Sanctity of Contracts (for CEOs Only)

3-19-09, 11:26 am

A fundamental legal principle of capitalism is the sanctity of contracts. Exchanges of goods and services cannot be made without them. Without legally binding contracts, society would be an anarchic mess.

At least that was the implication in top White House economic advisor Larry Summers' comments March 15 when he blunderingly attempted to explain the difficulty of getting top executives at global financial giant AIG to return about $165 million in bonuses paid out after a massive bailout at taxpayers' expense.

Summers told CBS' Face the Nation that while the AIG bonuses were 'outrageous,' '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.'

This now infamous comment deepened growing public anger at a company and a system that looked the other way as AIG participated in activities that helped inflate and then burst the housing bubble, contributed to the collapse of the financial markets and the recession, and caused that company serious financial jeopardy. AIG and its defenders then made the argument that it needed gobs of taxpayer money to stay afloat because it was 'too big to fail.'

New media reports now suggest that AIG rigged its bonus system last year to ensure fat paychecks for executives even if the company lost money. In fact, the top executives may have anticipated losing money.

A host of legislative efforts sprung up in response to the public outcry. Republicans, who blocked efforts to regulate the financial markets and who have deregulation hard-wired into their DNA, phonyed up their anger.

On the other hand, Democrats offered their own responses, most of which sought to preserve the sanctity of contracts: from taxation of the bonuses to public pressure on the companies to voluntarily give the money back.

Rep. Barney Frank (D-MA), who chairs the House Financial Services Committee offered a unique and pragmatic alternative, however. Frank told Capitol Hill reporters this week that the US government should recoup the bonuses not as an advocate of sound business policy or as an outside regulator. The US government should go after the bonus the way any business owner would if it had been cheated. 'I do believe that it is time for us to assert our ownership rights under this arrangement,' he said.

Without its bailout of AIG, the US owns a majority share of that company. Frank's demand seems to suggest the US should act like one, not just a cash pot for greedy and corrupt CEOs.

While leading members of Congress tried to work out a way to protect the sanctity of contracts. Other Republican members of Congress and corporations have projected a creative view of the concept of contracts.

The predominant theme? The sanctity of contracts does not apply to workers. Sen. Bob Corker (R-TN) railed against the Big Three loan package, last winter, saying that union contracts should be torn up and the federal government should order massive across the board pay and benefit cuts for American workers.

The Bank of America, also a recipient of massive taxpayer bailout money to the tune of $25 billion, last fall looked the other way as a Chicago company, Republic Windows and Doors, chose to unilaterally suspend its contract with its workers. Bank of America had loaned the manufacturer millions of dollars and in effect owned most of the capital in the company.

But Republic closed down and refused to pay workers contractually agreed upon severance. Workers intervened and took over the factory. At first, Bank of America, which now in effect owned the company, said that the contract could be cut up. Under massive public pressure, however, the bank caved in and paid the workers.

In Windsor, Ontario, Canada, this week, Catalina Precision Products Ltd., the owner of auto parts supplier Aradco, decided to break its contract with the workers at that plant. After it shut down Aradco and refused to pay workers a contractually agreed upon severance package totaling about $1.7 million, the workers took over the factory and welded the doors shut. Stay tuned for the finale of that story.

Bus drivers in Grand Rapids, Michigan just recently won a lengthy court battle with a private school bus company which unilaterally refused to recognize a union contract held by the bus drivers. In 2005, the Grand Rapids School district, to save a little money, outsourced busing to a private company. The new company, Dean Transportation, refused to recognize the contract and the union up until a judge last January ordered them to do so.

The list goes on.

In the minds of many capitalists, the sanctity of contracts can be selectively applied. It works for owners and CEOs, not workers. Contracts and their applicability are tools for profit, above all else.

Maybe Barney Frank is right. Taxpayers and workers aren't going to get even a sense of justice during this crisis until we exercise our rights as owners of this system.