AN ESSAY
After the AIG scandal broke last week, I wrote an essay explaining that there is no legal barrier to breaking contracts. Recently, Americans have been horrified to see federal bailout money paying AIG executives whose conduct helped create the economic crisis. This popular outrage, in turn, sparked a debate as to whether the government can abrogate private contracts. Most Americans seem to think that private contracts are inviolable. They seem to think that contracts have a mystical power that makes them immune from State interference. President Obama’s economic adviser, Larry Summers, went so far as to say: “This is a country of laws. The government cannot just abrogate private contracts.”
Yes it can. Government enforces contracts by sovereign grace. If the sovereign decides that a particular contract will be enforced, there is nothing the aggrieved party can do about it within the law. Of course, this would not set a good precedent. After all, people only do business with each other if they know that the law will force the other guy to honor his promise. But this is a policy concern, not a legal one. In essence, the power to enforce contracts stems from pure political might. It has nothing to do with abstractions, principles or sacred vows. And it certainly has nothing to do with whether the United States is a “country of laws.”
In The Prince, Niccolo Machiavelli wrote: “The principal foundations of all states, whether new, old, or mixed, are good laws and good arms… [and]… there cannot be good laws where there are not good arms…[and] where there are good arms, there are bound to be good laws.” The Prince, Chapter 12 at p. 52. Machiavelli’s clear prose reminds us that a “nation of laws” cannot exist without “good arms,” namely, powerful executive authority. Law cannot exist without force, nor can it even come into being without an original coup. In the United States, there would be no Constitution or laws had the colonists not risen up and defeated the British army through “good arms.” Through “good arms,” the United States maintained the essential stability it required to establish “good laws.” Thanks to protection under “good arms,” commercial men could depend on stable laws. They could count on courts to enforce contracts against those who broke their promises. Americans grew accustomed to a “legal State” in which they could dependably rely on courts to enforce private bargains with neutral, reasonable laws.
That remains the case today. Larry Summers did not voice an insane sentiment when he said: “This is a Nation of laws.” Most Americans agree with him. They take pride in the fact that they live in a society in which courts neutrally apply legal principles that technically treat everyone equally. After all, a “Nation of laws” differs from a “Nation of men,” in which a legal rules flow from the wanton caprice of a single individual. In America, we have laws. In theory, the laws apply equally to everyone, and—as the logic goes—that is a good thing.
But these “defenders of the law” forget that their laws would mean nothing without executive power. Courts enjoy power because they can count on the executive to enforce their “principled” decrees. In contract law, they ruminate about abstract ideas like bargain, consideration, benefit, detriment, equality of exchange, restitution, rescission, reformation, mistake, parol evidence and reliance. They even attempt to allot money damages to aggrieved parties according to fixed, “neutral” rules. They then scribble out judgments and force the offending party to pay. If he does not, the court has no institutional power to do anything but write strongly-worded opinions. To enforce its decrees, it must turn to its institutional partner: The Executive. Only the executive has the billy clubs, guns, prisons and handcuffs to browbeat the offending party into paying up. If he does not obey the court, the executive takes away his property or his liberty. To avoid that fate, the offending party does what the court tells him. That is true power: The power to compel. Cf. Kant (“Law is linked to the authority to compel”). Introduction to Legal Doctrine, The Metaphysics of Morals (Einleitung in die Rechtslehre § D, Die Metaphysik der Moral). The executive is powerful because it can directly inflict pain on bodies and take away property. And as Machiavelli knew, nothing compels men more than threatening their property: “[B]ut above all, [a Prince] must abstain from taking the property of others, for men sooner forget the death of their father than the loss of their patrimony.” The Prince, Chapter 17, p. 72.
What good is it to be a “nation of laws” if the laws themselves are stupid or degrading? That was the question Americans asked when they found out that federal bailout money paid multimillion-dollar bonuses to scallywag AIG executives last week. In my view, waving your hands in the air and pontificating about “our Nation of laws” is absurd. Quite simply, the whole rhetoric about the United States as a “nation of laws” is a vacuous talisman. If it is necessary to allow brigands to take money that would not have been available without their skullduggery because that is what “the law dictates,” then I say the “rule of law” is just as stupid as the law itself. During his confirmation hearings in the United States Senate, Chief Justice John G. Roberts repeatedly pledged that he would issue opinions: “Consistent with the Constitution and the rule of law in the United States,” as if the “rule of law” were synonymous with goodness. What is all this nonsense about the “rule of law?” Laws come from men. Men can be stupid. So can their laws. Therefore, to use a lawyer’s logic, the “rule of law” can be stupid, too. I reserve no exalted place in my heart for the “rule of law.” There once were laws that permitted slavery. Under the “rule of law,” men could own other men in this country. If a law is bad, so is “rule under the law.” For that reason, I reject this hypnotic, reflexive insistence on the “rule of law” in every single situation in which legal rules come into question. For me, it is no answer to mouth the words “rule of law” when defending legal principles that lead to intuitive mischief.
