Monday, March 16, 2009

The Law of Unintended Consequences cannot be Abrogated

Former Treasury Secretary Larry Summers is relying on the foundational principles of contract law to explain why the $165 million AIG bonus payments must be honored (via This Week with George Stephanopoulos (emphasis added)):
...We are a country of law. There are contracts. The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system...
The Obama administration does not have a consistent policy on respecting contract law and it will have unintended consequences:
(WSJ) Mortgage 'Cramdown' Plan Hits Turbulence in Senate

A central piece of President Barack Obama's plan to aid strapped homeowners is running into turbulence in the Senate as Democrats scramble to secure support from both parties' moderates.

The bill, which has already passed the House, would allow judges to write down mortgage debt [as in change the written contract] for people in bankruptcy court...
Sec. 103 of the H.R. 1106 details (emphasis added) the potential 'abrogation' of existing contracts passed by the House and now being considered in the Senate:

Section 1322 of title 11, United States Code, is amended-- ...

...`(D) by providing for payments of such modified loan directly to the holder of the claim or, at the discretion of the court, through the trustee during the term of the plan; ...
Update: From the AP story FACT CHECK: Obama having it both ways on economy?:.
...THE CLAIM: Obama repeated his assertion that his housing bailout will help "stabilize the housing market and help responsible homeowners stay in their homes."
THE FACTS: Even officials in his administration, many supporters of the plan in Congress and the Federal Reserve chairman have said some of the bailout money is bound to go to those who acted irresponsibly.

Fed Chairman Ben Bernanke has said it's important for the nation to go ahead with the plan even though it means assistance will go to some who should have known better than to get in over their heads.

Sheila Bair, head of the Federal Deposit Insurance Corp., made a similar point when she said it's "simply impractical" to examine every delinquent loan and weed out those taken by people who overstated their income or assets to get a mortgage they couldn't afford.


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