Let me start off with what many will take as an insult, just to set the mood:
What many people here think about AIG is a poor indicator of what should be done.
That isn't to say that they are necessarily wrong. It means that some people are on a hair trigger. It would take little (maybe nothing) to convince David Sirota that Tim Geithner should be fired. David was born convinced of that. I'll be convinced that extreme measures – breaking valid contracts, pushing AIGFP into bankruptcy, firing AIGFP employees and, yes, firing Geithner and Summers – are necessary when people who have clearly thought through all of the ramifications have weighed in. I'm not convinced that David has. (Can you imagine him not yet ready to fire?)
This does not mean that David (or other commenters) are not "serious" or worth listening to. It means that they will almost always promote drastic action whether it's called for or not.
I've written this diary as one who can be convinced that, for example, Geithner needs to be fired, but who isn't yet there. I want to list what I think I need to know before I get on board the train.
(1) First, I'd like to know that the world isn't going to end.
It's easy (and fun!) to be a conspiracist and say, for example, that Wall Street heightened the pain of the Lehman Brothers failure just to teach us a lesson about not doing whatever they say needs to be done to bail them out. That's certainly possible. If I were writing a script, I'd have it be true. What a wonderful wish-fulfillment fantasy that would be: that the world is really a safe place made unsafe only because of the bad actions of a few men who can be defeated by a little courage and ingenuity. (How many scripts have you seen based on that premise?) But we're not in a fantasy world, and before we declare that we can suffer an AIGFP bankruptcy with minimal damage to the financial system that keeps most of us alive, we should be – what's the technical term for this? – really fucking sure.
If you're not worried about the possibility of a credit collapse, as I can readily accept that we were skirting back around September 15 when the first bailout was rushed through Congress. Some people confidently assert that this was a false alarm just designed to squeeze money out of taxpayers. Maybe – but before I'd say that I'd want to be really fucking sure that there wasn't a real crisis on hand. Did some people take advantage of it? Almost surely – some always do. But, given what happened to the economy after Lehman collapsed and in the wake of the bailouts, it seems to me that the danger of a seizure of the credit system for which we don't, unfortunately, presently have a ready alternative was and is a serious concern.
It's funny that people here will often embrace political conspiracies while laughing off scientific ones. Take the example of the activation of the Large Hadron Collider, which some people had a theory could spark some sort of a reaction that could destroy the world. Haw, haw, haw – what maroons! Well, how do you know that? I can safely say that both the people making this charge and those defending against it know a hell of a lot more about particle physics than I do; in forming an opinion, I'm not going to be judging the underlying merits but judging whom I think I can trust. I was looking for the opinions of established scientists – the Larry Summerses and Tim Geithners of their field, you might say – as to what should be done, but I wasn't going to take their word for it. What I wanted to hear is that, given the stakes, they had /listened to what their crackpot critics had said and been able to generate satisfactory explanations as to why their arguments were a hill of beans. I think that's only fair to expect.
Now in the case of the dangers of pushing AIG (or at least its Financial Products subsidiary, AIGFP) into sudden bankruptcy, thereby ending all of the debate about contracts altogether, the experts are – for self-interest reasons or not – on the side of caution. They are the ones begging that before acting we think through all of the implications of AIG's counterparties suddenly operating without a net. Why, if you agree that it was only fair to be really fucking sure that the Large Hadron Collider was extremely unlikely to destroy the world before turning it on, is it unreasonable to think that we should be really fucking sure that an AIG bankruptcy isn't going to put us on the express train to feudalism (or at least an avoidable and materially much worse economic situation that otherwise obtainable)?
AIGFP bankruptcy makes sense to me, and I know more about bankruptcy and economics than I do particle physics, but I still want to see experts weighing in – in fractious public debate, with as much transparency about the underlying facts as necessary – about what it would likely mean. If we're going to take this sort of risk, let's do so after an informed consensus.
As an aside that I've mentioned elsewhere, based on Gretchen Mortenson's interview with Terri Gross on Fresh Air, it seems at least possible to me that the money going into European banks has not been going to pay off failed credit default swaps, but simply to provide additional collateral called for by contract so that AIGFP doesn't default on those swaps. Imagine a situation where AIG would not lose its bet with a European bank that some disaster would occur, so (pretending that swaps are actual insurance, which is an oversimplification) AIG would not have to pay off. However, the contract says that if AIG's credit rating dips, then it defaults and does have to pay off its obligation. If that happens, the counterparty (like, say, a European bank) stands to gain twice: once because things didn't go bad, so it was due no "insurance" payment, and again because its "insurer" defaulted on its contract. If the U.S. is loaning money to AIG to prevent defaults on winning bets, then I am for that. In that case, also, we don't have to worry about cascade effects from failures of foreign banks. However, if this is the case, I would like us to know about it and I would like the Obama Administration to negotiate its way out of such defaults, especially if we are honoring the underlying contract. (Our credit is good.)