Yet there is no need to even reach the question. We need only worry about the “rule of law” if we assume that the executive will enforce legal decrees. In essence, law is about power. Our constitutional system arose from power and does its best to diffuse power across several institutions. In theory, our legislative, executive and judicial branches are supposed to be “equal” in power. In practice, however, we see how artificial and wooden this distinction truly is. After all, who really has power? Only the branch with the power to compel men’s bodies and take their property has real power. Courts have the power to write erudite opinions on archaic constitutional provisions. Legislatures have the power to draft voluminous bills that attempt to better society with new rules and regulations. But only the executive has the power to shoot, kill, take, invade, imprison, threaten and enforce. Without the executive, neither legislative nor judicial “power” would mean anything. Courts and legislatures are like powerless children who depend on their father to do the muscle work. Only the executive has real power, because it is the branch with the “good arms.” And, in Machiavelli’s parlance: “There are no good laws without good arms.” The Prince, Chapter 12, p. 52. Only real power assures that the law has any force at all. On this point, Machiavelli again puts it best: “For, between an armed man and an unarmed one there is no comparison whatsoever, and it is not reasonable that one who is armed should willingly obey one who is unarmed.” The Prince, Chapter 14, p. 63. In this light, should the executive in this country really listen to carping about the “rule of law” in enforcing abhorrent private contracts for AIG executives? No. In Machiavelli’s terms, it would not even be “reasonable” for the “armed” executive to obey an “unarmed” court.
My sentiments here will undoubtedly cause discomfort among legal “process lovers.” Indeed, my article last week prompted a response that: “This is no way to run a government.” On this point I agree. Laws should be followed. Laws provide stability and comfort to commerce, and that inures to everyone’s benefit. When men know that they can obtain a peaceful remedy from a court, they will refrain from private retribution and “collection.” In almost every case, the executive should enforce legal decrees that compel private obligations. But that does not alter the fact that executive enforcement is essentially discretionary. Only the executive is armed; the court has no real power to compel anything. In rare cases—as here with the AIG bonus fiasco—the executive has the institutional discretion to refuse to honor legal decrees. After all, if private contract law leads to a result so repugnant that it reaffirms Charles Dickens’ famous dictum from Oliver Twist: “If this be the eye of the law, sir, then the law is an ass,” then the executive can step in to reverse the outcry. True, some may say that such “indulgences” to popular sentiment are the first step on the road to dictatorship and capricious government. But I say that it is worse to allow perverse “legal” results than to suspend the law in an exceptional case to avoid public indignation.
I have little patience for those who fanatically put their faith in law. Positive law—meaning written laws passed by popular majorities for majority purposes, ostensibly according to logic and human reason—does not invariably lead to good results or justice. In Hitler’s Germany, for instance, positive law—passed by democratic majorities—forbade marriages between Jews and Gentiles. Later German laws made it “legal” to exterminate Jews at concentration camps. This is an extreme example, but it shows that positive law should not be a talisman. Positive law can be bad. For that reason, trust in the “rule of law” can also be misplaced.
We all want our bargains protected. But that does not mean we should allow AIG Executives to scream “rule of law” to create a result at fundamental odds with our common sensibilities. Our common sensibilities may not be written down in a statute or casebook, but they still matter. On this point, we can turn to the executive to exercise its inherent power to deny enforcement.
Showing posts with label AIG. Show all posts
Showing posts with label AIG. Show all posts
Wednesday, April 1, 2009
Tuesday, March 17, 2009
YOU CAN'T BREAK A CONTRACT? OH YES YOU CAN
AN ESSAY
Yesterday I satirized AIG’s Financial Products Executives for receiving colossal bonuses from government bailout money despite their active roles in ruining the economy last year. Two days ago, the New York Times revealed that AIG executives received over $165 million in manager bonuses. Although that amount pales in comparison to the $150 billion allotted to rescue AIG, it is the insolence that offends. At a time when most Americans struggle to find work in a toxic economy, these rapacious executives award themselves huge bonuses with government money intended to help the weak. It is something akin to stealing welfare money to buy a yacht. Yet here we see the institutional problems associated with the government bailout plan. We have given out so much money to so many private companies. Obviously we cannot account for all of it. And private companies are private companies; we cannot rightly be shocked that some executives will “take a little extra for themselves.” For wealthy corporate leaders, money is the ultimate temptation. Put them in a room with money and they will not keep their hands off.
But I do not write today simply to criticize rich corporate people. I enjoy doing that, but I recognize that it can easily descend into shrillness. Rather, I want to address a more troubling legal aspect to this bonus boondoggle: The contract issue.
Who allowed AIG executives to receive their bonuses at a time like this? Did anyone consider how bad it looks to hand government bailout money to wealthy executives, especially the ones who created the problem in the first place? Why is government allowing this? Yesterday, President Obama reacted to the outrage over the bonuses by swearing to stop the payments. But a different administration spokesman said he could do nothing to stop the payments, because AIG was “contractually obligated” to pay them. Lawrence Summers, Obama’s Director of the National Economic Council, said: “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.” In other words, as wretched and tasteless as the bonuses may be, the government could do nothing, because these executives signed contracts with AIG last year, and now AIG must pay the bonuses. After all, according to Mr. Summers, we are a “country of law,” and a “country of law” does not intervene to break promises made between two private parties.
