The AIG Contract

The contract guaranteeing employees of AIG’s Financial Products their retention bonuses has been published. Since I am not a lawyer, and my impression is that contract law is not for the faint of heart, I haven’t read it all the way through. Steven Davidoff at Dealbook has, however, and he teaches corporate law. His basic summary:

“These bonuses are payable regardless of performance and are calculated at 100 percent of 2007 compensation for all employees except senior management, who receive 75 percent of 2007 compensation. The amount is payable unless they are fired with good cause, resign without good reason or fail to meet performance standards. For those hoping that these employees could now be fired, “good cause” is defined in the agreement as a very high standard. This is normal for these agreements. (…)

Similarly, failure to meet performance standards is another hard test to meet. If you could meet this latter standard, the contract provides that the employee still keeps his or her 2008 payments, just not next years. So even if the employee fails to meet performance standards this past year, they still keep the money paid this past weekend.

The contract also appears as inviolable as it states. Of course, this is not to say that it cannot be broken some other way, such as through bankruptcy, taxation or perhaps legislation.”

I’ve read a lot of commentary suggesting that there has to be a way to show that these employees failed to meet the conditions of the contract. If Prof. Davidoff is right, there probably isn’t.

As Matt Yglesias wrote before he learned that the bonuses had already been paid, the government could also have instructed AIG not to pay the bonuses and let the people who destroyed the company take their chances before a jury of their peers. Personally, I’m glad the government did not do this. It would be one thing for Congress to override the contracts in some way. I gather they could do so, though I’m not sure I think it would be a good idea. But it would be different if the administration ordered AIG not to pay.

The Congress gets to make the laws. If it changes the laws in some way that invalidates this contract, fine. But if it doesn’t, then existing laws remain in force, and AIG is contractually obligated to pay. AIG could, and absolutely should, try to renegotiate those contracts. AIG and the government should consider what they might do to make refusing to renegotiate look less appealing to the people at AIGFP. But in the final analysis, it takes two to renegotiate a contract, and the people at AIGFP might not agree. If they don’t, then legally, AIG is on the hook.

The executive is supposed to faithfully execute the laws. Obama swore an oath to do so. I didn’t like it when George W. Bush tried to find ways around the law. I don’t like the fact that by not prosecuting those responsible for torture, Obama is not fulfilling his obligations under the Convention Against Torture. And while I’m furious at the people at AIGFP, I don’t think that means that I should start liking it when my President decides to ignore the law this time.

I hope the people at AIGFP listen to their CEO and return their bonuses. Failing that, I hope we find some way to renegotiate those contracts. But what really matters is making sure that nothing like this ever happens again. That means setting up procedures for dealing with systemically important firms that are not banks when they become insolvent, so that we don’t have to improvise everything at the last minute; and making sure that those procedures include provisions for scrapping employment contracts like this one.

What I’m really hoping, though, is that this episode manages to shake politicians into actually taking on Wall Street, and does so without producing any genuinely ghastly policies. With any luck, for instance, the people at AIGFP have blown any chance that hedge fund managers might have had to keep their absurdly preferential tax treatment. With a little more luck, this could help those members of the administration and Congress who want much tougher regulation of banks and other financial services firms.

Hey: a girl can dream, can’t she?