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Argument: AIG bonus contracts are invalidated by taxpayer bailout

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Senate Republican leader Mitch McConnell of Kentucky: "'we all know that contracts are valid in this country, but they need to be looked at. Did they enter into these contracts knowing full well that, as a practical matter, the taxpayers of the United States were going to be reimbursing their employees? Particularly employees who got them into this mess in the first place? I think it’s an outrage.'"


Morgan Housel. "AIG's Bonuses Are an Absolute Joke". The Motley Fool. March 16, 2009 - And the money must be paid, story goes, because they're legal, contractual obligations that have to be met, lest lawsuits argue otherwise. Larry Summers -- President Obama's top economic advisor -- chimed in, saying, "We are a country of law. There are contracts. The government cannot just abrogate contracts."

Fair enough. But I can't be the only one fascinated that the same people with the authority to commit $10.16 trillion of taxpayer funds don't have the authority to alter an employment contract. The Treasury can flip a company's capital structure on its head, ring-fence guarantee any asset it wants, and give a blank check to whomever it deems fit. But holding back bonuses at a company it owns 80% of? Whoa … way out of its pay grade.

And, no, that doesn't make me a berserk Socialist who wants the Fed to control businesses with an iron first. It makes me someone who sees AIG for what it is -- a bankrupt company on life support that should be treated like all bankrupt companies, where contracts are often null and void. Just like convicted felons, some rights get revoked when you misbehave. That's how life works. No, that's how capitalism works.

Besides, ever since taxpayers became the de facto owner of all things unsuccessful, we've been light-years away from what's normal, moral, and probably even legal. You can say reneging employment contracts is breaking the rules, but let's be real here: We haven't been playing by anyone's definition of "the rules" since last September. AIG bulldozed every normal procedure of how capitalism works, but insists we revert to business as usual when it comes to paying bonuses to employees who single-handedly buried taxpayers in a black hole. I find that quite hypocritical.

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