I beg to differ. Our “country of law” enforces contracts between private individuals by sovereign grace. Courts may weigh legal fineries in order to determine who owes whom what. Indeed, scholars and jurists have penned endless tomes concerning the ornate technicalities of individual contractual obligation. But in the final analysis, a judge’s words mean nothing without the sovereign’s sword to enforce them. For example, a company may promise to deliver 40,000 tons of steel in return for another company’s promise to pay $40,000,000. If the selling company fails to deliver, the aggrieved buyer can go to court and sue for contract breach. He may obtain a judgment entitling him to money damages or specific performance. In other words, the law fully supports the buyer’s position. But once the judgment issues, it falls to the sovereign to force the seller to pay money or deliver the goods. If the sovereign says: “I will not enforce this judgment,” the buyer has no remedy. In this example, we see that contract law means absolutely nothing without brute executive force. In reality, the executive overwhelmingly enforces legal decrees involving contracts because it wants people to feel assured in their bargains. Yet that does not change the fact that the executive retains the final discretion whether to enforce a contractual obligation. After all, the law deals with compulsion. No one feels compelled to do anything unless a stronger party puts a gun in his face or twists his arm with sufficient strength. The executive has the guns and the arm-twisters. Without it, courts mean nothing.
Mr. Summers said: “There are contracts. The government cannot just abrogate contracts.” Yes it can. If President Obama really wanted to, he could stop the payments to AIG’s executives. True, he would face enormous opposition from lawyers and jurists, but as a practical matter, he has the power to interfere with private contracts. Courts would rule in the executives’ favor. If AIG refused to pay the bonuses, the executives could sue AIG for breach; and they would win. After all, the law favors vested contract rights; and vested contract rights favor those with superior bargaining power. But after the executives win, they would have to turn to the executive to force AIG to pay. Here, President Obama (or his State law counterpart: The Governor of New York) could intervene. He could order the Sheriff to stand down and refuse to enforce the Court’s judgment against AIG. At that point, the executives would probably try to sue the executive on constitutional grounds. They would argue that the President’s action deprived them of “property” without Due Process under the Fourteenth Amendment, or that the State Governor’s action “impaired the Obligation of Contracts” under Article I § 10. The Supreme Court would probably agree with the AIG executives, since Chief Justice Roberts and his Republican majority invariably support business and contract rights. Again, however, the Court would have to turn to the executive to enforce its long-winded legal reasoning. Do you think the executive would take action against itself? Of course not.
This is not as radical a position as it sounds. There is precedent to support a President’s refusal to heed the Supreme Court’s conclusions. In 1832, the United States Supreme Court held unanimously that President Andrew Jackson could not relocate the Cherokee Nation to Oklahoma from its ancestral home in Georgia and Tennessee. Worcester v. Georgia, 31 U.S. 515 (1832). The Court reasoned that the United States entered into a treaty with the Cherokee, and the treaty forbade such territorial incursions. The President said: “John Marshall made his decision; now let him enforce it!” Jackson sent an army into the Cherokee Nation and evicted the natives from their homes. The Supreme Court’s judgment had no practical effect, even though the law favored the Cherokee. This example shows how a determined executive can utterly ignore judicial pronouncements, even if he acts contrary to law. Again, we see that law depends on force, and only the executive controls State-sanctioned force. If the executive wants to ignore the law, there is little the other branches can do. Congress could try to impeach the President. But impeachment has less to do with the law or the Constitution than with political favoritism. If the President has enough allies in Congress, he will not face impeachment. Andrew Johnson faced impeachment in 1867 because a Republican majority in Congress detested his Reconstruction Policy. Bill Clinton faced impeachment in 1998 because a Republican majority in Congress did not like him as a person and because he was a Democrat. Neither President committed a gross infraction against the Constitution; politicians in Congress simply did not like them.
President Obama enjoys immense support in Congress. Nancy Pelosi and the Democrats would never take action against him if he intervened to stop bonus payments to AIG’s executives. In fact, such a move would be entirely consistent with the President’s mission to “clean up Wall Street.” The AIG executives would whine and moan and wave the Constitution in the air. But Presidents must think beyond the law. President Obama is trying to rebuild trust in an economy that nearly destroyed itself through avarice. Men like the AIG executives are prime suspects in this meltdown. While those executives technically hold enforceable rights to bonuses under established contract law, this is a case in which the law stands at odds with historical circumstances. If contract law simply functions “according to plan” in these circumstances, the men responsible for destroying the economy—and triggering the bailout—will actually receive a windfall at taxpayer expense. In other words, these men would not have gotten any bonuses if AIG collapsed last year, but because they acted wrongly, they prompted a government bailout. And now the bailout lets them get their bonuses. This is a perverse result; but it is also the legal result. I argue that the President has discretion to set aside “normal legal procedure” when “normal legal procedure” would fatally undermine public confidence in the entire system. This is precisely such a case.
Process-minded legal theorists will undoubtedly disagree with this approach. They will argue that legal rules—especially contract rules—can never be relaxed, no matter how ridiculous (or even ironic) their consequences. Contract rules are intended to provide predictability and reliability in commerce, and if the government denies their effect in one case, then commercial men will never again take chances because they will never know whether the State will uphold their bargains. In this case, they would say that AIG must pay the executives’ bonuses because “bargains are bargains,” and our economy depends on confidence that the law will honor every private bargain. Process theorists would likely agree that it looks terrible to pay bonuses to men whose conduct caused the economic crisis, but they would say that maintaining faith in legal process is more important than averting a perverse result.
