Sunday, March 15, 2009

Larry Summers: Liar?

Larry Summers dissembles as follows:
"If we simply throw up our hands, refuse to deal with any of this, we'll have the kind of financial catastrophe that we saw after what happened at Lehman Brothers," Summers said. "[Treasury] Secretary Geithner has negotiated very forcefully with AIG. He has done everything that is legally permissible for the government to do to limit the payment of bonuses. But where there are contracts, binding contracts that were entered into long before the government put any money in to AIG - we're not a country where contracts just get abrogated willy-nilly."
The government can do a lot of things - put AIG in receivership, sell off its profitable pieces, and liquidate the rest. They could avoid fear-mongering about what happens if it fails, and either create a "Chapter 10" bankruptcy for companies that are "too big to fail" or simply say, "If you don't renegotiate those bonuses, bankruptcy court awaits."

Again, quite obviously, the "sanctity of contracts" isn't an issue in relation to the auto industry bailout. Abrogation and renegotiation of contracts has been made a condition of any bailout. This is different only because Summers and Geithner are continuing the Bush Administration's incompetent, poorly conceived bail-out that somehow deems it wrong for the people who ran our economy into the ground to suffer a financial consequence. Not when they can be fully paid, courtesy of the taxpayer.

Flashback to November:
Someone in the Obama administration, with both business savvy and a suitably tough-minded approach, could bring together the parties, including the dealers, the union and the company. He (or she) could force the union and the company to renegotiate their contracts. With his input, Congress could perhaps pass a law that dealt with the state laws governing dealerships. (Or the government could pay off the dealers itself, instead of having G.M. do it.) He could sign off on plant closings. He could force the companies to come up with real plans that would return them to profitability. And in return, the government would make federal loans that would give them the breathing room they need.

Come to think of it, this would be a perfect first job for Lawrence Summers, who is expected to become an economic adviser to the president-elect. If he can’t knock these heads together, nobody can.
When did I miss the retort from Larry Summers that we don't renegotiate contracts in this country, no matter how unprofitable a business, and no matter how much taxpayer money is on the line? It would be a nice thing to clear up, now that he's actually been given that job.

When he makes the same type of "A contract is a contract", "the government cannot just abrogate contracts" statement about the auto industry, we'll know he's not a liar. Otherwise....

Note to Obama: I know these guys haven't been on the job very long, and neither have you, but this combination of spinelessness and rudderlessnes on the financial crisis has to stop. If you believe that this type of continuous bailout of AIG, despite its complete lack of willingness to take responsibility for its past actions or financial condition, or additional TARP-type bailouts of banks are necessary, you had best be thinking of alternatives - this may have just destroyed the chances that you'll get the funding.

Update: Josh Marshall's observation,
I don't believe the bonuses themselves are the heart of the matter, nor the fact that they're going to the very executives who caused AIG's implosion or even the galling reality that, since all money is fungible, they're being paid with taxpayer dollars. What's really driving this forward - and what makes it such a dangerous moment for the White House - is the jarring image of the administration's impotence....

Few exchanges have so captured the disconnect that makes this situation so politically explosive. We're collectively taking our country's future in our hands, spending vast sums of money to keep these companies from suffering the consequences of their own folly and (in many cases) criminality. And in return we're receiving cavalier dictates about pay-outs and bonuses from executives who by any reasonable measure work for us - dictates we promptly accede to. There's a beggars can't be choosers problem there. And the disconnect is so mighty that it fuels the impression that the whole enterprise is not what it seems, not what we've been told, that in addition to picking up the tab we're being played for fools.
Update 2: Glenn Greenwald addresses Summers on the "sanctity" of contracts:
Legal strategies aside, just as a business matter, one of the first things which every compnay in severe distress does is go to its creditors, explain that it cannot make the required payments, and force re-negotiations of the terms. That’s as basic as it gets. To see how that works, just look at what GM and other automakers did with their union contracts – what they were forced by the Government to do as a condition for their bailout....

There may be other reasons why the Treasury Department decided it wanted AIG to pay these bonuses (Marcy Wheeler considers some of those reasons here), but this claim from Larry Summers that the sanctity of contracts precludes any alternatives is not just false, but insultingly so.
Update 3: Summers suggests that withholding the bonuses could have caused AIG to fail.
"Secretary Geithner has used all the legal authorities that are open to him to contain and limit the payment of bonuses," said Summers, chairman of the National Economic Council. "What he did not do, and what would have been irresponsible to do, as outrageous as these payments are, would have been to put at risk the stability of the financial system.