(2) Second, I'd like to know that we can maintain our system of government.
Aside from the underlying prospect of global economic collapse, perhaps the most depressing thing I've seen is the sentiment, largely from the Left, that Contract Law is just some sort of silly game of Calvinball, where we can change the rules any time we'd like. This is a corrosive belief, one that puts us on the wrong side of the moral argument, where I hate to be.
In any number of situations – from demanding that the U.S. uphold treaties, to demanding that insurance companies don't screw around with using delay payment of settlements as a way of negotiating payoffs less than earned, to demanding the employees with contract protection not be fired without due cause – the Left is on the side of honoring the obligations of contracts unless they are abrogated or reformed by rule of law, without duress.
Here's Glenn Greenwald in today's New York Times blog:
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. Every day, America’s commercial courts are filled with litigations between parties to seemingly clear-cut agreements.
I found this one of the most galling aspects of practicing commercial law a few miles north of where Glenn used to practice. The notion that honor has no role in contract law beyond that which is imposed on you by a court, the notion that the legal process is itself a club that can be used to beat someone over the head and take their rightful property, is disgusting. Right now, I'm working for far less money than I could make because I simply refused to take part in the areas of law that were the only ones left hiring when I finished my electoral work last fall – areas like insurance defense. I have to accept that the law is the law and that other people can try it and it's the responsibility of lawyers on the other side to be able to defeat it. But the last thing I'm going to do is make these sorts of scurrilous and reprehensible practices more acceptable.
And yet that is exactly what many commenters are willing to do.
Like a little elementary school kid with a hulking big brother in tow, we're happy to throw our wait around because, well, "whatcha gonna do about it, huh? My big brother will rip off your head!" We'd see contracts abrogated and reformed because, as the government, we have the power to mess with people for as long as need be before they give up even what is rightfully, legally, theirs. (I accept that many or even all of these bonuses are going to people who are undeserving, but I maintain that that is a matter for the courts, not the popularity-seeking legislature, to determine.)
I hate it – and I can't tell you how much hatred is packed into that word "hate" – when agents of the government through their weight around without recourse to what is right simply because they can. I hate it when prosecutors use it to force the accused into false plea bargains because they know that they will likely be convicted even if innocent. Don't you? And given that stance, I cannot accept that we as the government have the moral right to squash people's rights just because we could get away with it.
To be fair, while many commenters have interpreted Glenn's comments as affording some sort of liberating legal nihilism, he backs away from that implication. He notes that contracts can be collusive, self-dealing, fraudulently induced, subject to counterclaims, and all sorts of legitimate arguments. But these arguments are to be made in court. The possibility of these legal arguments doesn't justify the government taking away property and laughing at people who assert a violation of their rights.
Greenwald, thankfully, comes off better than some others the Times tapped for debate. James Tuthill, a lecturer at Berkeley says:
Every first-year law student learns that a court can invalidate a contract’s "unconscionable" terms, rescind it or reform it. If these bonus contracts benefiting the very people who have destroyed incalculable amounts of wealth in the pursuit of their own personal greed don’t warrant revision, rescission or reformation, then our legal system is seriously deficient.
...
[W]ith a payment of a bonus, it must be presumed that an implied term is the employee won’t destroy the company and shareholders for whom the employee supposedly works. If the employees’ acts have been so contrary to the interests of the shareholders, as is the case with A.I.G., then payment of the bonuses is unconscionable and the obligation can be voided.
The doctrines of rescission and reformation can also be used to challenge the bonus contracts. Under rescission, a contract can be voided because of misrepresentation or mistake, and under contract reformation, a court may equitably modify a contract where there are mistakes of fact or law. The bonus contracts that A.I.G. said were made last year must have been premised at least on maintaining A.I.G. as a shareholder-owned company. Thus they were premised on a mistaken fact and now can be revised.
The first thing to note here is that Tuthill is calling for actions to be taken through the court system. This is the opposite – and far preferable – approach to that being considered by Congress: just taking property away by legislative fiat. Our legal system is not deficient: if these contracts were, for example, induced by fraud, the system will find out. What the system will not find, though, is the sort of implicit term Tuthill suggests. Just as the Dodgers don't get their money back because Andruw Jones, who had received a huge contract, sucked last year, AIG doesn't get its money back because the agents it hired made stupid but unintentional mistakes. (One issue, of course, is whether their mistakes were unintentional. Another is when they were stupid at the time, given that many of the assumptions they made were widespread. You can't collect from a doctor for malpractice if they operated on a kidney when it should have been a liver if most of the doctors in the field would have agreed that they should operate on the kidney; that's not malpractice, it's practice.)