I do not eschew legal process. It plays an essential role in our constitutional order. But I venture that blindly following legal rules in every circumstance is more dangerous than making prudent exceptions when real crisis beckons. Today, we find ourselves in a unique moment. Never before has government so massively intervened to prop up private enterprise. This is a new adventure for government, and it will not succeed unless the People have faith in its purposes. If the economy collapses, neat contract rules will mean nothing. To that extent, maintaining public trust in government action should be the President’s foremost concern. The public rightly loses trust when it sees scoundrel executives taking government money to pay for their bloated bonuses. Although the executives may have contractual rights to their money, honoring those rights may do more harm than good to the overall recovery effort. I argue that maintaining public trust in the recovery effort takes precedence over private contract rights in these limited circumstances. If the recovery effort fails, everyone loses. But if the government stops AIG executives from receiving their bonuses in this unique case, only those few men lose money they do not even need. Balancing those harms against each other, I conclude that the President should refuse to enforce the executives’ contractual claims for bonuses. I am strengthened in my conclusion that the executive has even greater discretion because the AIG managers would not even have been in the position to receive bonuses if the government had not supplied the bailout money to pay them. He who pays the piper calls the tune, and in this case, that means the government can impose some restrictions on pre-existing contract rights.
There is nothing sacred about contract rights. Government compels private parties to adhere to their contractual obligations because that is the most efficient policy for society, not because some magical force animates private promises. Commerce functions best when people do what they promise. But there is nothing intrinsically good or noble about contracts. They function by sovereign grace, not a priori principle. Thus, there is no fundamental truth to the assertion that “contracts are contracts.” Contracts are valid only to the extent that the executive is willing to enforce legal decrees. And the executive has many duties beyond enforcing private contract judgments. Today, the executive confronts a massive financial crisis that threatens countless Americans. It is attempting to redress that crisis through bold, general action. That general action will inevitably impact some specific rights.
President Obama should not miss the forest for the trees in this situation. He can deny effect to these executives’ contracts without undermining faith in contract law as a whole. I think most Americans would understand his reasons if he did exactly that. Permitting the executives to benefit from government bailout money in this case sends a far worse social message than interfering with a particularly unjustifiable private bargain. After all, these bargains would have meant nothing if the government had not supplied the money to honor them. In that light, can the executives really complain that the government modifies those bargains?
These scoundrels are still getting their massive salaries. They still have homes, high-paying jobs and nice things. That is a whole lot more than most people have as they struggle to cope with this crisis. Frankly, their whining about “contract rights” falls especially flat when I consider just how many other advantages they enjoy. In a crisis like this, government must make exceptions that will anger a few private interests. That does not mean the government does not care about the law. In fact, sometimes a government best preserves faith in the law by refusing to apply it in cases in which it arouses public disgust. This is exactly such a case.
Yesterday I satirized AIG’s Financial Products Executives for receiving colossal bonuses from government bailout money despite their active roles in ruining the economy last year. Two days ago, the New York Times revealed that AIG executives received over $165 million in manager bonuses. Although that amount pales in comparison to the $150 billion allotted to rescue AIG, it is the insolence that offends. At a time when most Americans struggle to find work in a toxic economy, these rapacious executives award themselves huge bonuses with government money intended to help the weak. It is something akin to stealing welfare money to buy a yacht. Yet here we see the institutional problems associated with the government bailout plan. We have given out so much money to so many private companies. Obviously we cannot account for all of it. And private companies are private companies; we cannot rightly be shocked that some executives will “take a little extra for themselves.” For wealthy corporate leaders, money is the ultimate temptation. Put them in a room with money and they will not keep their hands off.
But I do not write today simply to criticize rich corporate people. I enjoy doing that, but I recognize that it can easily descend into shrillness. Rather, I want to address a more troubling legal aspect to this bonus boondoggle: The contract issue.
Who allowed AIG executives to receive their bonuses at a time like this? Did anyone consider how bad it looks to hand government bailout money to wealthy executives, especially the ones who created the problem in the first place? Why is government allowing this? Yesterday, President Obama reacted to the outrage over the bonuses by swearing to stop the payments. But a different administration spokesman said he could do nothing to stop the payments, because AIG was “contractually obligated” to pay them. Lawrence Summers, Obama’s Director of the National Economic Council, said: “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.” In other words, as wretched and tasteless as the bonuses may be, the government could do nothing, because these executives signed contracts with AIG last year, and now AIG must pay the bonuses. After all, according to Mr. Summers, we are a “country of law,” and a “country of law” does not intervene to break promises made between two private parties.
I beg to differ. Our “country of law” enforces contracts between private individuals by sovereign grace. Courts may weigh legal fineries in order to determine who owes whom what. Indeed, scholars and jurists have penned endless tomes concerning the ornate technicalities of individual contractual obligation. But in the final analysis, a judge’s words mean nothing without the sovereign’s sword to enforce them. For example, a company may promise to deliver 40,000 tons of steel in return for another company’s promise to pay $40,000,000. If the selling company fails to deliver, the aggrieved buyer can go to court and sue for contract breach. He may obtain a judgment entitling him to money damages or specific performance. In other words, the law fully supports the buyer’s position. But once the judgment issues, it falls to the sovereign to force the seller to pay money or deliver the goods. If the sovereign says: “I will not enforce this judgment,” the buyer has no remedy. In this example, we see that contract law means absolutely nothing without brute executive force. In reality, the executive overwhelmingly enforces legal decrees involving contracts because it wants people to feel assured in their bargains. Yet that does not change the fact that the executive retains the final discretion whether to enforce a contractual obligation. After all, the law deals with compulsion. No one feels compelled to do anything unless a stronger party puts a gun in his face or twists his arm with sufficient strength. The executive has the guns and the arm-twisters. Without it, courts mean nothing.
