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Sentences to ponder
You people do like to comment on A.I.G. bonuses, don't you? That's exactly my worry about the whole debate. If my last post on the topic had elicited only five comments I would feel much better about what is going on.
In any case, this sentence, by John Carney (via Felix Salmon) caught my eye:
I don't see anything about voiding the contracts on the grounds of public policy as violating the sanctity of contracts.
In any case, the best way to prove me wrong is for you to never think about this entire topic, ever again. In the meantime, beware your intuitions about vindication and payback, I would say.
Ruth Marcus makes good points. Read Jim Manzi too. Steven Pearlstein says they could have, when the bailout started, preemptively based on the bonuses on minimizing taxpayer liabilities. They didn't.
Posted by Tyler Cowen on March 18, 2009 at 11:34 AM in Law | Permalink
Comments
Ok Tyler - time for a change of pace - what would be your economic rationale for this - certainly the differences are statistically significant - but I am not certain I have sorted out causality :-)
http://www.forwardon.com/view.php?e=Id1200c8f6b7f5f813
Posted by: Bruce Humbert at Mar 18, 2009 11:40:19 AM
Getting hung up on the AIG bonuses is like getting hung up on earmarks. Yes, they're both annoying and wrong in principle, but there are way bigger fish to fry.
Posted by: Christopher Monnier at Mar 18, 2009 11:56:21 AM
"I don't see anything about voiding the contracts on the grounds of public policy as violating the sanctity of contracts."
Except for the pesky fact that the purported "public policy" has to exist prior to the formation of the contract. See generally, "due process of law."
And I still have yet to hear from any self-appointed expert on contract law the following two words: quantum meruit.
Posted by: KipEsquire at Mar 18, 2009 11:57:26 AM
OUTRAGE!
Posted by: Jack Spade at Mar 18, 2009 12:04:15 PM
The key to understanding the AIG bonus issue is that AIG would be bankrupt and in the process of a court supervised liquidation but for the extraordinary government action that has kept the company afloat. If not for the government bailout, the contracts would be worthless because the employees would be unsecured creditors in a company worth less than zero. (...)Actually we are not, employees can get retention bonuses when the company is declared bankrupt. See Conseco.
There's simply no reason that a bailout meant to support the company because of systemic risk from failure must also mean that other aspects of AIG's operations cannot be treated as if the company actually were broke. We're in undiscovered territory here, it's true.
Posted by: kurt at Mar 18, 2009 12:05:07 PM
There aren't bigger fish to fry; what we're seeing now may be the fulfillment of Marx's prophecy that capitalists would destroy capitalism. It's damn hard to get voters to stay on the side of free markets when you see stuff like this going down, wouldn't you think?
Posted by: M1EK at Mar 18, 2009 12:05:45 PM
Bruce's link will be the most interesting comment.
Posted by: josh at Mar 18, 2009 12:06:10 PM
Halleluia, Tyler! I'd say the same goes for opinions on why the American car companies are failing. In a just world, most of us wouldn't have one.
Posted by: kebko at Mar 18, 2009 12:08:01 PM
Can anyone suggest a country to flee to if this populism gets out of hand? Maybe Singapore?
Posted by: Brian at Mar 18, 2009 12:09:08 PM
On the one hand, if we don't bailout Wall Street, apparently the whole economy collapses and everybody loses their savings. On the other hand, the people getting bailed-out have a heck of a lot more to lose than the average tax-payer fronting the money for this bailout. So, the terms of the bailout are basically being negotiated as a giant game a chicken between the people who run Wall Street and the rest of America. From long ago game-theory classes, I seem to remember that the best way to win a game of chicken is to throw-out the steering wheel. I think portions of the public are coming to this conclusion also.
Posted by: MH at Mar 18, 2009 12:15:29 PM
"In any case, the best way to prove me wrong is for you to never think about this entire topic, ever again. In the meantime, beware your intuitions about vindication and payback, I would say."
The issue of AIG bonuses as such is piddling. The idea that Congress can or ought to go around rewriting or abrogating contracts is not (See also: mortgage cramdown). That's the real issue, not the relatively tiny amount of money involved.
No one mentioned quantum meruit because: (1) we don't do that kind of pleading anymore; and (2) this would not be a quantum meruit case because there is a written contract. Quantum meruit is for cases where one party is enriched at the expense of the other, but no actual contract was formed (or maybe the recipient breached after conferring a benefit on the other party). Since the recipients (we assume) did not breach the contracts, and there are no apparent defenses to formation, the proper cause of action would be a straight contract suit for expectation damages.
Posted by: John Jenkins at Mar 18, 2009 12:18:21 PM
Tyler is clearly very uncomfortable with irrational human emotion. That's an understandable sentiment for an intelligent person committed to rationality, and a common enough sentiment among economists. That's probably also why most people instinctively distrust economists.
There's also a rational, and dislikeable to be sure, argument to be made for vengeance and decapitating (maybe even literally) the elite class of the nation and letting fresh blood rise to the top every now and then. It arguably worked in Germany, Japan, France, Russia (I'd say less well) and China. Strictly from the perspective of improving creativity and productivity, you could probably demonstrate that a brutal round of vindictiveness and payback against America's ruling class may be in America's best long-term interest. Libertarians would argue that a more humane solution is to let the market sort it out, and the chaff can be put aside in a far less destructive way. In a perfect world, sure. But how do you get the market mechanism unstuck when it's clogged up with the detritus of an oligarchical elite that continuously undermines the market to pay favors to itself?
Posted by: vanya at Mar 18, 2009 12:26:44 PM
Or to put it another way, if I can't get positive returns after 12 years of very conservate savings/investing and the people running large Wall Street firms apparently can't be paid less than millions a year regardless of who they actually perform, why not let the economy collapse and see if we can't build a better system?
Posted by: MH at Mar 18, 2009 12:28:20 PM
The speed at which people get dumb is an exponential function of how much money they have lost recently.
But seriously, Ayn Rand could not have written this plot.
Posted by: stanfo at Mar 18, 2009 12:31:46 PM
Recently, many have worried about the moral hazard of bailing out failing businesses. In this case, taking away the bonuses will not create a bad precedent, but a good one: in the future, agents will be less confident that they can act againt the interests of their principals, despite arranging for contractual protections.
As for the sanctity of contracts, consider bankruptcy. The government regularly modifies contracts when a company is bankrupt. (In addition, courts regularly decline to enforce contractual provisions for a number of policy reasons.) AIG is a special case where the company went bankrupt, but for important public policy reasons, the government chose to give AIG the funds to meet obligations it otherwise could not (in effect, bailing out the parties it contracted with). In this special case, it is quite consistent and appropriate for the government to decide not to honor those obligations of AIG that are not in the public interest.
This story demonstrates that Tyler Cowen's previously expressed ideas concerning executive pay---"It's become increasingly hard to deny top producers what they, in economic terms, are worth"---are flawed. Maybe cognitive dissonance makes Mr. Cowen reluctant to think about this topic.
Posted by: mm at Mar 18, 2009 12:40:39 PM
Apparently (see link below), much of this was known to many of the people that are now "outraged."
Congress has virtually no credibility to lose, but the administration does/did.
http://www.msnbc.msn.com/id/29754670/
Posted by: John Bailey at Mar 18, 2009 12:44:43 PM
Tyler, I would suggest that you discuss this issue with some people who feel strongly but are (semi-)rational (I'm sure there are *some* at your university.)
In my view, what you are *not perceiving* and the commentator Vanya keeps stating is this viewpoint:
"Bailing out a company is one thing. Giving very large (by typical American standards) bonuses to the EXACT people who nearly DESTROYED the financial system (and did effectively DESTROY their company; as in 80% government ownership) seems, to be blunt, just *evil*."
And, FYI, the whole "voiding contracts would be a moral outrage and is just never done!" argument appears to be false - see this link:
http://www.nytimes.com/2009/03/18/opinion/18cunningham.html?ref=opinion
Posted by: Mark at Mar 18, 2009 12:48:16 PM
If a company goes bankrupt, the government gets to make their decisions. If the government hands them money, we get to whine about it.
What point do we consider the official commencement of the 2nd great depression? I propose when politicians invoke seppuku for CEOs.
Posted by: Andrew at Mar 18, 2009 12:56:50 PM
I'm glad conservatives and libertarians care about ridiculous wallstreet pay when everyone else pays for it with taxes. When its coming out of everyone else' pocket by lower returns to one's 401k by leveraged arbitrage gains by wallstreet, oh, who cares.
Posted by: yoyo at Mar 18, 2009 1:01:09 PM
I don't think the outrage is really about AIG bonuses in particular. It's about bonuses, in their current
form, as an appropriate and accepted form of employee compensation.
They don't seem to align pay with productivity. Perhaps it's the measurement of productivity that is
wrong.
Posted by: KB at Mar 18, 2009 1:01:55 PM
Sorry Mark, but that professor's opinion piece is very, very short on actual legal reasoning.
For example, most states have enacted the Uniform Fraudulent Tranfer Act and paying a contractual retention bonus in the ordinary course of A.I.G.'s business would not be a voidable transfer.