The second thing of note is that most of the remedies Tuthill proposes would probably be rejected in court because of the doctrine of "unclean hands." If AIGFP was doing stupid and reckless things, but AIG's corporate headquarters knew (or should have known) about them and approved them, then AIG has no claim against AIGFP employees. Its hands are unclean; it was involved in the bad act. We (stupidly, in my opinion) own 80% of AIG without having any shareholder control over it; that means that, as owners, we own AIG's mistakes in dealing with AIGFP. Greenwald's suggestion, that we look for fraud in the inducement or fraud in the factum as a basis for rescission, is better – but I have my doubts as to whether the people approving these deals in New York truly were defrauded by those in London.
(3) Third, I'd like to know that wrongdoers will be punished.
The key to avoiding a payoff may be in today's disclosure that the provisions that supposedly would trigger default if people leave or are fired are – and I would not have believed this until I heard it today – actually "key man" insurance provisions, which protect against the loss of critical employees. (I don't have a reference to offer yet; I heard this from a New York Times reporter, Andrew Ross Sorkin – whose [http://www.nytimes.com/2009/03/17/business/17sorkin.html?scp=1&sq=andrew%20ross%20aig&st=cs
e column yesterday was unfairly maligned – on Warren Olney's radio show in LA this afternoon.) That is: AIGFP employees apparently wrote contracts saying that, if they left the company, AIGFP would default on the contract and would have to pay. This is, simply, nuts. It is so nuts, so obviously self-dealing, so clearly unjustifiable, that it gives the government great leverage over it. Both AIGFP and the counterparties had to be party to such an arrangement. I think that if this does turn out to be true, we can fairly go up to the counterparties and say "you should have known that this was unconscionable; if you don't waive your right to exercise these 'key man' provisions then we are going to charge you as being part of a conspiracy to defraud the government.
I can also accept that it is better to have people who "know where the bodies are buried" around. I would, however, tell people that their government wants them to serve, and that their government would prefer to pay them not in bonuses but in clemency. That is, if the people who do this know that they have committed fraud and will probably go to prison for it (hopefully they will not be killed by the pitchfork-and-torches crowd whose love notes Liddy read today), the best thing they can do to ease the total burden of punishment they will face is to cooperate fully and aggressively with unwinding their handiwork safely. I don't like the government imposing unilateral contract reformations in a civil context (including the pretextual use of taxation), but I don't mind their bargaining hard for people to make partial restitution (in this case, by minimizing total damage) in a criminal context.
(4) Fourth, I'd like to know who falsely tried to finger Dodd -- and that they've been fired.
As I said, I'm not sure that I want Geithner and Summers fired. Replacing them with people who think much like them would just be a cosmetic change. Replacing them with, say, Stiglitz and Krugman, or maybe Brad DeLong and Dean Baker, or Atrios and Jerome a Paris, would "spook the markets," perhaps to a degree where we'd have to recalibrate that phrase. I don't care about the people getting rich off the markets; I do care about the impact on the rest of us. Beyond that, if the threat we'd face by and AIGFP bankruptcy is as dire as they say, and if they are doing their best to generate better alternatives to it, then there's no basis for firing them on the merits. Anyone in their position who wanted to do the right thing would end up doing what they're doing, in that case.
So I wouldn't want to go after them for the mortal sin of destroying the economy. But I would absolutely want to see them fired for a venial sin: I want the head of whoever intentionally misled the public and press by trying to blame the non-retroactive application of the limits on bonuses on Senator Chris Dodd.
If it was Geithner, fire him. If it was Summers, fire him. If it was both, fire both.
Obama can afford to make good faith mistakes about how to handle the economy. No one really knows what should be done, given how badly Phil Gramm and George W. Bush screwed it up. If he is transparent and honest and the Republicans clearly have no better alternative – and I bet that they won't – I have to believe that the public will forgive him if things don't go as well as planned. Even if I didn't believe that, I don't claim to have any perfect knowledge of what they should do instead.
But there should be no place in the Obama Administration for the sort of sniper attack on Dodd that we've seen. Blaming him for not doing something that Geithner and Summers prevented him from doing is beyond the pale.
Other people may not see this as a priority today, but I see it as one because it is the only problem that I feel confident about how to solve. We should hold Obama's feet to the fire and make him investigate and divulge which hidden assassin took this sniper shot against Dodd. And then we should make him fire that person. Most of the rest of what is being discussed today is mostly blather. This is something that we have a right to expect of Obama and the ability to make him do. If he is to deal fairly with Congress over the next four to eight years, there is no place, none, for the likes of that.
Those are just today's thoughts on the ongiong crisis; in the unlikely event that you've made it all the way through them, thanks for your attention and I hope that it was worth your time.