Mr. Summers said: “There are contracts. The government cannot just abrogate contracts.” Yes it can. If President Obama really wanted to, he could stop the payments to AIG’s executives. True, he would face enormous opposition from lawyers and jurists, but as a practical matter, he has the power to interfere with private contracts. Courts would rule in the executives’ favor. If AIG refused to pay the bonuses, the executives could sue AIG for breach; and they would win. After all, the law favors vested contract rights; and vested contract rights favor those with superior bargaining power. But after the executives win, they would have to turn to the executive to force AIG to pay. Here, President Obama (or his State law counterpart: The Governor of New York) could intervene. He could order the Sheriff to stand down and refuse to enforce the Court’s judgment against AIG. At that point, the executives would probably try to sue the executive on constitutional grounds. They would argue that the President’s action deprived them of “property” without Due Process under the Fourteenth Amendment, or that the State Governor’s action “impaired the Obligation of Contracts” under Article I § 10. The Supreme Court would probably agree with the AIG executives, since Chief Justice Roberts and his Republican majority invariably support business and contract rights. Again, however, the Court would have to turn to the executive to enforce its long-winded legal reasoning. Do you think the executive would take action against itself? Of course not.
This is not as radical a position as it sounds. There is precedent to support a President’s refusal to heed the Supreme Court’s conclusions. In 1832, the United States Supreme Court held unanimously that President Andrew Jackson could not relocate the Cherokee Nation to Oklahoma from its ancestral home in Georgia and Tennessee. Worcester v. Georgia, 31 U.S. 515 (1832). The Court reasoned that the United States entered into a treaty with the Cherokee, and the treaty forbade such territorial incursions. The President said: “John Marshall made his decision; now let him enforce it!” Jackson sent an army into the Cherokee Nation and evicted the natives from their homes. The Supreme Court’s judgment had no practical effect, even though the law favored the Cherokee. This example shows how a determined executive can utterly ignore judicial pronouncements, even if he acts contrary to law. Again, we see that law depends on force, and only the executive controls State-sanctioned force. If the executive wants to ignore the law, there is little the other branches can do. Congress could try to impeach the President. But impeachment has less to do with the law or the Constitution than with political favoritism. If the President has enough allies in Congress, he will not face impeachment. Andrew Johnson faced impeachment in 1867 because a Republican majority in Congress detested his Reconstruction Policy. Bill Clinton faced impeachment in 1998 because a Republican majority in Congress did not like him as a person and because he was a Democrat. Neither President committed a gross infraction against the Constitution; politicians in Congress simply did not like them.
President Obama enjoys immense support in Congress. Nancy Pelosi and the Democrats would never take action against him if he intervened to stop bonus payments to AIG’s executives. In fact, such a move would be entirely consistent with the President’s mission to “clean up Wall Street.” The AIG executives would whine and moan and wave the Constitution in the air. But Presidents must think beyond the law. President Obama is trying to rebuild trust in an economy that nearly destroyed itself through avarice. Men like the AIG executives are prime suspects in this meltdown. While those executives technically hold enforceable rights to bonuses under established contract law, this is a case in which the law stands at odds with historical circumstances. If contract law simply functions “according to plan” in these circumstances, the men responsible for destroying the economy—and triggering the bailout—will actually receive a windfall at taxpayer expense. In other words, these men would not have gotten any bonuses if AIG collapsed last year, but because they acted wrongly, they prompted a government bailout. And now the bailout lets them get their bonuses. This is a perverse result; but it is also the legal result. I argue that the President has discretion to set aside “normal legal procedure” when “normal legal procedure” would fatally undermine public confidence in the entire system. This is precisely such a case.
Process-minded legal theorists will undoubtedly disagree with this approach. They will argue that legal rules—especially contract rules—can never be relaxed, no matter how ridiculous (or even ironic) their consequences. Contract rules are intended to provide predictability and reliability in commerce, and if the government denies their effect in one case, then commercial men will never again take chances because they will never know whether the State will uphold their bargains. In this case, they would say that AIG must pay the executives’ bonuses because “bargains are bargains,” and our economy depends on confidence that the law will honor every private bargain. Process theorists would likely agree that it looks terrible to pay bonuses to men whose conduct caused the economic crisis, but they would say that maintaining faith in legal process is more important than averting a perverse result.
I do not eschew legal process. It plays an essential role in our constitutional order. But I venture that blindly following legal rules in every circumstance is more dangerous than making prudent exceptions when real crisis beckons. Today, we find ourselves in a unique moment. Never before has government so massively intervened to prop up private enterprise. This is a new adventure for government, and it will not succeed unless the People have faith in its purposes. If the economy collapses, neat contract rules will mean nothing. To that extent, maintaining public trust in government action should be the President’s foremost concern. The public rightly loses trust when it sees scoundrel executives taking government money to pay for their bloated bonuses. Although the executives may have contractual rights to their money, honoring those rights may do more harm than good to the overall recovery effort. I argue that maintaining public trust in the recovery effort takes precedence over private contract rights in these limited circumstances. If the recovery effort fails, everyone loses. But if the government stops AIG executives from receiving their bonuses in this unique case, only those few men lose money they do not even need. Balancing those harms against each other, I conclude that the President should refuse to enforce the executives’ contractual claims for bonuses. I am strengthened in my conclusion that the executive has even greater discretion because the AIG managers would not even have been in the position to receive bonuses if the government had not supplied the bailout money to pay them. He who pays the piper calls the tune, and in this case, that means the government can impose some restrictions on pre-existing contract rights.
