In Bailout Nation, employment contracts matter -- or they don't.
As outrage explodes over American International Group Inc.'s plan to lavish $165 million in bonuses on the unit most responsible for its collapse into federal ownership, the insurer's brass is claiming the inviolability of employment contracts to justify big-ticket payouts to those whose risk-taking helped bring the global financial system to its knees.
Contracts? Sacred? Unbreakable? Tell that to autoworkers whose union cut a deal with Detroit's automakers only to see the Bush administration, Team Obama and ranting members of Congress from both parties demand those contracts be torn up in exchange for a $17.4 billion federal lifeline.
Tell that to bondholders of General Motors Corp. under relentless pressure to swap two-thirds of their debt for shares in the automaker and risk bankruptcy. Tell that to CEOs at GM and Chrysler LLC now working for $1 a year and flying commercial. Or to employees whose bonuses are gone. Or to suppliers whose "contracts" aren't worth the paper they're printed on.
Contracts matter in Bailout Nation or they don't. And either the lenders of last resort -- you and me, Congress and the Obama White House -- can demand shared sacrifice from those who managed their firms into the ground or they can't.
Perpetuating this double standard -- one set of rules for troubled Wall Street firms with a demonstrable record of fat campaign contributions and another for automakers with union labor and little clout in Washington -- is arbitrary, indefensible and deserves the backlash buffeting Congress and the Obama administration.
And they know it, judging by the reactions of Congress, administration officials and even President Obama over the past two days. Populist fervor, once ignited, can be hard to control, especially when the original sins are as egregious as AIG's.
So far, the federal government has pumped more than $170 billion into AIG. The feds control 80 percent of the company. They approved the hiring of its embattled CEO, Edward Liddy, and are likely to engineer his removal, I'd guess. And they know -- some from first-hand experience on The Street -- that bonus payouts are a crucial part of compensation for Masters of the Universe, even amid mind-bending losses.
The last people to be surprised by the stunning arrogance of AIG's actions and the twisted rationale behind them should be administration officials who worked on Wall Street (White House Chief of Staff Rahm Emanuel and Treasury Secretary Tim Geithner come to mind) or members of Congress who gladly accept the industry's campaign contributions.
"Instead of being outraged at AIG's last revelations," Peter Morici, a business professor at the University of Maryland asked Geithner rhetorically in a blast e-mail, "perhaps you can explain to all of us why UAW worker(s) earning $29 an hour must give back wages and benefits to keep their company alive, while the architects of the biggest financial disaster in history get to keep their gold plated contracts."
It's simple, professor: There are different, more elastic rules for the well-connected financial elite and harsher, less forgiving ones for everyone else. AIG's too big to fail and GM's too big to fail. AIG takes 10 times the federal money so far loaned to Detroit's automakers and pays $165 million in bonuses; GM's brass gets eviscerated on Capitol Hill, the UAW's contract gets gutted and GM's North American business gets a necessary, if politically motivated, workout.
The issue, here in Detroit, isn't whether GM's business model is broken and in desperate need of repair, or that its debt load is unsustainable. All true. It's that the federal government appears complicit in a campaign to dismantle a cornerstone of American manufacturing even as it allows taxpayer dollars to be rewarded to those at the epicenter of the global financial meltdown.
Late Monday, Treasury officials signaled their intent to use a planned $30 billion federal infusion into AIG to unwind the bonuses, euphemistically called "retention payments." Normal folks here in the real world call it "rewarding failure," know it looks terrible and they know it doesn't pass the smell test, whatever the "contracts" say.
Under duress, economic fear and political expediency, we're allowing (even encouraging) the rewriting of what used to be ironclad rules. Now, contracts are valid until they aren't, responsibility matters until it doesn't, business executives are accountable until they're deemed too important to fail.
An emerging truth, in fact if not intent, is that contracts with their implied responsibility look like they will matter a lot less in the post-meltdown America. Consider where we're headed in Bailout Nation:
Union deals can be trashed if political critics demand it in exchange for federal loans. Executive employment contracts can be deemed worthless, as AIG's are likely to be by week's end. Contracts between a lender and a borrower can be reworked by a bankruptcy judge, weakening a fundamental economic relationship and undermining the recovery of the flat lining mortgage market.
Is this what we want?
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