A couple people asked my opinion on AIG, so I thought I would post something. Basically, my thoughts are mostly summarized by Andrew Ross Sorkin:

Everyone from President Obama down seems outraged by this. The president suggested on Monday that we just tear up those bonus contracts. He told the Treasury secretary, Timothy F. Geithner, to use every legal means to recoup taxpayers’ money. Hard to argue there.

“This isn’t just a matter of dollars and cents,” he said. “It’s about our fundamental values.”

On that last issue, lawyers, Wall Street types and compensation consultants agree with the president. But from their point of view, the “fundamental value” in question here is the sanctity of contracts.

That may strike many people as a bit of convenient legalese, but maybe there is something to it. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

The Obama administration clearly knows this as Larry Summers has indicated that they aren’t going to start abrogating contracts, but they will have to maintain the faux outrage.

Tyler Cowen adds:

The real lesson is that this is another reason not to nationalize banks. It means politicizing every decision which ends up in the newspaper.


One response to “AIG

  1. Definitely. See my earlier note on this one. I am probably going to update it now that the House of Representatives is going to tax these bonuses punitively.

    Why dissolve a contract, when you can simply tax the consideration away?

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