I don’t approve of that conduct, but what’s fascinating is that people like Calomiris who otherwise would condone doing business in that way are suddenly stricken by it.

However, it seems like in many cases the asymmetries of power have grown so large, and the ability to delivery meaningful consequences has diminished to such a degree, that many contracts have ceased to function in a meaningful way. To take your example of contracts with service providers, I have often felt like such contracts are meaningless; if a provider doesn’t honor its contract, what recourse do ordinary citizens really have? Even in cases where failures to honor contracts are probably illegal, the resouces needed to obtain recourse are prohibitive for many individuals.

AIG should use this logic. If contracts by definition favor one part over another, AIG could decide not to honor its contracts with its employees who received bonuses, and let such employees decide whether it is worth their while to go public and sue.

Aside from the legal issues, though, it seems to me that our popular moral understandings of contract are as messy and contradictory as moral mapping of debt is. I wonder if anybody has done a good ethnographic study of contract as an idea and practice in the U.S., in fact. For example, there was a recent story about a University of Florida professor who was trying to fight a demand by the administration that she teach an additional class when she was hired to teach a 1/1 load with administrative responsibilities as well. Not surprisingly, the online brickbats started flying, occasioned largely by the idea that her workload was too cushy. Only a few people pointed out that this was a contractual relationship and that it was moral for her to enforce it. But most of the people complaining about the professor in this instance would likely argue that a lot of other contractual obligations in our society are and should remain sacrosanct, not so much as a matter of law but as a matter of moral obligation. Beyond a likely consensus that you can’t contractually be bound to perform illegal actions, I suspect there’s a really messy popular landscape around what contracts are and should be in moral and social terms.

I’m not a fan of the whole “circumstances are changed, so this contract can be voided” argument under any circumstances. Because if it can be used against people who are clearly malefactors, it can also be used against people who aren’t.

For example, at a certain research university, a few years back the university had agreed to increase the minimum stipend for graduate students over the course of three years as part of a settlement with the TA union. Well, when the university ran into financial difficulty because their stock portfolio (like everyone else’s) had tanked, they said that the promised pay raise had only been a promise to try and raise the minimum stipend if it were possible. At which point the TA union said, “Oh no you don’t,” went to the labor board, and the university very quickly backed down. Now then, the reason that the union was able to do that was because they had a binding guarantee, so that when the university said, “reality has intervened,” the union was able to throw a bullsh*t flag. The happy ending was that we did get our pay raise.

Now then, I hate to sound like a high school civics teacher on this one, but if you can void the contract for a collection of malfeasant executives at will, then the contract for a collection of graduate students isn’t any safer. I for one do not want to start down that road. And yes, I know I sound like a high school government teacher lecturing on the Bill of Rights. But there’s a reason we have high school government teachers.

Calomiris did make fridaykr’s second argument, that you’ve got to have these specific employees because they’re the only ones who know the full measure of the credit default swaps and thus are invaluable in untangling them. That’s fine, but my point about their marketability specifically holds against that. I hadn’t thought that there would be any mileage in using that knowledge to bet against the company simply because I think credit default swaps of this kind are almost certainly going to be the first major target of new regulation.

At face value, these seem like better arguments that than the ones Calomiris was espousing, if only because they attempt to speak to our own interests, not just those of Wall St. or AIG. Unfortunately, I lack the financial background to assess the merits of the above arguments. For example, I would really like to know the extent to which the over $50 trillion in credit default swaps worldwide (obviously not all AIG’s) can only be “unwound” by a select few. I find this hard to believe, frankly. I also need to be shown how, in this market environment, inside knowledge of credit default positions confers a trading advantage that could harm others. Maybe this is true, but someone needs to explain it to me.