LEGAL FICTIONS AND THE SANCTITY OF CONTRACTS – A LOT OF NICE BULL
Corporations, limited liability companies, banks, financial entities, non-profit organizations, governmental entities, and all private enterprises in the world are essentially legal fictions. What is a legal fiction?
It is a fictitious “person” created by law that has certain legal rights and obligations. It exists on paper, in public records, and in our hearts and minds, but it is still not real. We believe they exist and we arrange our lives around such assumptions.
The fictitious corporate entity “AIG” has swallowed up over $170 billion from the Federal Government (another legal fiction created by the Constitution) acting as an excessively generous Santa Claus (another long-running fictitious person). But the Federal Reserve Bank (another legal fiction) merely “created” the money out of thin air (by magic) and U.S. taxpayers are now by contract obligated to eventually pay off that amount from the wages they earn working for various legal fictions. Isn’t this a wonderful parallel fantasy world we’ve created?
Over this past year, many jobs (over 5 million) became fictitious along with the pension savings and the former living abodes for millions of Americans. We thought they were “real” but actually they were just part of our imaginations, because they were tied to our legal fictions. Now that real life has become surreal, fictions win.
Legal fictions come and go – by means of incorporations, dissolutions, bankruptcies, sales, purchases, transfers, mergers, and reorganizations – and in every case, real people keep on living, loving, eating, and working. Legal fictions are lovingly cared for by lawyers, accountants, financial advisers, and our governments. Rest assured though, if all legal fictions suddenly disappeared, “the sun will come out tomorrow, you can bet your bottom billion…”
What has been forgotten by too many in corporate America is that every business enterprise is essentially a group of dedicated, hard-working, ethical, talented, experienced, and creative human beings. A person does not learn how to manage or lead any organization in business school. It takes years of hands-on experience. Because too many large U.S. corporations and financial institutions were run by greedy, short-sighted, ignorant and lazy people who viewed employees and customers are mere fungible objects, we ended up in this huge systemic failure. It may take years to purge all those useless economists and MBAs from our public and private organizations.
Things that are tangible and real (ergo not legal fictions) are human beings – our family, friends, acquaintances, co-workers, co-students, pets, enemies, and the relationship we build between each other. Other things that are real consist of tangible goods and products, such as cars, phones, clothes, computers and appliances, legally called “chattel” and rhyming with another tangible item “cattle.” The most important real things are the planet we live on and the Sun that provides the energy to sustain life. It’s too bad that we used way too many legal fictions to buy our chattels because when we cannot meet our contractual obligations, they suddenly become fictitious. Contrarily, some of the best real things in life are still free.
The U.S. Constitution, Article 1, Section 10 states in part: “No State shall … pass any … Law impairing the Obligation of Contracts … “ So what does that mean? Over the past 200 years, we have developed dozens of caveats permitting the modification, impairment or nullification of our private contracts, such as the contract must be for a legal purpose and not against public policy. Bankruptcy courts and all our criminal and civil courts regularly interpret contracts, impairing or disregarding some parts, and enforcing others for a variety of legal reasons.
AIG spent years creating and selling “credit default swaps” that were explicitly exempted from any insurance or security regulations over the past 2 decades, despite many attempts to the contrary. AIG insured the highly questionable financial investments that bundled various debts and mortgages from failure. Of course, being unregulated securities and insurance, AIG did not have to maintain any reserves in the event these fictitious investments actually failed. (They actually thought that possibility would be a fantasy.) The extensive investor trading in these credit default swaps was essentially gambling. Alas, the fantasy of Las Vegas financial products became the reality of American banking and business practices during the past decade.
Now the Federal Government, as majority owner of AIG, is essentially insuring and paying some of those bad gambling debts of private investors. That is why AIG still argues that the bonuses created by these happy fictions are real and deserved by its highly incompetent London-based employees who failed the basic requirements of sound insurance underwriting. Of course some even argue these bonus payments are justified under the quaint and highly debatable concept: “sanctity of contract.” In either case our legal fictions and those that created them, are profiting from real people who work real jobs and pay real taxes.
Over many years, I have been involved in negotiating and drafting hundreds of business contracts, and also reviewing and litigating the inevitable fall-outs of many one-sided and poorly-drafted contracts. If a contract is essentially fair to the 2 parties that signed it, and the 2 parties conduct their actions ethically and good faith, absent major outside events, the 2 parties will do everything to live up to the terms and conditions of the contract because they will mutual profit from the relationship.
However, if the contract is so one-sided or poorly-drafted, or one party is unethical and does not deal with the other honestly and in good faith, once that huge fairness disparity is discovered (and it will be) the aggrieved party will do everything to break or modify that contract. And that is the stuff that keeps some attorneys and courts busy for years.
Too many lawyers think their temporal contracts should be etched in stone for all posterity. They pile on endless dribble attempting to accommodate every possibility, and naturally they fail. Contracts work until they don’t work – for various reasons, and for only as long as both parties profit from following them. Contracts do not deserve any more respect than that.
The Mafia liked to make contracts “people couldn’t refuse” and their examples are actually very good for any understanding of contract law. (A person could watch all 3 Godfather movies and probably pass a first year contracts course in any law school.) For example, a contract of adhesion is an extremely one-sided agreement, usually obtained by coercion. “You will sign this agreement giving us 20% of your store’s gross daily receipts or else we blow it up and do untold harm to your loved ones.” That is just not enforceable in any court as it is against public policy and it was obtained by illegal methods. “We will loan you $100 and you pay us 400% weekly interest until it is repaid in full, with no credit for early repayment.” This is another private contract just asking to be nullified by public policy, though most states abandoned usury laws in favor of campaign contributions from nationwide unregulated check cashing businesses.
Why is it when well-known Mafia figures engaged in such entertaining private contracts with various individuals, those agreements were eventually stricken as illegal, while essentially identical contracts (albeit without any threats of violence) heisted upon many members of the general public by banks, financial institutions and private enterprises are regularly upheld by our courts because we do not want to disturb the illusory sanctity of contract, or some nebulous freedom to contract? Perhaps between 2 equal parties with the same army of lawyers meeting over several months that these concepts make some sense. However, with all our consumer “contracts” with respect to mortgages, car loans, credit cards, and every bank account policies, we are hapless ants against an ant-eater.
How many people reviewed and negotiated their credit card contracts, and how could one if the terms and conditions in miniscule text are mailed after a person signs up for the card? A person’s only choice is dropping the card and going with another equally bad credit card. I tried that several years ago when living in Chicago. (I never met or heard of Barack Obama while I lived there.) I marked up the documents the credit card company sent, including that I expected a fixed 8% interest rate and that any disputes would be settled in a court where I lived, not arbitrated in South Dakota. After 2 months of silence, I got a call from the representative of that credit card stating those provisions could not be changed, and therefore I would no longer qualify for the card. Fortunately I never used it so we went our separate ways. Talk about a contract of adhesion, yet our Congress and state legislatures have all been bought off by the large financial institutions to permit such crap. I personally have lived without any credit cards for more than 5 years. A debit card suffices for me.
The federal government now owns 80% of AIG and therefore has theoretically complete control over the Board of Directors and management of that company. Why can’t it simply say that the most recent round of bonuses and most of the past ones were fictitious and against public policy, and therefore we will not honor them. The actual transactions upon which they were based were highly unethical and insufficiently protected from eventual failure. Such a position would mean full employment for an army of lawyers for at least a decade debating that point.
If AIG and the many zombie banks still sucking up taxpayer money to survive while they are drowning in their own toxic assets, were actually put into bankruptcy reorganization, the court could look back 6 years and demand the repayment of all questionable salaries, commissions, bonuses and expense reimbursements in order to protect the creditors. AIG recently released a list of major recipients of its bailout money, and it consists of all the large major domestic and international financial institutions that fell in love with those credit default swaps, some of whom have their own bailout programs with the Federal Government.
Do some of the major recipients of federal bailout money have some secrets on Treasury Secretary Timothy Geithner (just as the Mafia often used) that will expose him as a fraud or a participant in their prior misdeeds while he was the President of the New York Federal Reserve? If Secretary Geithner does not come clean on all this financial mess, and promptly, his credibility and that of the Obama Administration may be severely damaged.
All the niceties of legal fictions and all the crap we’ve heard about contracts, credit default swaps, mortgage-backed securities, and the fear the entire global financial system collapsing if we don’t continue to pour trillions of dollars down these black holes of greed, have entered the world of fantasy. It is becoming increasingly difficult to believe anything from the current public officials who are holdovers from the prior Bush Administration. They either must provide simple, direct, honest, viable and complete explanations of what is going on and how they plan to go forward, or else President Obama should request a significant number of resignations. It is curious why the President is afraid of some expressing some moral outrage on behalf of the American people. Advocating public policies that benefit 90% of American consumers over the completely discredited and bankrupt U.S. financial executives will not produce a negative effect at the next elections.
When President Franklin Roosevelt took over in 1933, there were no Hoover Administration holdovers trying to clean up the messes that they in part created. There are many intelligent, creative and experienced people around the U.S. who could help the President solve the financial and banking crisis. Many do not have Ivy League educations or prior governmental experience. However those 2 prerequisites are grossly exaggerated in measuring the quality of federal job applicants. Over the past 2 decades, many of the key decision-makers on Wall Street and in Washington DC met both prerequisites, and we know where that group has gotten us and our entire economy.
Even if one agrees with many of the progressive proposals of the new Administration, it is becoming evident that the handling of the banking and financial crisis is woefully inadequate. This financial reorganization must be simultaneously, aggressively and competently pursued along with increasing public and private employment, and addressing all the other laudable and neglected programs, in order for this country to crawl its way out of our deep recession.
3/16/09 – by Marc Pascal in Phoenix, AZ