March 17, 2009
Sue Me, Sue Me, Shoot Bullets Through Me

If President Obama forces AIG to break those outrageous bonus contracts America as we know it will come to an end. China will call in our notes. Gibraltar will tumble, the Rockies will crumble.

Or so goes the line being peddled right now not only by the administration and Wall Street, but also by significant voices in the media. For instance New York Times financial writer Andrew Ross Sorkin, who today treated this argument with ludicrous respect:

“This isn’t just a matter of dollars and cents,” [President Obama] said. “It’s about our fundamental values.”

On that last issue, lawyers, Wall Street types and compensation consultants agree with the president. But from their point of view, the “fundamental value” in question here is the sanctity of contracts.

That may strike many people as a bit of convenient legalese, but maybe there is something to it. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

And so on. And so forth. Read the piece and shudder for the Republic.

Or not.

For God’s sake, get a grip, Sorkin. Even the dimmest sports fan knows that contracts, far from being sacred in American business or American courts, are broken every day. It is a standard, recognized business practice. Every mergers and acquisition hustler knows it; every Hollywood agent knows it; every CEO and every labor leader knows it. Potted plants know it. Birds and bees know it. Deep down, even financial writers for the Times must know it. So let’s slice the feces here, okay?

And Papa Bonk most certainly knows it, so I’ll yield the remainder of my time to the gentleman from Ketchup Is a Vegetable:

Secretary Geithner recently had one of those Lady or the Tiger choices to make. Except in his case, the doors were clear glass.

Behind one of them stood a beautiful woman dancing the mambo and singing a freedom song. That door was marked… “Just say no to AIG Bonuses.”

Behind the other door stood Barney Frank in a tiger suit backed by a mob of unemployed factory workers carrying pikes, hot tar and feathers. That door read “Take the other door, stupid.”

Secretary Geithner, wearing his Wall Street loafers with little tassels on them, a Brooks Brothers Suit and Ivy League club tie, consulted with his lawyers and set loose the mob.

Now you can’t fault a guy for listening to his lawyers, even when his lawyers are not making sense. I mean the lawyers told him he had to do it, right? If I had been his lawyer, here is what I would have told him. All contracts can be broken. The question is what do the parties do after the breach? The wronged party (in this case the AIG employees whose $165 million would not be paid) can always sue. They can also ask to settle for something else.

My advice would be let them sue. It would take from three to five years for the matter to be settled in court. In the meantime, I would have leaked to the press the fact that the Secretary had a hard balls meeting with AIG over bonuses and told them they would not be paid. The Secretary would instantly overcome a growing suspicion that the boy wonder is not so much wonder as boy. He would become a hard balls guy every bit capable of doing the tough job he has been handed. If asked about lawsuits, he would cavalierly answer, “That’s what we have lawyers for.”

To the notion that the U.S. Government does not have the authority to tell the company to abrogate the contracts, we should point out that we own 80 percent of the company. We could call a shareholders meeting and throw all the bastards out, including the CEO.

The President has done what he could to clean up this mess, but this should not have been necessary. The fact that this was a missed opportunity could not be lost on the President.

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Posted by Jerome Doolittle at March 17, 2009 06:43 PM
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What a great post, and blog. I'm going to have to start following it regularly. Thanks.

Posted by: Mahakal on March 17, 2009 7:54 PM

You gotta pick your fights and this is one that can pay huge for Barack. GWB wrote the first check and established the rules of the game and I believe Barack will allow public opinion to fomment and down the road allow him to change the public's opinion of Wall St. I believe that our national infatuation with all things Wall St. must change and I think that this is where BO is heading. Call me in a year...........

Posted by: lahru on March 17, 2009 9:03 PM

One thing: apparently, no one outside AIG -- Sorkin or anyone else -- has yet seen these contracts. So we don't know if the agreements were so-called "ironclad," or whether they were just normal bonus agreements -- which usually have no guarantee, and leave discretion to the corporation.

I.E., Sorkin's main point -- that withholding bonuses would breach the contract -- is theoretical only. Making his entire article naive and misleading in the extreme. Sorkin is out of the box taking AIG's word for what the contracts say.

Stupid, and not worth wasting a second of time on, until we know whether or not the contracts were guarantees.

And even if so, yes, companies break deals. Or, they go into bankruptcy, and the bankruptcy judge can accept or reject any contracts they feel like -- that is to say, the law breaks deals too.

Posted by: on March 17, 2009 11:17 PM
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