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March 22, 2009
AIG -- It's the Contracts!
There seems to be a simple fact missing from all of the coverage of the AIG “bonus” fiasco: the sanctity of contracts.
Congress can not be allowed to violate them. Altering a contract’s terms is the function of the parties to the contracts or of the courts when one of the parties defaults.
The free enterprise system cannot operate without contracts and private property rights. Every purchase we make is a contract.
Most contracts are verbal. We make these contracts all of the time and most of us do not even realize it. For example: When you go to a restaurant and ask the wait-staff about the daily luncheon special, you then ask the price of the several choices, you pick the one that most appeals to your palate and your wallet and finally you place an order with the wait-staff. This is a contract and you are obligated to pay the agreed upon amount.
(Even, if you don’t like the taste of it. You can argue about its worth but you can not legally do a “dine & dash.”)
Thanks to modern technology some contracts are verbal but unspoken. An example of this occurs when you pull up to the gas pump where the price per gallon is prominently displayed, you insert your credit/debit card, the pump’s computer verifies that you have the ability to pay (credit/debit) and you get as much gas as you want or your tank will hold. This is a valid contract even though not a word was spoken.
For any Contract to be valid three conditions must be met:
1.) a “good faith” offering for sale or rent.
Depending on the state and federal laws, some contracts, like those for larger purchases, contracts lasting more than a year, and real property contracts must be in writing to be valid.
The management at AIG made contracts with its employees well in advance of its taking government bailout money. This means that the government with congressional approval and insistence bought 80% of AIG -- lock, stock and barrel (including those employment contracts) -- warts and all. This is why businesses are ordinarily sold off piecemeal; smart buyers purchase only the assets not the company’s shell or corporation. Those entities own the liabilities and are the responsibility of the seller.
The government bought controlling interest in AIG and the TARP program on the basis of a three-page memo from Hank Paulson. That is $250 billion per page! No wonder Republican Minority Leader John Boehner referred to it as a crap sandwich. He should have stuck with his opposition. The Democrat Congress and the President compounded that error later by rushing through a “Stimulus Bill” so quickly, that no member of Congress or the Executive Branch read it completely before accepting it. Agreeing to a contract without reading it is the textbook definition of executive negligence.
Then, to add insult to injury the congressional perpetrators vilify those employees who made good faith employment contracts with management well in advance of AIG’s problems.
Congress decided to further compound its errors by making an end run, passing a tax bill targeting AIG and other bonuses. A key word being “other,” we will not have to wait long to see how the Law of Unintended Consequences applies to that word “other.” What is particularly disturbing is that 85 Republicans voted in favor of this “claw-back” attempt.
This is so far beyond outrageous; one must conclude that it is a purposeful attempt to destroy our economic system.
Does it not occur to the populists that if this sham is allowed -- nobody is safe, no agreement is safe and nobody in their right mind is going to get involved with any government bailout scheme?
There is another consideration: Money is lent on the basis of contracts. If you think that those who hold our national debt are not paying attention to this … think again.