AIG Bonuses and Political Will

Posted by: Michael Mandel on March 18

Simon Johnson writes on TPM Cafe:

Stabilization programs in emerging markets often come down to this: the government needs to do something unpopular, e.g., reduce some subsidies, privatize an industry, or eliminate the crazy credit that goes to oligarchs - no one likes oligarchs, but their factories employ a lot of people. There is naturally resistance - pushback from legislators, riots in the streets, or oligarchs calling their friends in the US foreign policy establishment. The question becomes: does the government have the “political will” to get the job done?

..snip..

It is striking that Ben Bernanke now asks whether the United States today has sufficient political will.

The term that I have used in the past is ‘political legitimacy.’ Solving a financial crisis requires a government with enough political legitimacy to ‘rearrange’ the status quo—reduce the debts of some people, force other people to absorb losses, all for the common good.

To be truthful, I didn’t think that the AIG bonuses were such a big deal. But the government’s arguments that these bonuses are contracts that can’t be broken completely misses the point. In a financial crisis, governments *have to* break contracts…that’s what they do (just think about the Obama mortgage plan, which modifies mortgages for a whole bunch of people…and mortgages are contracts too).

If the Obama Administration does not stop the bonuses because they are ‘contracts’, it becomes much much much harder to do the other contract ‘rearrangement’ that needs to be done. They waste their political legitimacy on something small.

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Reader Comments

Joe Cushing

March 19, 2009 12:53 AM

Agreed.

Bonuses are only to affect employees' behavior in the future. We should approach them from that angle not the contract angle.

nadezhda

March 19, 2009 01:30 PM

A heads-up on your RSS feed -- it's suddenly adding an extra http://businessweek.com in front of the url link to the post, which of course breaks the link.

nadezhda

March 19, 2009 01:30 PM

A heads-up on your RSS feed -- it's suddenly adding an extra http://businessweek.com in front of the url link to the post, which of course breaks the link.

empedos

March 19, 2009 02:04 PM

I believe that the mortgages' modification plan included a set of strong incentives for lenders to proceed with the modifications. In a democratic society where the constitution is respected by all, the goverment cannot modify contracts between individuals or entities without their consent if these contracts were not violating the Law at the time they were signed.
The political legitimacy of a democratically elected goverment may include things like taxing bonuses at an extremely high rate. I believe that this could have a constitutional basis and therefore be politically legitimate.

LAO

March 19, 2009 02:07 PM

I once sat through some great negotiation training that drove home one enormously important point -- the seemingly wonderful deal that excessively abuses one side will somehow come undone, regardless of all the contractual agreements in the world. This is a lesson that appears to have escaped the financial community completely, and these bonuses, though ultimately trivial and even legitimate from some perspectives, were indicative of the broad failure to grasp what they have wrought. It was not handled well, but it seems to me to have been as good a symbol as any to deliver the message that they must suffer consequences. It is difficult to find a way to deliver the same resounding message to irresponsible home buyers since, given the economic wreck, they kind of have us over a barrel if they actually still have a job, but I think the administration would win points if they could figure out a way to do it -- maybe a tax on a percentage of the gain if sold at a profit within the next 10 years?

Tom E

March 19, 2009 03:11 PM

This is what you get when industry does something that the public sees as wrong and it makes the government look helpless. Wall Street was counting on buying the politicians and getting away with whatever they want. However, you cannot buy the people and the politicians will follow the people if the outrage is strong enough.

HMB-Sandman

March 19, 2009 03:32 PM

No doubt there is outrage regarding the bonuses, as there should be.

I am not a lawyer, but my understanding is that contracts can be voided only by a bankruptcy judge.

Another option would have been for the Feds to make this a condition of the AIG bailout: we're ponying up, so you have to step up to the plate as well.

I think there is a lot of incompetence to go around, not just at AIG. Or maybe the folks at Congress couldn't deal with the pressure.

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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