Via Atrios, Senate leader Reid proposes taxing the AIG bonuses:

Senate Democrats want to tax the controversial bonuses doled out to AIG employees who work for the division that led to the company's downfall. Senate Majority Leader Harry Reid announced on the Senate floor Tuesday that the tax-writing Senate Finance Committee will pursue a legislative fix in such a way that the "recipients of those bonuses will not be able to keep all their money — and that's an understatement."

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When I was in law school, Grant Gilmore's 1974 book The Death of Contract was a part of the discussion of a theory of contract. Gilmore's work was answered by Charles Fried in his 1981 book Contract as Promise, in which Fried was critical of the theory of efficient breach.

In the NYTimes, it is argued that the AIG bonuses should be paid because "the “fundamental value” in question here is the sanctity of contracts. . . . If government officials were to break the contracts, they would be 'breaking a bond[.]' Even companies that have not turned to Washington might seize the opportunity to break inconvenient contracts." (Emphasis mine.) This is, in a word, nonsense. While I have argued here that, at first blush, the AIG bonuses agreements will be hard to break legally, it never would occur to me that there is some moral obligation to honor these contracts. Indeed, the "morality" of the situation, such as it is, would seem to militate towards not honoring the contract.

More . . .

Boy, the AIG Financial Products division really is filled with cluelessness and chutzpah. An "AIG senior financial products Manager:

"It's going to blow up," said a senior Financial Products manager, who spoke on condition of anonymity because he was not authorized to speak for the company. "I have a horrible, horrible, horrible feeling that this is going to end badly."

It's going to blow up? You mean it hasn't already? This is going to end badly? You mean it hasn't already? At this point, AIG needs a compelling argument why it should not just be shut down. This type of talking ain't it.

Speaking for me only

The WSJ reports:

Monday afternoon, a White House official said the Treasury Department will use a planned $30 billion infusion into AIG to compel the company to repay the bonuses promised to employees of its financial-products group, which is responsible for selling the exotic financial instruments that brought the company to near-collapse. The infusion, announced March 2, won't be finalized until the company and the Treasury work up repayment options, the official said.

(Emphasis supplied.) Devil is in the details here (a lot of potential for Peter paying Paul in this I think as the employees themselves won't be foregoing the bonuses but rather AIG itself will have to "repay" the government for the bonuses paid), but it looks like it is worth exploring.

Speaking for me only

AIG, some of its well heeled and compensated employees, and the counterparties to AIG's outrageous transacrtions, certainly are playing with fire regarding this bonuses issue. But what can the government do about the bonuses? Firedoglake has posted AIG's argument for paying the bonuses. From a legal perspective, some of the argument is sound to my eyes:

AIG has been advised by outside counsel that a breach of the retention plan would subject it to claims for not only the contractually owed payments, but also penalties and fees under the Connecticut Wage Act. The Wage Act provides for the recovery of double damages and attorneys’ fees when wages are improperly withheld and the employer’s refusal to pay wages lacks a good faith basis. (Conn. Gen. Stat. §31-72.)3 In addition, individual managers who decide to withhold wages that are due are individually liable for violation of the Wage Act.

More . .

NYTimes:

Attorney General Andrew M. Cuomo of New York on Monday sent a letter to the American International Group, demanding more information about the employees who are set to receive about $165 million in bonus payments. Mr. Cuomo’s letter, demand[s] the information by 4 p.m. on Monday under threat of subpoena . . .

I wrote about this yesterday, but it is now becoming conventional wisdom. The upside to the AIG furor is that the Obama Administration, should it wish to do so, will now have a much freer hand for adopting temporary takeovers as the the first bailout option. Indeed, it seems to be fast becoming the only politically possible option. Just this morning even Joe Scarborough was advocating for temporary takeovers and "preprivatizations." The Adam Nagourney writes:

The Obama administration is increasingly concerned about a populist backlash against banks and Wall Street, worried that anger at financial institutions could also end up being directed at Congress and the White House and could complicate President Obama’s agenda. . . . Mr. Obama’s aides said any surge of such a sentiment could complicate efforts to win Congressional approval for the additional bailout packages that Mr. Obama has signaled will be necessary to stabilize the banking system.

