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The Sanctity of AIG's Contracts
Larry Summers, Sunday, on AIG's payment of executive bonuses:
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.
Associated Press, February 18, 2009:
The United Auto Workers' deal with Detroit's three automakers limits overtime, changes work rules, cuts lump-sum cash bonuses and gets rid of cost-of-living pay raises to help reduce the companies' labor costs, people briefed on the agreement said today.
The UAW announced Tuesday that it reached the tentative agreement with General Motors Corp., Chrysler LLC and Ford Motor Co. over contract concessions, as GM and Chrysler sent plans to the Treasury Department asking for a total of $39 billion in government financing to help them survive.
Concessions with the union are a condition of the $17.4 billion in government loans that the automakers have received so far.
Apparently, the supreme sanctity of employment contracts applies only to some types of employees but not others. Either way, the Obama administration's claim that nothing could be done about the AIG bonuses because AIG has solid, sacred contractual commitments to pay them is, for so many reasons, absurd on its face.
As any lawyer knows, there are few things more common - or easier -- than finding legal arguments that call into question the meaning and validity of contracts. Every day, commercial courts are filled with litigations between parties to seemingly clear-cut agreements. Particularly in circumstances as extreme as these, there are a litany of arguments and legal strategies that any lawyer would immediately recognize to bestow AIG with leverage either to be able to avoid these sleazy payments or force substantial concessions.
Since the contracts are secret and we're apparently just supposed to rely on the claims of AIG and Treasury Department lawyers, it's impossible to identify these arguments specifically. But there are almost certainly viable claims to be asserted that the contracts were induced via fraud or that the bonus-demanding executives themselves violated their contracts. Independently, it's inconceivable that there aren't substantial counterclaims that AIG could assert against any executives suing to obtain these bonuses, a threat which, by itself, provides substantial leverage to compel meaningful concessions. Many of these executives were, after all, the very ones responsible for the cataclysmic losses.
The only way a company like AIG throws up its hands from the start and announces that there is simply nothing to be done is if they are eager to make these payments. One might expect AIG to do so -- they haven't exactly proven themselves to be paragons of business ethics -- but the fact that Obama officials are also insisting that nothing can be done (even while symbolically and pointlessly pretending to join in the populist outrage over these publicly-funded "retention payments") is what is most notable here.
Legal strategies aside, just as a business matter, one of the first things which every compnay in severe distress does is go to its creditors, explain that it cannot make the required payments, and force re-negotiations of the terms. That's as basic as it gets. To see how that works, just look at what GM and other automakers did with their union contracts - what they were forced by the Government to do as a condition for their bailout. Obviously, if a company goes into bankruptcy, then contracts to pay executive bonuses are immediately nullified, but the threat of bankruptcy or serious financial distress is, for obvious reasons, very compelling leverage to force substantial concessions. And the idea that, in this economy, AIG executives (of all people) will be able simply to leave and go seek employment elsewhere unless they receive their "retention bonuses" (even assuming that's an undesirable outcome) is nothing short of ludicrous.
There may be other reasons why the Treasury Department decided it wanted AIG to pay these bonuses (Marcy Wheeler considers some of those reasons here), but this claim from Larry Summers that the sanctity of contracts precludes any alternatives is not just false, but insultingly so. It's difficult to recall anything quite so vile as watching hundreds of millions of dollars in taxpayer money flow to AIG executives. One would expect the Obama administration to do everything possible to prevent that from happening. Instead, they seem to be doing the opposite.
UPDATE: Jane Hamsher has more here on AIG's insultingly frivolous claims as to why these contract obligations are unavoidable, and here FDL has a petition, to be delivered to the House Financial Services Committee during Wednesday's hearing on the AIG payments, demanding full disclosure before any more payments are made.
On a related note, could someone please reconcile Larry Summers emphatic declaration that "we are a country of laws" with this:
To use Larry Summer's eloquent phrase (perversely deployed to justify the AIG bonus payments): if "we are a country of law," we would probably do something about these severe violations of law that are right in front of our faces, particularly since we all know exactly who the lawbreakers are.
Apparently, this "we are a country of law" concept means that hundreds of millions of dollars in taxpayer money must be transferred to the AIG executives who virtually destroyed the financial system, but it does not mean that something must be done when high government officials get caught plainly breaking the law. What an oddly selective application of the "rule of law" this is.
