{"id":8592,"date":"2010-01-16T12:50:19","date_gmt":"2010-01-16T17:50:19","guid":{"rendered":"http:\/\/law.marquette.edu\/facultyblog\/?p=8592"},"modified":"2010-01-16T12:50:19","modified_gmt":"2010-01-16T17:50:19","slug":"contract-rights-under-assault","status":"publish","type":"post","link":"https:\/\/law.marquette.edu\/facultyblog\/2010\/01\/contract-rights-under-assault\/","title":{"rendered":"Contract Rights Under Assault"},"content":{"rendered":"

\"Barack_Obama_pledges_help_for_small_businesses_3-16-09\"<\/a>In 1789, as the inchoate American government was climbing out of the mountainous debt left over from the Revolutionary War, a thorny political problem emerged.\u00a0 While most of the chattering class was consumed with the debate over whether the states\u2019 war debt should be federalized, another far more visceral controversy arose.\u00a0 Because the Continental Congress lacked funds during the war, the Revolution was funded partly by wealthy private citizens who invested in bonds.\u00a0 As a result of the lack of governmental money, many American soldiers were given worthless IOUs at the end of the war, as states scampered for a way to give the patriots their back pay.\u00a0 Many of these soldiers panicked, and sold their IOUs to speculators for as little as fifteen cents on the dollar.\u00a0 The problem was, once the federal government began repaying the debt, the value of the bonds soared.\u00a0 So who should get the money: the patriots who fought bravely for their country and only sold the IOUs because of fear they would get nothing from their government, or the speculators?<\/p>\n

The answer for many populists was easy\u2014the veterans should not be swindled by greedy money men.\u00a0 However, Treasury Secretary Alexander Hamilton knew that the price of the government breaking a contract was far more costly to a young nation\u2019s character than the ephemeral outrage that many veterans felt.\u00a0 As Hamilton told President Washington, \u201c[t]he general rules of property, and all those general rules which form the links of society, frequently involve in their ordinary operation particular hardships and injuries.\u00a0 Yet the public order and the general happiness require a steady conformity to them.\u00a0 It is perhaps always better that partial evils should be submitted to than that principles should be violated.\u201d<\/p>\n

Because history has a way of repeating itself, it should come as no surprise that the debate over contract rights versus populist sentiment has returned with a vengeance.\u00a0 The first sign of trouble<\/a> came last March when President Obama urged Congress to sever the retention bonuses owed to several AIG derivative traders. \u00a0The outrage was understandable: AIG had gone belly up and was only kept afloat by the public dole.\u00a0 However, the retention bonuses were agreed to before<\/em> the TARP bailout; abrogating them would violate a clear contractual obligation.<\/p>\n

This did not stop some members of Congress from seeking to pass a Bill of Attainder<\/a> to recoup the bonuses via the tax code.\u00a0 Congressman Barney Frank even threatened AIG CEO Edward Liddy<\/a> with a subpoena if Liddy did not hand over the names of the AIG employees who received the bonuses.\u00a0 Just what, pray tell Congressman, did you intend to do with those names?\u00a0<\/p>\n

Not to be outdone on the outrage meter, Republican Senator Charles Grassley stated \u201cI would suggest the first thing that would make me feel a little better toward them [the AIG executives] is if they follow the Japanese example and come before the American people and take that deep bow and say, \u2018I am sorry,\u2019 and then either do one of two things: resign or go commit suicide.\u00a0 And in the case of the Japanese, they usually commit suicide.\u201d\u00a0 Goodness.<\/p>\n

But the low moment came in May during the Chrysler bankruptcy proceedings.\u00a0 The Obama administration was attempting to spare Chrysler from bankruptcy court by selling Chrysler\u2019s assets to a new company owned by the United Auto Workers (UAW) and Fiat.\u00a0 The only problem for the administration was that a group of plucky Chrysler bondholders refused to sell their assets on the grounds that they could get a better deal in bankruptcy court.\u00a0 Because these bondholders were secured creditors, they were entitled to first priority under bankruptcy law rules.\u00a0 These bondholders rightly pointed out that they owed their shareholders the fiduciary duty to hold out for the best deal possible.<\/p>\n

But bankruptcy court would have been bad for the UAW (as it was a junior creditor), so the Obama administration brought out the brass knuckles<\/a>.\u00a0 Thomas Lauria, the attorney for the group of bondholders, stated that his clients were threatened by the Obama administration into taking a haircut.\u00a0 For a brief moment, it appeared as if the bondholders would fight it out in court, but eventually they relented in the face of governmental pressure.\u00a0 Lauria said that his clients decided against a legal battle once they concluded they could not \u201cwithstand the enormous pressure and machinery of the U.S. government.\u201d\u00a0 Bankruptcy Judge Redfield T. Baum quipped that the bondholders had about as much of a chance of winning against the federal government as \u201cthe gentleman in Tiananmen Square when the tank came rolling in.\u201d<\/p>\n

As we dig ourselves out of the Great Recession, investors must cope with an additional risk: the threat of government abrogation of legal rights for political reasons.\u00a0 Even Warren Buffet bemoaned the Chrysler situation: \u201cIf we want to encourage lending in this country, we don\u2019t want to say to somebody who lends and gets a secured position that the secured position doesn\u2019t mean anything.\u201d<\/p>\n

\u00a0Russell Kirk once noted that \u201c[u]pon the foundation of private property, great civilizations are built.\u201d\u00a0 Ignoring these rights is how they fall.<\/p>\n","protected":false},"excerpt":{"rendered":"

In 1789, as the inchoate American government was climbing out of the mountainous debt left over from the Revolutionary War, a thorny political problem emerged.\u00a0 While most of the chattering class was consumed with the debate over whether the states\u2019 war debt should be federalized, another far more visceral controversy arose.\u00a0 Because the Continental Congress 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