Monday, March 16, 2009

Team Obama on the Sanctity of Contracts

Regarding AIG bonuses:

"We're not a country where contracts just get abrogated willy nilly," [Larry] Summers, a former treasury secretary, said on CBS's "Face the Nation" program.
Regarding mortgage contracts:
The financial services industry and House Republicans are fighting back against a bill pushed by House Democrats that would empower bankruptcy judges to write down mortgage interest rates and principal....Since Monday evening, the financial industry and House Republicans have sent a flurry of letters to the administration and House members in strident opposition. The “cramdown” provision is sponsored principally by House Judiciary Committee Chairman John Conyers Jr. (D-Mich.) and is part of a combined bill backed by Conyers and House Financial Services Committee Chairman Barney Frank (D-Mass.)....President Obama offered support for cramdown generally in his housing proposal last week.
I wonder: Is Larry privately opposed to the cramdown proposal as an abrogation of contract? (Of course, even if he is, he is too much of a team player to say so explicitly.) Or perhaps he sees some principled reason why one kind of contract cannot be rewritten ex post while the other can. It would be a good question the next time some reporter talks to him.

Update: A reader brings to my attention this older article on the topic by private citizen Larry, which suggests some sympathy for cramdowns. The article does not, however, fully explain when (in Larry's view) changing the rules of the game ex post is justified and when it is not.