WASHINGTON – President Barack Obama declared Monday that insurance giant American International Group is in financial straits because of "recklessness and greed" and said he intends to stop it from paying out millions in executive bonuses.
"It's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay," Obama said at the outset of an appearance to announce help for small businesses hurt by the deep recession.
"How do they justify this outrage to the taxpayers who are keeping the company afloat," the president said.
Sorry, Mr. President. I don't think your moral outrage will trump a binding contract in court. C'mon, you went to Harvard Law. You should know this. Larry Summers knows it. Why don't you?
While AIG royally screwed the pooch, there's nothing the government can do now to rewrite contracts between AIG and its employees that existed at the time President Bush bestowed the first bailout on them. I get why politicians are upset, but most of them should've thought of this before the federal government wrote the first check. Or the second check. Or the third check.
Certainly they're free to make the nullification of these types of bonuses a contingency for future assistance, but they can't expect a mulligan now that they realize they should've done things differently.
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The bonus payout excesses at AIG are just the tip of the iceberg of what is happening with the other Wall Street bailouts including Bank of America. Working productive Americans are bailing out the same crooks that destroyed our economy along with 45% of the wealth in the world and now the American taxpayers and our children will be forced to live a far lower standard of living with reduced prosperity and opportunities due to this but only we pay the price.
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Um, what would have happened to those contracts if the government hadn't bailed out AIG and AIG would have went out of existence as a result?
I understand that. What *would* have happened, however, is not legally relevant. If the government wanted conditions on the assistance, it should have demanded them before handing the money over, not after. This is just sloppy work on the part of Bush, Obama, and the former and current Congress.
Allowing government to terminate or unilaterally modify contracts between private parties is a dangerous road to travel, no matter how noble the cause may seem.
I agree that legally binding contracts should be honored by the government. However, there may be a legitimate question about whether the employees actually fulfilled the contractually-required conditions for the bonuses. If management simply gave everyone a glowing performance evaluation out of cronyism, then the shareholders (including the U.S. Government) have a legitimate right to question the bonuses.
Those jerks (only a hair short of criminals in my mind) ran the company into the ground, and now they are going to get bonuses from the money you and I put in to save the business and their jobs? Not only should they not get bonuses, they should be fired.
There is a clear precedent for changing contracts when a company goes under. If it goes to bankruptcy court, a judge can change the terms of almost any kind of contract (except home mortgages). So why is this contract so sacred? AIG would not be here if the taxpayers hadn't rescued it. There would no bonuses and no jobs if AIG had gone into bankruptcy and failed.
Don't pay the bonuses. If they want to sue, let them sue. Let's see how much sympathy they get from a jury.
Here's Judge Judy on Larry King Live:
"Judge Judy: We now own, you and I, 80 percent of AIG. And the excuse given for paying out these bonuses were that they were contracts and you can't void those contracts without consequences. And I think it's sort of interesting that you can't void contracts because these people were engaged in actions that were irresponsible, reckless and caused substantial damage.
How can they void the contracts of police officers and firemen and other civil servants who they're forcing to take furlough days despite the fact they have contracts? They're forcing them to take furlough days to make up budgets."
RS, I know that you are a potentially aspiring law student. One of the first things you'll learn during your introductory contracts class is that courts very frequently hear litigation about what at first glance appears to be a clear-cut employment contract. For example, given the actualy performance of AIG, there could be a legitimate argument that these executives didn't fulfill the terms of the contract. Or the contracts might actually have clauses that would provide a way out of paying these bonuses. It's hard to know until you actually see the contract. To my knowledge, they haven't been made public. Here is a good, brief discussion of the topic: http://firedoglake.com/2009/03/15/letter-from-aig-chairman-ed-liddy-to-timothy-geithner-we-have-to-pay-100-million-bonuses/
Also, parties at the bargaining table renegotiate existing contracts all the time. Here is an example of what happens when the beneficiary of an existing contract is a blue collar worker, not a multi-millionaire executive: http://www.businessrockford.com/archive/x82782143/Sources-UAW-deal-cuts-bonuses-some-raises
Whether or not such a cramdown on the executives is good policy is another matter (I happen to think it is). However, it's not as legally dubious of a concept as one might imagine at first glance.
I know that courts are allowed to void a contract if the terms are unconscionable. I also know that most are loathe to do it, and for good reason. And you raise a good point that none of us are privy to the exact details of those contracts, unless I've got readers at AIG.
If parties want to renegotiate, that's their business. What folks like Obama and Richard Shelby are talking about isn't a negotiation. It's one party wishing to unilaterally alter the terms of the agreement.
If there's an out in the contract, one might think it would have been found by now. Otherwise, my point is that I think it's a bad idea in general for courts to put themselves in the business of rewriting contracts simply because of public sentiment. I think that will do more to destabilize labor relations in America than anything we've ever seen.
@purrfect_mamma, whether a furlough of a union employee is legal or not likely depends on whether the court views the concept of a furlough the same as it views a layoff. If that's the case - that the court sees it as a employee being laid off and then rehired shortly thereafter - the employer is fine.
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/
It doesn't take a genius. If AIG had went out of business, the bonuses would obviously be a moot point, contract be damned.
Are you always this obtuse?
But they didn't go bankrupt, and so your point out what may have happened had the government not intervened is completely irrelevant from a legal standpoint. What may have happened is pure speculation.
Are you always this stupid? :-)
I couldn't agree more!
In this Twilight Zone time we are living in, why am I not surprised that Sen. Chris “Sweetheart Mortgage” Dodd (D-CT) and Rep. Barney “I had a sexual relationship with a Fannie Mae executive Herb Moses” Frank (D-MA) are the one’s most agitated? They are the crooks!
All of this is a contract issue. The employees are entitled, by contract, to those bonuses, and that’s that! Congress, Obama, keep out!
There was a great article about this titled “Bonus Indignation” found at http://economicefficiency.blogspot.com/2009/03/bonus-indigation.html
It also really skewers Chuck Grassley for his seppuku remark (pun intended).
So many questions. Can the contracts be invalidated after the fact if the government intervenes? Was the government aware of the provisions of the contracts before they pumped money into the company? If the company is in the dumper, did they actually meet the conditions for earning the bonuses? (Hey, I could have screwed up the company as bad as they did and I would have done it for half as much money). Bottom line: I foresee a hundred Ph.D dissertations as a result of this.
My understanding is that for many of these employees, these poorly-named "bonuses" may well simply be similar to deferred compensation - that their pay schedules were set up to require them to agree to stay through a certain date in order to collect this compensation. If that's the case, it shouldn't matter how well the company as a whole did/did not do.
Congress is still bloody stupid, and we're seeing it in spades today.
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