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153 Comments so far
Show AllContinuing to allow AIG *_ p a y o u t s _ * to incredibly dumb and culpable banksters -- of insurance benefits -- on the illegal PONZI scheme called derivatives is _ I N S A N E _.
especially when the *US taxpayer is funding the 100% coverage,
when the market in already less than 50% of that,
there is plenty of evidence that this doesn't do anything to solve the economic crisis,
they deserve to return their full salaries from previous years, not get more bonuses,
and to boot, future generations will have to pay them back the interest on this, as well .
I want my money back
Namaste
The other Ponzi schemes:
Fiat currency
Fractional reserve banking
Social security
Let's end them ALL
But, but it is the masters of deregulation and the worshippers of the libertarian free market god that are now the detested gubbermint that has done brung us spiralling down.
And you complain about social security?
I'll betcha those bloated CEO's are whining about Social security robbing the fruits of their labor too--while Grandmom eats dog food and gets evicted by the gentrifying condo association funded with urban renewal funds to impose emminent domain.
>>But, but it is the masters of deregulation and the worshippers of the libertarian free market god that are now the detested gubbermint that has done brung us spiralling down.
Lies. These bankers are all for the free market right until the day the free market puts them out of business. Then they cry for socialism. Don't you get it? in the free market, there's a sword hanging over the head of these CEOs every day, and if they pull shit like this they get tossed out on their butts. It's YOU LIBERALS THAT REWARD THEIR MALFEASANCE WITH OUR MONEY.
>>I'll betcha those bloated CEO's are whining about Social security robbing the fruits of their labor too
Social security is a Ponzi scheme. Look it up. I pay into it every single check and I know I won't see a goddamn dime of it when I get old. Fuck the AARP pissing on me and telling me it's raining.
Until libertarian ultra-capitalist unregulated free market ideology was revealed to be a disaster--it had to morph to fend off the crisis of faith of a failed god.
No system is perfect--so we approach it with what is to the greatest benefit to the Common Good. Social security is pooled resources benefitting the whole--and of course free marketeers want to raid it for themselves--that is at the heart of capitalism--greedy self interest and the law of the jungle as opposed to cooperation among all to benefit all in the intersts of fairness and decency and not getting over at the expense of your neighbor.
>>Until libertarian ultra-capitalist unregulated free market ideology was revealed to be a disaster--it had to morph to fend off the crisis of faith of a failed god.
Can you tell me when this existed? Certainly not at any point after the creation of the central bank, the Federal Reserve.
>>No system is perfect-
The free market is not a SYSTEM. It is not something you design and implement. It is a DESCRIPTION: a description of conditions under which people can trade together freely and create wealth. The natural result of a free people living together is peace and prosperity. The natural result of economy-by-diktat is poverty and violence. It is not difficult to understand.
Its a pipedream.
Unfortunately, as the saying goes, men are not angels--therefore regulation (law) is NECESSARY to protect people from the potential ruthlessness of others.
Ah yes, and now we again reach the crux of the liberal worldview.
Too many people are EVIL. The government must regulate all people to keep the EVIL ones in check. Without these protections, men would revert to ignorant savagery and move back into the caves their ancestors abandoned. The collective must protect itself against those EVIL people, as the common man is too ignorant to protect himself. Human nature is the problem, and people cannot live together freely and trade freely because wickedness and slavery will inevitably ensue.
Of course the reality is just the opposite. Most people are naturally good, and freedom both economic and social leads to prosperity. Government is the TOOL of evil people, it is what they use to oppress - it does not restrain them, it is their enabler. Since all government edict is ultimately enforced using political violence, looking to the government for a solution is the ultimate in might-makes-right. Your view, as is currently practiced in this country, is what leads to savagery, poverty, and violence. Who sent our army to Iraq? Was it Microsoft? Was it FedEx? Or was it the GOVERNMENT?
What was the subject of this thread again?
Oh yeah, about how the free market champions of deregulation ran the country into a ditch.
Actually, the gubbermint at the behest of corporate interests framed as "US interests" is the typical cause for US aggression.
The fact is you do not understand government. What government, at its core, is.
Government is the pomp and circumstance that legitimizes wickedness. Without government, people would see things rightly - the state is the criminal organization that grants legitimacy to murder (war,) theft (taxation and conquest,) thuggery (law enforcement,) ethnic cleansing (eminent domain,) slavery (welfare and open borders,) kidnapping (arrest,) torture (interrogation.) Without the 4 year election cycle and the flag, people would recognize these things for what they are.
And THIS is the principality you expect to protect people!?
Dammerung asks, "Who sent our army to Iraq? Was it Microsoft? Was it FedEx? Or was it the GOVERNMENT?"