There is nothing sacred about contract rights. Government compels private parties to adhere to their contractual obligations because that is the most efficient policy for society, not because some magical force animates private promises. Commerce functions best when people do what they promise. But there is nothing intrinsically good or noble about contracts. They function by sovereign grace, not a priori principle. Thus, there is no fundamental truth to the assertion that “contracts are contracts.” Contracts are valid only to the extent that the executive is willing to enforce legal decrees. And the executive has many duties beyond enforcing private contract judgments. Today, the executive confronts a massive financial crisis that threatens countless Americans. It is attempting to redress that crisis through bold, general action. That general action will inevitably impact some specific rights.
President Obama should not miss the forest for the trees in this situation. He can deny effect to these executives’ contracts without undermining faith in contract law as a whole. I think most Americans would understand his reasons if he did exactly that. Permitting the executives to benefit from government bailout money in this case sends a far worse social message than interfering with a particularly unjustifiable private bargain. After all, these bargains would have meant nothing if the government had not supplied the money to honor them. In that light, can the executives really complain that the government modifies those bargains?
These scoundrels are still getting their massive salaries. They still have homes, high-paying jobs and nice things. That is a whole lot more than most people have as they struggle to cope with this crisis. Frankly, their whining about “contract rights” falls especially flat when I consider just how many other advantages they enjoy. In a crisis like this, government must make exceptions that will anger a few private interests. That does not mean the government does not care about the law. In fact, sometimes a government best preserves faith in the law by refusing to apply it in cases in which it arouses public disgust. This is exactly such a case.
Monday, March 16, 2009
THANK YOU LETTER FROM AIG EXECUTIVES TO PRESIDENT OBAMA
Dear President Obama,
My name is Mr. Herbert F. Lessmann. I am a Senior Fund President in American International Group’s (AIG) financial products department. Although AIG is primarily an insurance company, in recent years we built a solid reputation consolidating loans and other financial products for industries worldwide. Unfortunately, last year we discovered that our collateral was not as robust as we would have liked and our entire business almost collapsed. Thankfully, the Federal government intervened to keep our company afloat. With the Federal money, we once again have resumed issuing credit-default swaps and other financial products intended to stimulate capital growth in a new economy.
Federal money also helped award me a $9,500,000 bonus for 2008. True, my fund caused millions of private owners to lose their homes in the subprime mortgage debacle, but I am a skilled financial manager. AIG’s Board of Directors knows top performers when they see them, and I am no exception. Under company contracts I signed in early 2008, the Board promised to pay me a bonus if my fund sold at least 120,000 financial products in Fiscal 2008. My fund sold 121,107 financial products in Fiscal 2008. For that reason, the Board was obligated to pay my bonus. At one point late last year, it appeared that the company would fold and I would not get my bonus. But then the Federal money came in, and now I will get the bonus I deserve. I worked hard for that bonus. Mr. President, thank you so much for allocating the funds needed to reward me for my hard work on behalf of American families.
I am so glad that I received my bonus. For a while, I was genuinely nervous that I would only receive my annual salary of $4,000,000 in 2008. My wife was especially concerned because she is redecorating our kitchen, and she was counting on my bonus to bring in the best marble cutters from Italy to get the job done. Additionally, my son has been bothering me about buying him a new Lamborghini. His friends at Whipporwhill Academy have been teasing him about it, and it’s only fair that he gets what he wants. After all, he got a C+ in biology, and I promised I would buy him any car he wanted if he got at least a C in that class. Promises are promises, and contracts are contracts. How could I go back on my word? How could I not honor my obligation to my son? Mr. President, thank you very much for allowing AIG to honor its obligation to me, and for allowing me to honor my obligations to my son and wife. We will put that money to good use.
Your administration is doing a great job. You understand that America’s companies need great managers, and great managers do not stay at their jobs without great bonuses. Although I disagree in principle with government bailouts, I have no objections when government bailouts are necessary to pay my bonus. I voted against you in the November election, Mr. President. But since then I have come to see my error. You said that you wanted to treat “Main Street” as well as “Wall Street.” However, I know now that you are not some closet communist. You knew that taking care of Wall Street actually takes care of Main Street, too. When you took care of me, you ensured that I would keep doing my job for American homeowners everywhere. I need a $9,500,000 bonus because I am worth it. I sell mortgage-backed securities and credit-default swaps to banks all over the world. I enable people to get rich and live in dream homes. True, the economy collapsed last year, but that was not my fault. I am no Bernie Madoff. I never stole from anyone. I just tried to help people make more money than they already had.