. . . [T]he financial crisis is the most acute problem facing the administration, one it will not be able to play down. Christina D. Romer, the White House’s chief economist, said Sunday on “Meet the Press” on NBC that the administration was close to unveiling details of its plan to remove the worst of the bad assets from the books of banks, a move sure to refocus attention on winners and losers from bailouts.

(Emphasis supplied.) In my opinion, this is a good thing. The Obama Administration has been entirely too timid in its approach to the financial crisis. Here is a case where angry populism could force the Obama Administration to do the right thing, something it has been reluctant to do - temporary takeovers of insolvent financial institutions.

Speaking for me only

Paul Krugman sort of poses this question:

The clear and present danger to Europe right now comes from a different direction — the continent’s failure to respond effectively to the financial crisis. Europe has fallen short in terms of both fiscal and monetary policy: it’s facing at least as severe a slump as the United States, yet it’s doing far less to combat the downturn.

Why is Europe falling short? Poor leadership is part of the story. European banking officials, who completely missed the depth of the crisis, still seem weirdly complacent. And to hear anything in America comparable to the know-nothing diatribes of Germany’s finance minister you have to listen to, well, Republicans.

But Europe's biggest failure is in its powerless continental institutions. Krugman writes:

The chances of a future TARP are hurt by news like this:

The American International Group, which has received more than $170 billion in taxpayer bailout money from the Treasury and Federal Reserve, plans to pay about $165 million in bonuses by Sunday to executives in the same business unit that brought the company to the brink of collapse last year. Word of the bonuses last week stirred such deep consternation inside the Obama administration that Treasury Secretary Timothy F. Geithner told the firm they were unacceptable and demanded they be renegotiated, a senior administration official said. But the bonuses will go forward because lawyers said the firm was contractually obligated to pay them.

. . . The payment of so much money at a company at the heart of the financial collapse that sent the broader economy into a tailspin almost certainly will fuel a popular backlash against the government’s efforts to prop up Wall Street. Past bonuses already have prompted President Obama and Congress to impose tough rules on corporate executive compensation at firms bailed out with taxpayer money.

Some say there is legal recourse against paying these bonuses, namely bankruptcy I think that is wrong legally (I'll do a post about that later), but it does pretty much make clear that the chances of another TARP-style bailout is zero. For those institutions unable to meet their financial obligations, temporary takeover is going to be the only way out.

Speaking for me only

I wonder what motivated the Chinese to say this:

The Chinese prime minister, Wen Jiabao, expressed unusually blunt concern on Friday about the safety of China’s $1 trillion investment in American government debt, the world’s largest such holding, and urged the Obama administration to provide assurances that the securities would maintain their value in the face of a global financial crisis. . . . Mr. Wen said he was “worried” about China’s holdings of United States Treasury bonds and other debt, and that China was watching economic developments in the United States closely. “President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures,” Mr. Wen said. “We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”

There obviously is a motivation for saying this - it is not in China's financial interest to cause concern for US debt. What are they after with this?

Speaking for me only

We may have stumbled on to a strategy for the financial crisis:

As public outrage swells over the rapidly growing cost of bailing out financial institutions, the Obama administration and lawmakers are attaching more and more strings to rescue funds. . . . Some bankers say the conditions have become so onerous that they want to return the bailout money. The list includes small banks like the TCF Financial Corporation of Wayzata, Minn., and Iberia Bank of Lafayette, La., as well as giants like Goldman Sachs and Wells Fargo.

Good. These banks should only take government money if they absolutely have to. If they have other options, exercise them. That's why I do not like the reaction from this anonymous (naturally) Treasury official:

Now that Citi and the financial industry are "good investments", another way to look at the current situation is as a "buying opportunity" for the US government. I am largely being facetious here, but here is one description of what the "Oracle from Omaha" said about bank stocks: