…to spite your face appears to be the Fed’s modus operandi in the AIG bonus fiasco.  Regarding the Administration’s and Congress’s screeching about blocking those payments, The Foundry notes:

Returning to the banking crisis, the White House’s willingness to abrogate contracts outside of lawful bankruptcy proceedings is guaranteed to undermine their plans for stabilizing the banking sector. The Washington Post reports: “The attack by lawmakers on AIG pay has provoked renewed complaints from some financial company executives that federal involvement in business decisions is making it difficult for struggling firms to return to profitability. … A senior executive at one of the nation’s largest banks said he had heard from several hedge funds that they would not partner with the government for fear that lawmakers would impose retroactive conditions on their participation, such as limits on compensation or disclosure requirements.”

This past Sunday, National Economic Council director Lawrence Summers told ABC News: “We are a country of law. There are contracts. The government cannot just abrogate contracts.” This is exactly why government participation in the market, and all the political considerations it necessarily entails, undermines the rule of law which is the foundation of our success as a free market nation. As one executive at a private-equity firm told the Washington Post:

“Why do you think Hong Kong is a better place to do business than Shanghai? Because of the certainty of the contracts. Once the uncertainty factor goes up, the less interested you are in doing business because it becomes a more risky proposition.”

They should have gone with “Haste makes waste.”

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