Opinion

Felix Salmon

Sorkin Smackdown Watch, Anna Gelpern Edition

By Reuters Staff
March 18, 2009

Andrew Ross Sorkin used his column yesterday to push "the sanctity of contracts" in general — and of AIG guaranteed-bonus contracts in particular. Lawyers, in general, were not impressed. John Carney responded quickly:

I don’t see anything about voiding the contracts on the grounds of public policy as violating the sanctity of contracts.

And now Anna Gelpern gives chapter and verse:

Enforcing contracts where private parties have no money means either suffering default and firm failure, or using public funds to pay up on the parties’ behalf. The alternative is using government power to rewrite the contracts.
There is no doubt that the U.S. Congress has such power aplenty. In an article coming out in the Southern California Law Review, Adam Levitin and I examine Supreme Court jurisprudence assessing the veritable extravaganza of contract rewriting in the New Deal. In opinions spanning over two decades, the Court was unequivocal: the government’s power to regulate the economy, not just to manage economic emergency, trumps private contracts.

It’s pretty obvious that in the midst of a financial crisis, there are lots of things more important than the sanctity of contracts entered into by a company which, were it not for hundreds of billions of dollars of government cash, would by now not only be in liquidation, but which might well have dragged a large part of the global financial system down with it. To put it bluntly, those contracts ain’t worth shit.

But even then l like the idea of simply applying a surtax to the bonus payments rather than abrogating the contracts. If there’s a way of clawing back the bonuses which doesn’t involve abrogating contracts, then why not use it?

Reprinted from Portfolio.com

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