This is a trick question, because corporations have hijacked the government to do their dirty work, socializing the costs while privatizing profits. Economic freedom for them does NOT mean prosperity for all, contrary to your assertion.
Here's a necessarily short but representative list of those who really sent our army to Iraq (and far too many more nations): ExxonMobil, Halliburton, Blackwater and Raytheon would be among the primary piggy beneficiaries of the GWOT, but they're certainly not alone at the trough.
Yo Damera___
What's wrong with Social Security? It keeps us senoiors off the street when nobody will hire us anymore. Social Security as originally envisioned pays for itself. How can you call retirement income - Ponzi?
With that logic all retirement plans are Ponzis!
I agree with your other 2 Ponzi scheme nominees.
It's a Ponzi scheme in the most technical terms. It always requires more and more new people to pay-in to meet the promises to the old payers; meanwhile, the entire fund is looted by the government to fund its own evil projects. Eventually there won't be enough people entering Social Security to pay off the old ones, and the entire edifice will come down. This is a matter of public record! Theft in blind daylight.
As I said check out the original!!!! It did not need the new people coming in
Then check out the raids on SS monies begun under Nixon that were used to fund other guv programs not envisioned originally - including supplementing the US gov't general operating fund.
This unmitigated looting begun by Nixon is what created the need for new folks coming in.
Are you suggesting you trust the gang of criminals, thieves, and thugs collectively called "government" with your retirement money under any circumstances?
Everything was working OK until the Repuglicans started the thievery. When it was conceived, it was only for those who contributed. Just look at all the programs now funded. Those of us who paid in all our working lives are lucky to get the pittance we do.
I prefer that to the fast and loose investment bankers and Wall Street speculators. No matter who is in office, there are rules, procedures and lots of civil servants to lend stability to Social Security.
Joe
Correct!
I believe you will find that it was Johnson and not Nixon.
Medicare was added in 1965 by the Social Security Act of 1965, part of President Lyndon B. Johnson's "Great Society" program. Social Security was changed to withdraw funds from the independent "Trust Fund" and put it into the General Fund for additional congressional revenue.
From Wiki.....
Dammerung,
Why are you paying into Social Security, then?
The neocons have repeated the same lies about social security for the past three decades. A lie repeated three times and not challenged becomes a fact. The neocons have convinced so many social security beneficiaries that it is a flawed system, the failure of the system may become a self-fullfilling prophesy.
While social security was originally sustainably structured, there was no provision to charge Congress interest on the trillions of dollars Congress has "borrowed" from its surplus. We can only define that "borrowing" as de facto theft.
Had the neocons succeeded in their 2005 campaign (they spent two hundred million dollars on it)to privatize social security, social security would now be in its last cries of imminent death and the Wall Street pirates would be walking away with even more of the victims' money, and every square foot of the underside of every bridge in America would now be fully populated with homeless Americans. Social security payments are the number one source of income in 80% of US counties and its demise would cause a financial crisis beyond imagaination.
If Obama doesn't re-regulate the financial industry soon, the US will not just experience a depression, it will turn in to a third world nation with few real jobs, at which point, the alleged inadequate number of employees paying into social security will be the least of its problems.
Good points.
And even now SS is secure into 2043. The screams to revise it are lies.
How DARE anyone suggest a corrupt and unmanageable government bureaucracy that gives our elderly mere pittance and a fraction of what they invested into it is not the best solution for retirement care! After all, what would our politicians do if they were unable to directly loot people's retirement funds?
Does the current economic crisis and the looming disaster to our pension funds and 401K's not give you even a moments pause? It damn well should.
Why aren't the two million suckers (who braved the cold weather to attend Obama's inaguration) returning to DC to set up camp in front of the white house and capitol to protest?
Don't these two million suckers know that Obama is selling them down the river?
I understand Obama is making outraged noises again--claiming he will try to see if he can find a way to block the bonuses. Yeah right, who is buying that? The usual bone he tosses out--its insulting that he thinks he can go through the motions to placate and align himself with the people. But think if it was McCain making the indentical statements--do you think anyone would give him the same cover they insulate Obama with?
Ironically, it was the economy that gave Obama his edge over McCain--but I don't imagine McCain would be doing anything differently--they both serve the same masters after all. In fact, I am starting to be of the opinion that it might've been better if McCain won--then we wouldn't have to tiptoe around Obama's false images of a Democratic alternative and call it what it is. Instead the process gets dragged out waiting for others to deal with their shattered illusions of hope and change.
