As furor over a report that AIG intends to pay out as much as $450 million in bonuses over the next two years to its financial services division that was largely responsible for its collapse, and up to $1.2 billion across the entire company, politicians on The Hill have been left scrambling to find legal justification for reducing or prohibiting those payments altogether, while bloggers across the wire are demanding accountability.
Andrew Ross Sorkin, in defense of paying the bonuses in his New York Times column, quoted compensation consultants who argue that breaking contracts at AIG simply because it is "convenient" may have wider ramifications across the financial services industry at the worst possible time. Sorkin appeared as a guest on MSNBC's "Morning Joe" program this morning to talk about his story, and began his defense of the payouts by saying, essentially, that (paraphrasing) "contracts are contracts and you can't just break them."
Constitutional and civil rights attorney Glenn Greenwald noted in his Salon column that similar arguments were made by Lawrence Summers, Director of the National Economic Council, while touring the weekend talk shows. Summers said that "We are a nation of law", and that the government "cannot just abrogate contracts."
Greenwald was strongly skeptical of arguments against going after the AIG bonuses based on the notion that contracts are so iron clad that they are practically written in stone. That, legally speaking, the government's hands are tied.
"As any lawyer knows, there are few things more common – or easier – than finding legal arguments that call into question the meaning and validity of contracts", he wrote on Monday. "Particularly in circumstances as extreme as these, there are a litany of arguments and legal strategies that any lawyer would immediately recognize to bestow AIG with leverage either to be able to avoid these sleazy payments or force substantial concessions."
Legal contracts are often only as iron clad as the opinion of the judge that interprets them.
A commenter on Greenwald's story suggested that Congress already has a solution to this problem, one which it used to protect the nation's largest telecommunications carriers from civil liability over alleged privacy violations last year: immunity. Congress has the legal authority to grant AIG blanket immunity from civil suits if AIG agrees to scale back the bonus payments, or decides not to honor those specific contracts at all.
Possible legal avenues have been suggested over the past 48 hours which include an attempt to recall all outstanding government loans from AIG, which would in effect force it to declare bankruptcy. Bankruptcy judges have the authority to unilaterally dismiss contracts almost at will, along with debt owed to creditors, if it means avoiding liquidation.
Some conservative politicians have argued that letting the most troubled financial institutions fail under bankruptcy proceedings would be preferable to nationalization -- even if it was only temporary -- based on the theory that the continual "black hole" loans that are just barely keeping them alive will never be capable of restoring them entirely.
The government could also continue loaning money to AIG until the insurance giant has been de facto nationalized, at which point the executive management can be fired, and bankruptcy forced by federal managers.
Another strategy that may be simmering quietly in the background would have the Department of Justice begin a formal investigation within the anti-trust division, with the ultimate goal being the breakup and sell-off of AIG, a fate that may be unavoidable for Citigroup, though through different means and for different reasons.
Jane Hamsher has argued that AIG Chairman Ed Liddy's claim that the bonuses are needed to retain valuable employees is in direct contradiction to a down economy where jobs are at a premium, and there is actually a surplus of overqualified workers desperate for any job they can get. She spoke with the cofounder of hedge fund Pantera Capital Management, Ron Glantz, who recounted having to fire a "Rhodes Scholar finalist they had hired away from Goldman Sachs who spoke fluent Chinese and was a magna cum laude graduate of Princeton."
That finalist reportedly has still not found work.
Glantz believes the bonuses are nothing but an end run around government restrictions on excessive payouts for failed executives.