My bonus money will go to good use. Because you helped me get my bonus, I think it’s only fair that I tell you what I plan to do with it. First, I will put about $2,000,000 in my personal medium-yield money market. Then I will put another $1,500,000 in my kids’ special trust fund so they can buy things they want while I am at work. Third, I will take $1,000,000 and go on a nice month-long vacation with my wife in Maui. That will be very nice; I need to relax after all the anxiety about my bonus. Not only that, vacations help me stay focused. American homeowners need me to be productive in order to help them make money. Next, I will take $2,000,000 as a down payment for my daughter’s new home in Manhattan. She can’t live just anywhere; I need to find her a place on Park Avenue on the Upper East Side. I can’t worry about my daughter. With the remaining $3,000,000, I will buy my son’s Lamborghini and pay for my wife’s kitchen renovation. That will leave some cash for jewelry, new suits, antiques, maybe an armchair and a sofa. It all depends on what my wife wants to do.
You know what you’re doing, Mr. President. Money spent on executive bonuses is always money well spent. After all, our economy depends on men like me. We know the ups and downs. We don’t get frazzled every time the DJI drops a few hundred points. We stay in there and sell our products, come hell or high water. We are financial experts and we have hard lives. It is not easy to manage the fortunes of millions of Americans. We are more important to the average American than religion or mental health. We make money for people, and money creates jobs. To that extent, we deserve every penny we make. If we do not receive bonuses, we will not be able to rescue our economy. In these dark times, our economy needs bold business leaders, not defeatists. And bold business leaders do not work for small-time pay. It would be unfair to us and to the American people if we do not receive the bonuses we deserve. Well-paid executives do what is right for America. By paying us well, you guarantee a better future for America. That is what the President is supposed to do, isn’t it?
In sum, I was wrong about you, Mr. President. You are not some bleeding heart socialist who wants to provide top-notch medical care to beggars and criminals. No, you spend money where it should be spent: On executive compensation. Against all opposition, you earmarked funds intended to save AIG from destruction. In the process, you paid the executives who make this country run. That is a bailout in the word’s truest sense, because when we get our bonuses, everyone survives. I can promise you that our economy will recover. I can also promise you that I will really enjoy the money you gave me. Have you ever received a $9,500,000 check for talking on the phone, sitting in conference rooms and looking at computer screens for a year straight? Let me tell you, it feels good. Really good. I know you probably like your job, but you don’t get $9,500,000 every year in addition to a $4,000,000 salary. Well, to each his own.
I know that people will give you a hard time when they hear that I received my bonus. Don’t listen to them. You know that fixing the economy begins with paying the important guys. People will say that it’s wrong to reward men who got us into this pickle in the first place. All lies. We did no such thing; there is no way we could have predicted that the economy would fall apart last year. Risk comes with our trade. The market rises and falls. Does that mean we should not get paid for putting our necks on the block every day? Of course not. We drive the economy because we take risks. If we did not take risks, no one would succeed. No one wins when everyone plays it safe. People want winners, not wet noodles. Sure, we invested in some risky mortgages, but our clients wanted big returns. And you can’t get big returns without taking some chances. We get paid because we take the risks that everyone wants us to take. You understand that. You understand that we need bonuses to feel good about our work, whether we win or lose. We are risk-takers. We deserve high pay for that. Consider it hazard pay. Put simply, Americans don’t want wimps controlling their financial lives. They want brazen, sword-swinging, throat-cutting financial swashbucklers who go for the treasure chest, not the penny pouch.
That is what we do. We go for the treasure chest. When we get the booty, everybody gets some. And no one complains when the market is good. When we receive bonuses, we stay hungry. When we’re hungry, we swashbuckle for America. You know that, Mr. President. That is why you guaranteed that we received our bonuses this year. Swashbucklers don’t swashbuckle for free. America needs us. You need us.
Thank you very much for paying our bonuses. Good luck during the rest of your term.
Sincerely,
Herbert F. Lessmann
Senior Fund President, American International Group
Financial Products Department
The Billion Bunch® Honorary Key Holder 2007
My name is Mr. Herbert F. Lessmann. I am a Senior Fund President in American International Group’s (AIG) financial products department. Although AIG is primarily an insurance company, in recent years we built a solid reputation consolidating loans and other financial products for industries worldwide. Unfortunately, last year we discovered that our collateral was not as robust as we would have liked and our entire business almost collapsed. Thankfully, the Federal government intervened to keep our company afloat. With the Federal money, we once again have resumed issuing credit-default swaps and other financial products intended to stimulate capital growth in a new economy.
Federal money also helped award me a $9,500,000 bonus for 2008. True, my fund caused millions of private owners to lose their homes in the subprime mortgage debacle, but I am a skilled financial manager. AIG’s Board of Directors knows top performers when they see them, and I am no exception. Under company contracts I signed in early 2008, the Board promised to pay me a bonus if my fund sold at least 120,000 financial products in Fiscal 2008. My fund sold 121,107 financial products in Fiscal 2008. For that reason, the Board was obligated to pay my bonus. At one point late last year, it appeared that the company would fold and I would not get my bonus. But then the Federal money came in, and now I will get the bonus I deserve. I worked hard for that bonus. Mr. President, thank you so much for allocating the funds needed to reward me for my hard work on behalf of American families.