Sioux Rose
DAVE B: Interesting that you selected the "acting" angle as both men (Bill Clinton and Barrack Obama) are LEOS, and that is considered the sign of acting and show biz according to basic astrology 101.
"- Gee, what a surprise. This is what happens when a shyster con-man who's nothing more than the candidate of Wall Street gets elected president."
Exactly! This is what I was thinking during the primaries. After all, Wall Street financed a huge chunk of Obama's campaign. Wall Street/corporate America had a win/win election set up, even before the battle between Clinton and Obama was decided. Clinton, Obama, and McCain were all paid for corporate candidates, so no matter who won, the corporations were set up to win also and we were set up to lose, as usual. It's set up like this every election. The only thing that will put a candidate into office that truly represents we the people is publicly funded campaigns with a complete ban on corporate and individual donors. If we could get a publicly funded campaign system going, along with a ban on lobbyists, then there is a possibility that we could get not only a president that represents US, but a congress that represents US as well, rather than than being nothing more than another paid servant to the money worshippers. Until this happens, we will continue to have the best government money can buy.
Exactly what I was thinking.
Ex Goldman-Sachs governor of NJ, Jon Corzine threatens forced furloughs, if not layoffs--as if violating the union contract wasn't an issue at all.
Even worse, these self-entitled jerks are the ones who created the disasterous circumstances to begin with, now claim if they don't get their obscene bonuses, they're going to walk.
Let them walk! Where they gonna go? The unemployment line?
More evidence that Obama is a boy to the financial elite.
Go ahead and give the execs, their bonuses. However...as a condition of these bonuses, they must publish their full names and addresses in a full page newspaper ad that is printed in every major newspaper in the U.S. Perhaps that would change their attitudes towards their "contracts."
"Full disclosure" for future taxpayer payouts isn't good enough. Tell AIG that if it gives out those bonuses there will be NO MORE taxpayer bailouts. They can go find their own money or go bankrupt meeting their contract obligations. And those so-called indispensable employees can go do what they do.
It could not be more clear that we have 2 sets of rules. One to protect the rich, the other to screw the working class. And this time they are really rubbing our noses in it.
This is the first time I have been seriously disappointed with Barack Obama. I have not been delighted with some of his decisions, but have been willing to wait and see. Not now. Just whose side is he on?? Talk is cheap. Action counts.
We need a serious taxpayer revolt here. Enough is enough. Tell your Congress critters if they don't step up to the plate we will do it for them in 2010. And as far as I'm concerned if Obama doesn't change whose side he's on I will do what I can to make him a one term president.
I am furious.
When the people fear their government there is tyranny,
when the government fears the people there is liberty.
~ Thomas Jefferson
"but it does not mean that something must be done when high government officials get caught plainly breaking the law. What an oddly selective application of the "rule of law" this is."
Such as it is for members of THE UNITED STATES OF AMERICA, INC.
This is yet again another chapter in the story of the (now not so) gradual decline of the United States. Obama, if he wants, could get tough as buckshot with these greedy, cynical, unpatriotic bastards. He chooses not to do anything except shake his fist. Some of that "bonus" cash will be flowing right into his and other Democrats' reelection coffers.
[ _____ H e __ w h o __ i s __ t h e __ G O L D M A N _____ ]
[ ____________ S A C K S __ t h e __ R u l e s ____________ ]
.
Our update for 'He who has the gold, makes the rules '
If Obama becomes Oblysmal and refuses to move on criminality, we'll know that he's just dancing with the one ( Goldman Sachs ) that bought him to the dance.
.
It's past time to take back our banks, money and currency from the financial moronic thieves and extortioners ( FED w/o RESERVE included )
Namaste
Sioux Rose
Right on! Man with GOLD SACKS the nation! There's so much of this... although my favorite remains Neil KASHKARI, a/k/a cash & carry, man born to be the bag man for the big banks. (Then we can go back to Henry with something to Hyde, Oliver North by Northwest, Madeleine All-bright on the Western Front, Bob born to delay, etc.)What's in a name, indeed...
Don't forget Bernie Madeoff with the money. Can you do something with Dick Fuld? If someone were to write a modern version of "School For Scandal", they wouldn't even have to think up the names.
Joe
There are many firms besides AIG, Goldman Sachs, Bear Stearns, Bank of America, Citi, etc., which are considered "too big to fail". It is now time to break those firms up into smaller, independent companies before the current firm appears to be on the verge of failure. This should be done NOW, also, with the likes of AIG, Citi, GM, Ford, Chrysler, GE, etc. If they are currently "too big to fail" then let us ensure that once bailed out this time, they can not fail again thus requiring yet another bailout because they are "too big to fail".
