Friday, March 20, 2009

the majority owner of a public company (in this case, the government) can't just abrogate enforceable contracts.

TO BE NOTED: From the Economics Of Contempt:

"The Government and AIG

Josh Marshall unleashes a very strange rant against AIG:
The problem is what appears to be the president's mortifying impotence in the face of bankers and financiers who created the problem. The president speaks and acts for the federal government, which is to say, the American people, who have mobilized more than a trillion dollars and all powers of the state to repair the damage emerging out of the financial sector. And with all that, he's jacked up on a employment agreement between a company the government now owns and derivatives traders who sank the world economy and may quite likely be looking at criminal charges for their activities in the not too distant future?

Anyone can look at that and see that the equation of power and accountability is all screwed up.
[F]undamentally, Obama needs to start showing that he's in charge, that he's operating as the American people's advocate and that he has the power to do it -- which these stories of getting jacked up by some Gordon Gecko wannabes in London just terribly undermines.
What's shocking is that Marshall finds any of this shocking. The government is in control. When the government took an 80% stake in AIG last September, it fired then-CEO Robert Willumstad, and hand-picked Ed Liddy to be the new CEO. The president doesn't have time to run AIG, so the government essentially hired Liddy to do it instead.

Liddy is, for all practical purposes, acting as "the American people's advocate." When confronted with the bonus contracts, Liddy consulted outside counsel, who informed him that AIG was, in fact, contractually obligated to pay the bonuses. Liddy determined that refusing to pay the bonuses would ultimately cost the taxpayers more than simply paying the bonuses—which is undoubtedly true, seeing as failure to pay the bonuses would have triggered the "cross-default" provisions in AIG's derivatives contracts. As CEO, that's Liddy's decision to make. Marshall just doesn't like Liddy's decision.

Now, some might argue that the bonus contracts wouldn't be enforceable if AIG was in bankruptcy, and that the only reason AIG isn't in bankruptcy is because the government bailed them out at the last minute. That's true, but the fact of the matter is that AIG isn't in bankruptcy. Marshall and others might wish that AIG was in bankruptcy, but it isn't, and so the bonus contracts are enforceable. Marshall seems to be appalled that the majority owner of a public company (in this case, the government) can't just abrogate enforceable contracts.

TPM is one of my favorite sites on the internet, but its coverage of the AIG bonus controversy has been sub-par. TPM is way out of its depth on matters of finance, so they've allowed pure emotion to replace thoughtful analysis.

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