"To have courted the kind of disaster that followed the decision to let Lehman Brothers simply collapse might have felt good briefly, but it would have touched the lives of a huge number of Americans who would have unnecessarily become unemployed or seen destruction of their lifetime savings."
Are we really supposed to believe that? Other than the AIG lawyers who were paid to tell Liddy exactly what he wanted to hear, who actually believes that a refusal to pay the bonuses could constitute a default and cause AIG to fail?


  1. Wow, there are so many crazy people out there.

    If Summers et al. actually want to save AIG, to avoid further instabilities, they cannot treat AIG as a bankrupt company, and no one can assume that the company is dead so that its contracts can be ignored.

    Either the company is kept alive, and then the contracts hold, or it is left to die, and then another escalation of the panic and chaos may follow.

    Saying "you must renegotiate bonuses" simply means "we leave it to someone else to decide whether AIG will be killed". They don't want to leave these essential things to someone else and because they want to keep AIG, it obviously means that they must respect the bonuses and only say that they dislike them.

    It's the law and whoever wants to violate it is a criminal.

  2. Yeah... Because you have to be "crazy" to think that a bankrupt company shouldn't be using taxpayer money to pay absurd bonuses to the people who banrkupted it. Thanks for that brilliant insight.

    How did you manage to overlook the part of my post where I discussed alternatives to bankruptcy, including the possibility of a new chapter of the bankruptcy code that could accommodate supposedly "too big to fail" companies.

    How did you also manage to overlook the part of my post where I described this as a response to the exceptionally lame contention that the company can't get out of paying the bonuses, or that it's unfair to ask them to renegotiate contracts.

    Beyond that, while I recognize that there are people (yourself included) who prefer a "Chicken Little" approach to companies like AIG, surely you didn't also miss where I commented how much harder abuses like this make it to bail them out. If you think the sky is going to fall when AIG fails, this made that outcome much more likely.

    As for how saying "you must renegotiate bonuses" translates into "we leave it to someone else to decide whether AIG will be killed"? Well, that's called a non-sequitur. You see, it's quite possible to say that and continue to bail out AIG - with the added bonus that you don't infuriate 90% of the people in the nation and make it extremely difficult to get Congress to authorize more bailout funds.

    You're welcome to comment here - but next time before you post please at least read what I've written before you go off.

  3. I think he also somehow missed the obvious primary purpose of your post which, at least as I see it, was to point out the raw hypocrisy of the financial industry bailout as compared to the auto industry bailout. That Summers is aghast at the notion of rewriting compensation packages for (morally and arguably legally culpable) millionaires, but seems to take it for granted when it comes to UAW workers and retirees?

    On second thought, you're probably right that he just didn't read or think before he posted. (Rudeness is so much easier to take from people who at least post intelligent comments.)

  4. Yes, that was the focus. I addressed the likely reason we're going through this dance - the likely consequence of AIG's failure - a couple of days ago.

    Robert Reich just posted about these issues; he's not that far from where I am on AIG. (Crazy man. ;-) )

  5. “Wow, there are so many crazy people out there.” – Lumo

    Yeah, and you are one of them.

    Lumo, Lumo, Lumo, it causes me physical pain to have to agree with Aaron, but your post is so far off the mark I am afraid that I must. Now, where to begin . . .

    1) You don't have to "save AIG" to "avoid further instabilities". You can nationalize them (essentially giving them the corporate death sentence) and as long as you back their obligations with the new nationalized entity you have (probably greater) stability. There are costs (financial and otherwise) inherent in nationalization, but doing something as stupid as AIG is currently doing is a good way to get people behind nationalization.

    2. I'm not sure what kind of definitions for "alive" and "dead" you are using when it comes to AIG, but you can have a company refuse to honor/renegotiate a contract for any number of reasons (fraud, unconscionability, etc) without it resulting in the "death" of the company, or for that matter in any liability to the company.

    3. The company’s dispute with its own employees will not necessarily have any impact whatsoever on its contractual relationship with third parties. Although some scenarios whereby employees resign in mass in order to “punish” the company have been proposed, I’m not sure how realistic they are . . . a) would you really choose to be unemployed in this economy when your last reference will be the company you helped bankrupt? And b) would the French (or whomever) really have any more incentive to further destabilize the market than we do?

    “It's the law and whoever wants to violate it is a criminal.”

    4. The last time I checked, “wanting to break the law” wasn’t a crime. It’s also painfully obvious that you don’t understand (among other things) the difference between civil and criminal law.


  6. "it causes me physical pain to have to agree with Aaron...."

    That's good to know.


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