Populism vs contractual obligations

Peter Klein at Organizations and Markets offers some calming thoughts on the AIG bonus debate.

1. The main lesson is that AIG should never, ever have been bailed out with taxpayer dollars. I said that at the beginning, and I stand by it even more today. AIG should have declared bankruptcy. Under bankruptcy there are well-established, orderly procedures for winding down a firm, distributing the remaining assets among the various legal claimants, and so on. Injecting taxpayer money without any serious thought about the implications of government subsidy and/or ownership for management and governance is just plain dumb. Naturally, thats what Congress and the last President people who know exactly zilch about what companies do and how they are run did.

4. As an outside investor, I certainly would not have the right to renege on whatever prior contractual arrangements I happen not to like. I cant pick and choose, willy-nilly. Employees, contractors, suppliers, bondholders, etc. all have contractual claims on the firm, and my infusion of cash doesnt allow me to ignore these without legal consequences.

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6 Responses to Populism vs contractual obligations

  1. observa says:

    Too true. The irony of AIG ‘giving’ back $160 mill of the $200bill in slush funds, to shut up these morally outraged exemplars of such activity, shouldn’t be lost on any of us.

  2. Jacques Chester says:

    It never ceases to amaze me when companies act surprised that government money comes with politics attached.

    And is government really an investor, in the traditional sense? Any investor would avoid AIG like the plague. This is a subsidy in truth, not an investment. Subsidies always come with conditions, some of which are invented later.

  3. Patrick says:

    None of which diminishes the sickening hypocrisy and bullshit of the Congress, Treasury and Obama’s administration. I am actually a bit surprised, and it is not like I had high expectations of any politician, let alone lefty ones.

  4. Tel_ says:

    The main lesson is that AIG should never, ever have been bailed out with taxpayer dollars.

    Agreed, and I only hope more Americans wake up to this. There still seems to be this idea that a firm going broke is a disaster that must never be allowed to happen.

    As an outside investor, I certainly would not have the right to renege on whatever prior contractual arrangements I happen not to like. I cant pick and choose, willy-nilly.

    The IMF has a long history of being an outside investor that imposed it’s own political demands on the people who received the investment. The methodology is pretty simple, repeat after me, “you don’t get this loan, until you can meet certain criteria”. Taxpayer dollars could have been invested into AIG under exactly the same system. If reducing executive salaries is a key political objective of the Obama administration, then the government just has to write a contract offering the investment “bailout” money only once AIG has managed to get their top-level staff to agree to a pay cut. No pay-cut, no problem, see you all in bankruptcy court.

    Easy-peasy.

    Come to think of it, not so easy, it requires a government to think first before splashing other people’s money, around and it requires a government with clear objectives that they are willing to commit to writing.

  5. Tel_ says:

    It never ceases to amaze me when companies act surprised that government money comes with politics attached.

    To be fair, companies are tuned to working on the basis that stipulations are placed on the table up front and a contract is signed after everyone knows the deal. Governments are tuned to just whacking things with the legislative hammer any time it suits them, and breaking promises whenever convenient.

    Subsidies always come with conditions, some of which are invented later.

    The invented later bit is what annoys most people because you can’t make useful investments in the face of arbitrary rulebook changes.

    There was a Troppo article quite some time back regarding short-term thinking vs long-term thinking. My point is that everyone is happy to talk about how clever it is to have long-term thinking in theory but the practical bound on how far ahead you can make plans is how far ahead you can predict the environment that your plans will fit into. Creating an unpredictable environment merely optimises the return on short-term thinking. When faced with a situation where investment confidence is low, swinging the legislative hammer is guaranteed to discourage investment even further.

  6. Jacques Chester says:

    I don’t disagree with any of your points, Tel. My point is that people who expect politicians to keep promises are living in a fool’s paradise. If this is the level of strategic thought that passes as acceptable for AIG’s senior management, no wonder they failed.

    It would be nice if we lived in a world without crime. But we don’t. It would be nice if we lived in a world with free donuts. But we don’t. It would be nice to live in a world where governments weren’t poor servants and dangerous masters. But we don’t. Any CEO who doesn’t realise that is a threat to their own company.

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