Sunday, March 29, 2009

AIG Bonuses and the Road to Fascism

We are fast approaching the stage of the ultimate inversion: the stage where the government is free to do anything it pleases, while the citizens may act only by permission; which is the stage of the darkest periods of human history, the stage of rule by brute force.--Ayn Rand

As an outraged public fumes over the bonuses paid to bailout giant AIG, the statist camel has charged, nose first, into the tent. With the wind of that outrage at his back, President Obama is not wasting any time attacking the very glue that binds capitalism together…the sanctity of contracts. Without freedom of contract protected by a government of objective law, we will enter into the never-never land of a serfdom ruled by the arbitrary power of unknown, unpredictable government officials.

The issue here is crystal clear. The AIG bonuses, however distasteful, were paid consequent to legally binding contracts signed long before the bailout money arrived…and the politicians knew it. On March 17, 2009 Politico's Jim Vandehei wrote:

Watching the coverage the past 24 hours, it would seem AIG just made public its plans to give top employees big bonuses. Wrong.

AIG disclosed its retention-bonus program more than a year ago…

The bonuses were essentially a nonissue when AIG got its initial bailout money…Joe Biden, then the vice presidential nominee, came out strongly against the bailout. Obama did not.

Timothy Geithner, then at the New York branch of the Federal Reserve, was a huge proponent and architect of the AIG bailout. So if Obama had strong private opposition to the idea it did not affect his pick for the person who would oversee all bailouts.


Capitalizing on the sudden wave of anger, and stoked by the press and posturing politicians of both parties, Obama is seizing this opportunity to seek dictatorial powers over executive contracts of all companies, whether or not they received any bailout money;

President Barack Obama said he will seek legal authority over the financial system that will give the federal government power to step into contract issues, such as the one that has allowed American International Group Inc. to pay out $165 million in retention bonuses to employees of the tottering insurance giant's financial products group.

The president said he spoke with House Financial Services Committee Chairman Barney Frank this morning about granting him "resolution authority" similar to the power the Federal Deposit Insurance Corp. has over the thrifts it regulates. That would allow his administration to potentially abrogate contracts that it can show does not serve the good of newly regulated entities like AIG.

Mr. Obama said he needs the regulatory power "to allow us proactively to get out in front, to separate bad assets from good in dealing with contracts that may be inappropriate."


The government’s proper function is to protect individual rights. The right of consenting adults to enter into voluntary contractual agreements based upon mutual advantage is fundamental to those rights to life, liberty, and property. Without the freedom to act upon one’s own judgement in associating with others, all other rights are negated.

In a brazen power grab reminiscent of his hero FDR, Obama seeks arbitrary veto control over the “contract issues” in the entire financial system. The government will acquire the power to abrogate contracts based upon what it determines does “not serve the good of newly regulated entities”, “to separate bad assets from good”, or are “inappropriate”. What standard will be used to determine “the good”, asset quality, or “appropriateness”? There is only one proper, objective way for those determinations to be made…by the sum of the independent judgements of free individuals…i.e., the market. Yet that enormous power will be arrogated to a central planning bureaucratic elite, or to the president himself!

There is no doubt that that power is destined to sweep through the entire economy. Indeed, a flock of 70-year-old chickens is coming home to roost here. As stated above, the precedent is the Federal Deposit Insurance Corporation, the agency that was designed to “protect” depositors in failing banks. Such government protections never come without a steep price, as we are plainly seeing here. The FDIC precedent paved the way for Obama’s power grab, which will pave the way for even greater power.

Blinded to the essential principles that underlie all political issues by the philosophy of pragmatism, we are lurching toward the total state on many fronts. A nation that functions on the expediency of the short-term “solution” at the expense of the study of cause and effect and long-term consequences has no way of knowing what will preserve freedom and what will erode it. Only political philosophy can clear away the pragmatic fog and demonstrate the logical consequences of small but hideous precedents, by reference to basic universal principles. But “ideology” is disdained today, and we are paying a heavy price in loss of freedom.

The Undercurrent’s Rebecca Knapp writes:

[C]ontracts 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 in 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.

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.


There is only one just way by which contracts may be legitimately abrogated, altered, or re-written in a free society; other than by voluntary agreement among the parties...the bankruptcy courts. They were specifically designed to deal with the kinds of situations the country has been facing in recent months. The bankruptcy courts represent an objective venue for dealing with the conflicting claims arising from the collapse of a private company. Importantly, they are outside of the bounds of political interference. They are part and parcel to “a government of laws and not of men”. Yet that avenue has been all but abandoned during the current economic crisis in the bi-partisan rush to expand the arbitrary power of the political class.

We are rapidly moving toward an economy ruled not by merit but by an aristocracy of political pull. Added to the considerations by which companies contract for executive talent will be the unpredictable whims of unknown bureaucrats wielding arbitrary power. Consideration of the best interests of the company, its shareholders and its customers will now be replaced with the fear of what some government official will decry is “appropriate” to “the good” of the company. Rising in importance on the resumes of executive job candidates will be political connections, to the detriment of talent and experience. The corruption of the contractual process is a dangerous and unnecessary infringement to the rule of law. Rebecca Knapp concludes with this warning, with which I concur:

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

2 comments:

toronto realtor said...

On one hand there are contracted bonuses that ought to be paid, because of, as you mention, the sanctity of contracts.

On the other hand you have the case of a company being bankrupt - and not going that road because of outside money injection.

If the injection didn't come, these people wouldn't get paid, no matter the contracts.

Therefore I'm not entirely convinced what to think.
Take care,
Elli

Mike Zemack said...

As I stated in my essay, the bankruptcy courts are the proper venue for dealing with contract issues, not the political arena. As we have seen, poll and emotion driven political hysteria led first to the ex post facto confiscatory tax law aimed at existing contracts. This was followed quickly by the Obama administration’s vast power grab.

Your confusion, though, is understandable. AIG made a deal with the devil when it requested and then accepted the bailout. On the face of it, one could logically assume that the company should have to accept any strings that come attached to that money. But the total context must be kept in mind here. Retroactive law is the tool of the dictator, not the government of a country supposedly operating under the rule of law. The logical progression of events that began last fall under the Bush Administration has set us on an ominous course.

The bailout of AIG should never have taken place (none of them should have). But, since it did, that unjust chunk of corporate welfare should not have been compounded by the attack on the bonus contracts.

Interestingly, an AIG collapse would not have been the so-called “systemic” catastrophe it was portrayed as. All of AIG’s insurance subsidiaries were and are separate financial entities that would have remained solvent without any bailout. AIG’s collapse into bankruptcy would have hardly caused a ripple in the financial industry or the broader economy. Bank giant BB&T chairman John Allison gave an important talk in Washington on January 29, 2009, entitled “The Financial Crisis: Causes and Possible Cures”. In this talk from an insider’s perspective, Allison made this very point. Just by coincidence, I met an AIG on-site insurance representative at a large construction project in northern New Jersey (where I am currently employed) who confirmed the same thing.

For this reason, it is not at all clear that all of the bonuses would have been invalidated by a bankruptcy court.