Break up GM. Break up AIG. Break up Citi. Break up Bank of America. Break up Goldman Sachs. Break up GE. Break up Chrysler. Break up Ford. In fact, break up every single firm in the top half of the S&P 500 so that they CAN fail without causing cascading failures throughout the national or world economies and requiring a taxpayer bailout.
This has to be done or the American taxpayer will surely at some point be required to bail out these and other firms again, or in the case of some like Ford or GE threaten failure for the first time. Not one more bailout cent until these firms are first broken up.
And not one more bailout cent to the likes of AIG until ALL derivatives contracts regardless of whether they have yet been closed out and paid off are declared null and void and further similar contracts made illegal, not just Credit Default Swaps, but also put and call options on stocks, interest rate derivatives, etc. So you bought a credit default swap and you are owed money on it. Tough shit. So you bought stock option puts or calls and you are owed money on it. Tough shit. These result in nothing but cash settlements created out of thin air and they have NO contractual attachment to the so-called "underlying asset".
One need not hold a stock to write a new, or sell an existing, or purchase an option (derivative) on that stock. Its the same with credit default swaps. One need not be holding a "security" consisting of a thousand bundled mortgages in order to write (bring into existence for the first time) or purchase or sell a credit default swap. These are nothing more than side bets on the price movement of an underlying asset and they are absolutely fraudulent, though legal. They are no different, absolutely NO different, than illegal betting on sports where the game in progress is the "underlying asset" upon which the illegal wager rests.
Providing taxpayer bailout money to AIG so that it can cover its huge credit default swap losses is not one bit different than taxpayer bailout money coming to me to cover my losses in Las Vegas or even my losses to Joe the Bookie down at the corner cigar store. We taxpayers are being royally screwed.
Enough is enough damn it.
ekaton
You and I seem to be channeling (see my post just below), drawing the same sorts of policy distinctions, and the same general analogy, between investment risks and gambling risks.
Bill from Saginaw
To big to fail really translates as, to politically connected to have to worry about failing.
I certainly think that if these talented folks don't get their millions guaranteed by their ...CONTRACTS...they should certainly leave and take those better paying jobs at the other companies. There are so m many hiring right now.
Oh....these are the same talented folks that put AIG in the ditch? Lost Billions and bankrupted their company? By all means we must retain that talent!
When the first dollar from American citizens came thru the door these contracts were null and void. Time to decide if you are an American or not Mr. President. Time for many people to decide if they are Americans or not. There are only two sides going forward, pick one.
"Oh....these are the same talented folks that put AIG in the ditch? Lost Billions and bankrupted their company? By all means we must retain that talent!"
EXACTLY!!
ekaton
Orwell is turning in his grave right now. To call these people "talented" opposite to what they are, is exactly what the man warned us against.
Cheers,
As I've said before, we're watching a club of Ivy-League grads (which includes our president) covering each others' asses. There was never any intent on Paulson's part to help anyone but his buddies at GS. Clearly, Geithner, Bernanke, et al., maintain the same value system.
q
I blame Bush and AIG. Not Obama.
"He has told US Treasury Secretary Timothy Geithner to "pursue every single legal avenue" to block the payments.
He added he was "choked up with anger" over the issue. "
Obama is trying to save our economy from a catastrophic collapse and AIG is sabotaging his efforts with their greed.
Keep chugging that Kool Aid. Obama is an employee of Goldman Sachs.
Yeah but he sits on the boards of AIG and Citi.
Theatre is exactly all it is.
And, like many attorneys, he is good at it.
There is a chasm of 'hope' between his words and his actions.
ekaton
What new laws has Obama, and the Democrat controlled House, and the Democrat controlled Senate, passed to prevent recurrences of AIG, Citi etc?
An honest banker or Republican has a stake through its heart and a brick wedged into its dead jaws.one old atheist
Good job giving them so much money LIBERALS!
Let's face it. LIBERAL DEMOCRATS passed the porkulator bill. LIBERAL DEMOCRATS in office today do nothing to revoke or revise it. LIBERAL DEMOCRATS refuse to prosecute the previous administration for its crimes. LIBERAL DEMOCRATS continue to fund this banker Mafia's adventures with our tax dollars and our childrens' future.
WHO REPRESENTS US?! Is the US government really representative of the will and needs of its people? Does it need to be abolished and replaced with a truly representative democracy?