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Howard Schweber Headshot

Put Down the Pitchforks!

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I am starting to be genuinely worried by the potential destructiveness of a growing torch-and-pitchfork mentality that is partly the result of cynical manipulation, partly a result of failures of understanding, and partly the result of perfectly justified by presently misdirected anger.

Start with a legal point. There is no theory of which I am aware -- and none that I have heard that is remotely plausible -- under which abrogating the existing contracts with AIG employees would have been legal. To be sure, the situation would have been different had the company been put into receivership (more on that in a minute), but as long as a corporate entity called ""AIG" was up an running, the fact that said entity accepted government money and allowed the government to become a majority shareholder does not do anything to justify its abandonment of existing contractual obligations under any theory with which I am familiar.

The counterargument goes basically like this: if the government gives money to bail out a business, the government has a legitimate interest in how that money is spent, and should be able to prevent the managers of the business from wasting the money or spending it in a way that is contrary to the purpose of the grant. (Remember, again, that we are not talking about a situation of receivership.) As a general proposition, my reaction is. . . really? Is there any other situation in which people would be willing to see the same rule applied? Let's try a few. If a college receives federal funding, can government officials order faculty to be fired or students to be expelled or programs to be cut on the grounds that the expenditures involved are not consistent with the government's purpose? (Remember, the claim here is not that paying the bonuses does not serve the interests of AIG.) If a charity receives a government grant, can a bureaucrat not only order the charity to return the trucks it rented for its food drive -- on the grounds that "the money would be better spent on food" -- but also declare that the rental company cannot collect the fees that are due up to that point? If an artist accepts an NEA grant, can NEA officials order him or her to find a new studio, and then tell the landlord of the current space that they cannot collect any back rent because the enforcement of those contract obligations would contradict the government's idea of the best use of the grant money?

I have been reading blogs and listservs, and listening to arguments, and I have yet to hear any legal theory that comes within a light year of making sense of the proposition that when a private business accepts government funds, every contract that business has entered into is subject to revocation by the government. Some people say, "So what? Cancel the bonuses and let 'em sue!" Ah, yes. The old "badges? We don't need no stinking badges" school of executive authority. Personally, I had rather enough of that over the past eight years. "The rule of law" means, among other things, honoring contracts. Remember, it is not the case that the U.S. government is being asked to honor AIG's contracts; AIG is being asked to honor AIG's contracts. Which every business and individual is supposed to do as a matter of the Rule of Law, unless of course they go into bankruptcy.

What about that? Shouldn't Geithner have forced AIG into receivership, then paid off existing obligations at, say, 30 cents on the dollar? The answer is "no," for two independent and adequate reasons. Reason 1: it would have required the cooperation of Congress. I have to say that Congress over the past few weeks has demonstrated itself to be even more incompetent, more basically dishonest, more strikingly reminiscent of those clowns who pile out of an incongruously small car in the circus, than at any time in the past few years. That would take a whole additional post (or seven), but let's just say that Congress' frankly incredible performance in dealing with the original TARP package gave everyone very good reason to believe that anything that went through Congress would happen slowly, be anchored to a thousand local interests, and probably end up verifying the old saw that says "an elephant is a mouse built by committee."

But there is another, independently adequate, ground for avoiding receivership. The point, we all recall, was not to rescue AIG because we are so deeply fond of AIG. The point was to avoid further seizing up in the credit market, further collapse of investor confidence, and damage to AIG's "counterparties" foreign and domestic. A promise of eventual -- after long and complex litigation -- partial payments of outstanding obligations would have done exactly nothing to further the goals of the program.

Now, don't get me wrong. I think the whole idea of indirectly stimulating credit by funneling money to financial institutions is questionable. But given that basic strategy, the decision of what to do about AIG -- with the lessons of Lehman Brothers' collapse fresh in the historical consciousness -- was a no-brainer. And once the decision was made to avoid receivership, honoring existing contracts -- whether it was payments to Goldman Sachs or bonuses to executives -- was exactly what Obama promised his administration would deliver: the Rule of Law.

Meanwhile, I am becoming increasingly concerned. There is something laughable, if not nauseating, about the same Republicans who opposed any restrictions on executive compensation now using the provision that secured pre-bailout contractual obligations as a weapon against the administration's programs. Poll data suggests that public support for the entire program of stimulus spending is slipping, and that the AIG bonuses are being used by people who oppose any government action to make common cause with people who are suspicious that the government is not doing enough, or acting boldly enough to punish the business interests that got us into this mess.

This is really important. However you feel about the AIG bonuses, and whatever you think of the arguments I just made, to allow this issue to be used to derail the administration's efforts to blunt the effects of the worst economic crisis since the 1930s would be a disaster of the first order. Obama does, indeed, need to show more strength here: he needs to tell congressional Democrats to shut up and get in line, he needs to call out the Republican leadership on their hypocrisy, and he needs to do the hard job of using his position to sell an angry American people on the proposition that abiding by the Rule of Law is exactly what they ought to want from him. But meanwhile we -- and I do mean some of my fellow Huffpo posters -- need to put down the damned pitchforks.