Contracts and Bonuses

March 19th, 2009

Contracts are the glue that holds our economy together and, in a broader sense, our society.  If we ever get to the point where we can’t rely on the validity, predictability, and legality of contracts, everything else will deteriorate. 

Think about it–contracts aren’t just legal agreements among businesses, labor arrangements between businesses and unions, and compensation agreements between businesses and executives.  They’re ubiquitous in the lives of every American.  When you buy a house, rent an apartment, finance a car, rent a car, get married, use a credit card, begin cell phone service, subscribe to cable TV, and engage in innumerable other activities, you’re using and relying on contracts.  If you can’t depend on those contracts to be honored, and if you don’t have legal recourse to a judicial system that will ultimately enforce contracts, your life will descend into chaos.

All law school students study contracts.  By the time they become lawyers, they understand contracts.  The largest professional group among members of Congress is lawyers, at about 40 percent of the total.  The President of the United States is a lawyer, and presumably a smart one, having been such an outstanding law student that he was elected President of the Harvard Law Review, the highest honor a student can attain at Harvard Law School.

How is it, then, that in this agglomeration of legal expertise in Washington, so many don’t seem to understand the basics of contract law? 

That brings us to the contracts between AIG and some of their executives for the payment of bonuses.  The bailout/stimulus bill passed recently provides that contracts in force at that time must be honored.  The AIG contracts existed long before, and that fact was open and available to everyone.  Senator Chris Dodd was responsible for the language in the bill protecting contracts, and he had input from the Administration on that provision.  Dodd himself now admits that.  All the members of Congress who voted for the bill also voted to honor contracts like those which result in AIG executives receiving retention bonuses.

So what’s going on when the President, who signed the bill, very publicly expresses his outrage at the fact AIG is paying these bonuses?  When members of Congress, most of whom voted for the bill, express the same outrage before any TV camera in their vicinity and in long harangues during committee hearings?  Are our leaders uninformed and incompetent, or are they shamelessly pandering to the mob?  We can all decide for ourselves which is true.  In either case, the result is a major distraction from solving the economic crisis, an enraged if uninformed public, and death threats directed at AIG and its employees.

The government, as the White House has acknowledged, can’t force these contracts to be abrogated.  Passing a tax law promoted by Dodd that confiscates all or most of the bonuses from a few specific individuals is almost certainly unconstitutional.  And comes Representative Barney Frank, along with Dodd a major culprit in this whole fiasco, asserting that since “we” (the government) now own the company, we can do whatever we want.

These bonuses are a small issue compared to the totality of the economic crisis.  Yet we have the President and Congress seizing on it to whip up the public because, it would seem, they don’t have a clue what else to do.  Our leaders are playing a mass violin concerto while the economy burns.

There’s no excuse for the ignorance that characterizes the people sending threats to AIG and the people lobbing firebombs across the blogosphere, not to mention the politicians instigating them.  All the information necessary to understand what’s really happening is readily available in the media, including media outlets not normally considered to be pro-business.  Here are just a few sources:

Washington Gone Wild, Washington Post Editorial
House Passes Heavy Tax on Bonuses at Rescued Firms, The New York Times
House passes bill taxing AIG and other bonuses, AP/
Obama’s AIG Panic, The Wall Street Journal Opinion Journal 
Sen. Dodd Admits Adding Bonus Provision to Stimulus Package, Fox News
Dodd Blames Obama Administration for Bonus Amendment,
Pelosi: Don’t Blame Us for AIG Mess, Capitol Briefing, The Washington Post
The Gift That Keeps on Giving, New York Times Editorial
Grassley on AIG execs: Quit or suicide, Politico
Rage at AIG Swells As Bonuses Go Out, The Washington Post

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4 Responses to “Contracts and Bonuses”

  1. Kevin |

    Not to um… take this off on a tangent or anything but, marriage used to be seen as a contract and divorces were handled by the court system like most any other contractual dispute. My how times have changed.

  2. Brian |

    Maybe a Kristallnacht or Reichstagg fire for businessmen? The parallels are actually eerie.

  3. Contracts and Bonuses - [CollegeTimes] |

    […] article was also posted at Opinion Forum.) Insight, […]

  4. obloodyhell |

    > Are our leaders uninformed and incompetent, or are they shamelessly pandering to the mob?


    As a matter of fact, even:

    YES, *DUH*

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