Bankruptcy is a risk that is known in any contract when going in, and if A.I.G. were in bankruptcy and were being run under that statutory scheme, I don't think anyone would have a problem with it. The problem with A.I.G., insolvent banks (and GM for that matter) is that they are NOT in bankruptcy, where we could find out whether these businesses were economically failed or financially failed.
If Congress and the administration would just sit back and say: "we already have laws to deal with this in the bankruptcy code; these companies need to reorganize," there would be a lot fewer problems because we wouldn't be making up the rules as we go along (badly and without forethought).
Posted by: John Jenkins at Mar 18, 2009 1:15:26 PM
I understand that the $150 million in question is not going to make a difference in the short run big picture. But it seems to me that absolutely maximizing to the full extent politically possible PERSONAL retribution against the financiers whose willful ignorance, short-sightedness, arrogance, and greed caused this whole problem could be one of the best possible outcomes. Anything that could even SLIGHTLY push corporate culture in this country towards at least a bare minimum of responsibility to the medium and long term interests of the company (and of course by proxy our economy), is an excellent outcome. Passing a special excise tax to take back 100% of the bonuses from every single post-bailout recipient seems like a great message. If that leads to some big personal tragedies where some execs are forced to downgrade form their $8 million apartment to a $1.5 million brownstone walk-up, or even full on personal bankruptcy, so much the better.
I'd personally be more for just outright nationalization and capping all payment, salary, options, perks, everything, for every single employee, at, say $300k/year, but apparently the administration's too afraid to do that. You can make all the arguments you want about competition for talent, efficiently running the financial sector, all that bullshit. But they got themselves into this mess, and if the government took over all the currently insolvent banks, it would take over like 3/4 of the sector, and there would be no problem of underpricing in the competition for "talent".
Posted by: Matt at Mar 18, 2009 1:51:56 PM
Mark -- You should focus on the last paragraph of Prof. Cunningham's opinion piece: "Without reading the contracts, understanding their background and learning about employee performance, one cannot say whether A.I.G. is legally bound to pay or legally excused from paying these bonuses."
He is arguing that there may be legal bases for not paying the bonuses or clawing them back. Doing so would remain within the law. That's very different from tossing out the law because of one or another public policy.
Posted by: JP at Mar 18, 2009 1:56:06 PM
This sort of populist outrage serves a purpose. It is part of the Big Model. The choice not between living in a world where people pursue utilitarian/Kantian morality, take their licks, move on and living in a world where people see injustice and are angered by it, seek its correction, even if its correction is not worth the trouble. Incentives matter. Human beings get mad when bad deeds are rewarded because because the fact of bad deeds causing anger creates a consequence for bad deeds. At the margin this anger on its own probably causes less rewards for bad behavior. You would not rather live in a world where injustice was not met with outrage because that would be a world with greater injustice.
Posted by: Michael Foody at Mar 18, 2009 1:56:55 PM
a) Everyone seems to believe that if a number is negative, it cannot be the maximum. If AIG is in bankruptcy so the profits are negative, they seem to be saying, it must be that the managers could be replaced by the doormen (sorry, the doorpersons), and profits would necessarily go up, cause you know, negative profits cannot really be the best we can do at any time.
b) Everyone seems to believe that the purpose of a bonus is to share the profits, so with nonpositive profits there should be no bonuses. In fact, this is not the rationale of the bonus for most of managers (perhaps excluding a handful at the very top). It is very impractical, and it would probably create no or even perverse incentives to tie the bonus of low level managers to the whole firm's profitability. Better incentives are created if the bonus is linked to some achievable, easy to measure metric, one which the manager has the ability to affect more directly: division sales, customer satisfaction, etc.
c) Obama has no clue about economics. We knew that, no surprises there (and to be fair, McCain doesn't know any economics either.) It surprises me greatly that he has no clue about law. How could he expect companies to unilaterally declare contracts with their labor providers void in the absence of filling for bankruptcy? How could he expect to pass a law that would target one specific part of a single company's worker compensation with a 100% tax?
d) I loved Larry Summers comment about how the administration will get creative about the AIG bonuses. You know, you'd expect these people to still behave like economists after they are appointed in the administration. Otherwise, what is the point of having an economist there? He should know that "creativity" is the last thing the business need. On the other hand, he might be aware of that, and that's his public service announcement: we will get creative for years from now on, get out while you can.
e) What's the over/under for the time to reach a majority of people nostalgic for Bushitler's administration?
Posted by: Bushequalhitler at Mar 18, 2009 2:06:19 PM