I am so glad that I received my bonus. For a while, I was genuinely nervous that I would only receive my annual salary of $4,000,000 in 2008. My wife was especially concerned because she is redecorating our kitchen, and she was counting on my bonus to bring in the best marble cutters from Italy to get the job done. Additionally, my son has been bothering me about buying him a new Lamborghini. His friends at Whipporwhill Academy have been teasing him about it, and it’s only fair that he gets what he wants. After all, he got a C+ in biology, and I promised I would buy him any car he wanted if he got at least a C in that class. Promises are promises, and contracts are contracts. How could I go back on my word? How could I not honor my obligation to my son? Mr. President, thank you very much for allowing AIG to honor its obligation to me, and for allowing me to honor my obligations to my son and wife. We will put that money to good use.
Your administration is doing a great job. You understand that America’s companies need great managers, and great managers do not stay at their jobs without great bonuses. Although I disagree in principle with government bailouts, I have no objections when government bailouts are necessary to pay my bonus. I voted against you in the November election, Mr. President. But since then I have come to see my error. You said that you wanted to treat “Main Street” as well as “Wall Street.” However, I know now that you are not some closet communist. You knew that taking care of Wall Street actually takes care of Main Street, too. When you took care of me, you ensured that I would keep doing my job for American homeowners everywhere. I need a $9,500,000 bonus because I am worth it. I sell mortgage-backed securities and credit-default swaps to banks all over the world. I enable people to get rich and live in dream homes. True, the economy collapsed last year, but that was not my fault. I am no Bernie Madoff. I never stole from anyone. I just tried to help people make more money than they already had.
My bonus money will go to good use. Because you helped me get my bonus, I think it’s only fair that I tell you what I plan to do with it. First, I will put about $2,000,000 in my personal medium-yield money market. Then I will put another $1,500,000 in my kids’ special trust fund so they can buy things they want while I am at work. Third, I will take $1,000,000 and go on a nice month-long vacation with my wife in Maui. That will be very nice; I need to relax after all the anxiety about my bonus. Not only that, vacations help me stay focused. American homeowners need me to be productive in order to help them make money. Next, I will take $2,000,000 as a down payment for my daughter’s new home in Manhattan. She can’t live just anywhere; I need to find her a place on Park Avenue on the Upper East Side. I can’t worry about my daughter. With the remaining $3,000,000, I will buy my son’s Lamborghini and pay for my wife’s kitchen renovation. That will leave some cash for jewelry, new suits, antiques, maybe an armchair and a sofa. It all depends on what my wife wants to do.
You know what you’re doing, Mr. President. Money spent on executive bonuses is always money well spent. After all, our economy depends on men like me. We know the ups and downs. We don’t get frazzled every time the DJI drops a few hundred points. We stay in there and sell our products, come hell or high water. We are financial experts and we have hard lives. It is not easy to manage the fortunes of millions of Americans. We are more important to the average American than religion or mental health. We make money for people, and money creates jobs. To that extent, we deserve every penny we make. If we do not receive bonuses, we will not be able to rescue our economy. In these dark times, our economy needs bold business leaders, not defeatists. And bold business leaders do not work for small-time pay. It would be unfair to us and to the American people if we do not receive the bonuses we deserve. Well-paid executives do what is right for America. By paying us well, you guarantee a better future for America. That is what the President is supposed to do, isn’t it?
In sum, I was wrong about you, Mr. President. You are not some bleeding heart socialist who wants to provide top-notch medical care to beggars and criminals. No, you spend money where it should be spent: On executive compensation. Against all opposition, you earmarked funds intended to save AIG from destruction. In the process, you paid the executives who make this country run. That is a bailout in the word’s truest sense, because when we get our bonuses, everyone survives. I can promise you that our economy will recover. I can also promise you that I will really enjoy the money you gave me. Have you ever received a $9,500,000 check for talking on the phone, sitting in conference rooms and looking at computer screens for a year straight? Let me tell you, it feels good. Really good. I know you probably like your job, but you don’t get $9,500,000 every year in addition to a $4,000,000 salary. Well, to each his own.
I know that people will give you a hard time when they hear that I received my bonus. Don’t listen to them. You know that fixing the economy begins with paying the important guys. People will say that it’s wrong to reward men who got us into this pickle in the first place. All lies. We did no such thing; there is no way we could have predicted that the economy would fall apart last year. Risk comes with our trade. The market rises and falls. Does that mean we should not get paid for putting our necks on the block every day? Of course not. We drive the economy because we take risks. If we did not take risks, no one would succeed. No one wins when everyone plays it safe. People want winners, not wet noodles. Sure, we invested in some risky mortgages, but our clients wanted big returns. And you can’t get big returns without taking some chances. We get paid because we take the risks that everyone wants us to take. You understand that. You understand that we need bonuses to feel good about our work, whether we win or lose. We are risk-takers. We deserve high pay for that. Consider it hazard pay. Put simply, Americans don’t want wimps controlling their financial lives. They want brazen, sword-swinging, throat-cutting financial swashbucklers who go for the treasure chest, not the penny pouch.
That is what we do. We go for the treasure chest. When we get the booty, everybody gets some. And no one complains when the market is good. When we receive bonuses, we stay hungry. When we’re hungry, we swashbuckle for America. You know that, Mr. President. That is why you guaranteed that we received our bonuses this year. Swashbucklers don’t swashbuckle for free. America needs us. You need us.
Thank you very much for paying our bonuses. Good luck during the rest of your term.
Sincerely,
Herbert F. Lessmann
Senior Fund President, American International Group
Financial Products Department
The Billion Bunch® Honorary Key Holder 2007
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