Apparently it's a holdover from the time when investment banks were partnerships and the firm's partners shared in the income or loss of the partnership, which couldn't be determined till year's end.

I submit that once they became publicly-held firms their boards should have redesigned the system. Ex post facto argument, I know, and not relevant to right now, but should any of us be in such a position in the future, let's all bear it in mind.

[Willie]

It's even more dismal:

"A.I.G. employees concocted complex derivatives that then wormed their way through the global financial system. If they leave -- the buzz on Wall Street is that some have, and more are ready to -- they might simply turn around and trade against A.I.G.'s book. Why not? They know how bad it is. They built it.

So as unpalatable as it seems, taxpayers need to keep some of these brainiacs in their seats, if only to prevent them from turning against the company. In the end, we may actually be better off if they can figure out how to unwind these tricky investments."

http://www.nytimes.com/2009/03/17/business/17sorkin.html?_r=2&hp

[Barb]

FALLOUT GROWS: Those who voted for the stimulus supported the clause to protect the AIG's bonuses. Obama's Own Stimulus Bill Protects the AIG Bonuses He Now Condemns —

http://www.butasforme.com/2009/03/17/obamas-stimulus-bill-explicitly-grants-aig-the-legal-right-to-hand-out-bonuses/

[Chris The Cop]

Barb - I went to your link and it is absolutley astounding.

I only hope the language cited ("shall not be construed to prohibit any bonus payment required to be paid") can also be 'construed' to mean that bonuses are not required to be handed out. 73 AIG executives got $1 milion + in bonuses????? (per Andrew Cuomo) Are ya kiddin' me?

I thought it would take Democrats at least a couple months to show they were as fiscally irresponsible (and corrupt) as Republicans, but hey, I didn't think Buffalo would lose four straight Super Bowls, eiher.

[Apostate]

Disgraceful. Worse than that. There are no words. Crooks, the bloody lot of them. We need a revolution and their backs to the wall.

[sfmike]

The "financial services industry" was essentially taken over by organized crime quite some time ago so I'm not quite sure why everyone is so surprised by this behavior. They also own just about everyone in politics including my local, supposedly liberal representatives Nancy Pelosi and Dianne Feinstein. It's going to be fascinating (and frightening) watching how this all shakes out.