No Bonuses = No Contract Law

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Over the last few days Washington has been denouncing AIG for paying out retention bonuses to employees in its financial-products division—the same division responsible for much of the company’s recent losses.

AIGRelegated to the background is the fact the bonuses are a lawful contractual obligation. While bonuses are normally discretionary, in this case, presumably to retain key personnel at an uncertain time, AIG chose to make binding commitments. Now that AIG is failing, President Obama argues it’s unfair that AIG should have to fulfill its obligations under those contracts.

But what is it exactly that Obama is claiming is unfair? Since AIG is contractually obligated to pay the bonuses, the object of Obama’s criticism can only be contract law itself. To say the bonuses shouldn’t be paid is to say that contracts as such should be ignored. (This, of course, is exactly what Obama is arguing, in as explicit terms as you’ll ever hear from Washington.)

One little problem: contracts are the medium of production and trade. Contracts are the crucial moving part by which the economy functions. But contracts do not function unless they are inviolable. If they don’t operate in principle, then they don’t operate—and neither does the economy. The moment companies or the government arbitrarily choose which liabilities they will honor, contract “law” becomes a lie, and production and trade become a game played at the whim of government bureaucrats.

If AIG is a bellwether, then America is about to take another big step down this road. The wind in Washington is blowing us toward the death of contract. From multi-million dollar mergers, to your supermarket purchase of a loaf of bread, to supplier contracts, employment contracts, loan agreements, home purchases, bank accounts, insurance—soon all of it will function, not by right, but by the permission of government.

Of course, it was inevitable in a failed company propped up by 80% government equity and a government appointed CEO that this kind of controversy would arise. The government can’t have it both ways. Either AIG is a failed company, in which case it goes into bankruptcy and accesses the opportunity to renegotiate with all of its creditors, or it continues the pretense that it is a viable, functioning business, in which case law and justice require that it honor its contractual agreements. This is true regardless of whether Obama or the American taxpayers think that the creditor in question morally deserves the benefit of his contract. At least, if this is still America.

AIG’s reincarnation as the half-breed bastard child of freedom and statism paves the way for all kinds of through-the-looking-glass absurdities. It is only because we, the tax-paying public, have been forced against our will by the government to bear the burden of AIG’s failures that we assume the quasi-moral-power to object to AIG’s binding contractual decisions. Even so, were we true shareholders, we would have no legal right to retroactively invalidate them. It is only because Washington has fully committed itself to a pragmatic, anything-goes policy that it even pretends to the legal ability to toss AIG’s contracts out the window.

This direct attack on contract rights is highly significant as a signal of things to come. Let Obama protest all he likes that he is pursuing “legal” means of snuffing the contracts. There can be no legal means of annihilating freedom of contract as such, the sine qua non of all other economic freedoms. This is the subordination of law to populist politics.

Open your eyes America: this is another slow, sad step to the gallows. But we are beginning to pick up the pace.

(Photo credit: Gene Hunt)

Posted by on March 19, 2009. Filed under Business & Economics, Spring 2009. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry