The rational and the reasonable in the AIG bonus controversy.

• Author: Warnick, Barbara
• Position: Critical essay

Chaim Perelman's (1979a) landmark essay, "The Rational and the Reasonable," provided an account of what occurs in the legal field when a ruling that aligns with the dictates of legislation and precedent fails to coincide with the public's common sense of what seems reasonable within the context of the ruling. After the publication of this essay, observers raised questions about the intended scope of the theory as articulated by Perelman, as well as about its possible application in fields other than the law (Bertea, 2004; Bruner, 2006).

Many of those who have read his essay may be unaware that, after its original presentation, there was a lengthy discussion period in which Perelman responded to a number of questions and challenges from his audience. His on-site questioners at the International Symposium on "Rationality To-day" held at the University of Ottawa in 1977 included Jurgen Habermas, Louis Dupre, Hans-Georg Gadamer, and J. Vuillemin. (1) The purpose of this essay is to extend our understanding of his theory by considering the relations between the rational and the reasonable as Perelman explained them in that venue and applying his analysis to a specific case-the American International Group bonus controversy that occurred in the United States in the Spring and early Summer of 2009.

The questions posed during the Ottawa discussion session concerned such matters as the nature and function of the reasonable, its viability as a concept, its relation to the rational, and how the two come together in a dialectical relationship in national and international law. In responding to questions on these issues, Perelman reminded his audience that "law is in the domain not in the sense of the analytical but in the sense of the dialectical, the result of dialogue, discourse, and common opinion, the equitable" (Perelman, 1979a, p. 220). The question then remains of how dialogue and discourse come to play a role in this dialectic.

THE NATURE AND FUNCTIONS OF THE RATIONAL AND THE REASONABLE

Before turning to an analysis of the 2008 bonus controversy, it would be beneficial to consider Perelman's conceptions of the rational and the reasonable. There are two frameworks that can be used to consider his explanation of these terms: legal realism, which is a systems-level perspective on the workings of law in society, and Perelman's conception, which personifies the functioning of the rational and the reasonable specifically in light of human behavior. The legal realist framework, which initially was a reaction to legal positivism in the early twentieth century, denounced the established legal principle that had held that judicial systems should be deducible from legal rules and involve no creative activity on the part of the judge. The legal realists held that instead the primary concern of the law was not logical certainty but socially desirable consequences (Rogat, 1967). The legal realists discounted precedent as the sole controlling force in legal decisions, and they held that judges make decisions in accordance with the circumstances of a case and their own personal sense of justice (Hample, 1979).

Perelman's concepts of the rational and the reasonable were sympathetic to the legal realists' perspective, except that he focused on the reasonable as a check on exclusive systematic focus on the rational, and he conceived of it instead as a socially-embedded moral construct (Perelman, 1979b). Furthermore, he operationalized the reasonable in terms of human moral behavior. He noted that it is grounded in context and situation (Perelman 1979a, p. 117); conforms to principles of action acceptable to everyone (p. 118); can take different forms in different cultural contexts (p. 119); and has an existence that "makes it impossible to reduce the legal system to a formal and positivistic concept" (p. 121). He was also explicit in noting that the tension between the rational and the reasonable is not limited to the field of law. Instead, "We can find application of this principle in private and in public law, in civil and commercial matters, in the judicial, or even legislative exercise of power" (p. 121).

Perelman then noted that in the confrontation of the rational and the reasonable, there is "always a kind of opposition, everywhere, between the systematic and the consequences" (Perelman, 1979b, p. 224; my emphasis). That is to say, in a given situation certain requirements imposed by systemic changes in regulatory structures may nevertheless be fundamentally incompatible with other pre-existing structures in the system, and also with the desired consequences of the changes themselves. In the AIG bonus controversy, this surely was the case, and therefore some considerable compromise between the measures initially undertaken by Congress and those that were ultimately proposed and implemented was needed. In the end, a somewhat satisfactory arrangement was worked out through a dialectical congruence between the rational-proposed legislation to be enacted into law-and the reasonable, which was an alternative plan for continued federal monitoring of the bailed-out corporations' actions.

THE AIG BONUS CONTROVERSY AND CONGRESSIONAL LEGISLATION

The remainder of this essay will apply Perelman's framework to the bonus controversy. The controversy erupted when the public learned that a portion of the taxpayer-supported bailout funds provided by the Federal government to financial firms during the 2008 economic crisis was being used to pay bonuses to the executives of firms such as AIG. It turned out that the measures that Congress initially tried to enact appeared to be in conflict with existing laws governing the regulation of contractual obligations, and thus there arose the question of how to reconcile the rational (the system of the rule of law) with the reasonable (implementing mechanisms that would block bonus payouts and still mollify public opinion). The difficulties that confronted Congress and the administration during this period arose from conflicts between actions that legislators proposed and what was allowable under the rule of law (Neutral Source, Part 2, 2009). Reaching a resolution to the problem required decision-makers to generate alternative means of limiting bonus payments so as to avoid conflict with pre-existing legal requirements governing contracts.

As will become apparent in my discussion of the 2008-09 bonus controversy, American International Group (AIG) practices that seemed patently unreasonable to the President, Congress, and most of the polis generated a situation in which the public called the government to take corrective action. AIG had underwritten billions of dollars worth of financial derivatives without maintaining sufficient reserves to cover potential shortfalls. The U. S. Treasury and the Federal Reserve then had to assume control over AIG in the Fall of 2008 to prevent catastrophic effects on counterparties such as Merrill Lynch and Deutsche Bank. When AIG and other companies ended up in such straits that they required government assistance to avoid complete failure, Congress during the final months of the Bush administration approved bailout packages in excess of $180 billion for AIG. In the context of this situation, AIG's move to award bonuses to its top executives was viewed by the administration and the public as reckless and extremely irresponsible (Shear & Kane 2009).

When government leaders decided to take action in response to the bonus payment controversy, however, they found that nearly all the corrective options that they had considered were problematic under rule of law. Their ongoing struggle to mitigate the problem and end public dissent became complicated by various legal requirements and the looming possibility of negative consequences at nearly every turn. A review of the complex sequence of events in this controversy discloses the ways in which stringent but legally problematic Congressional legislation was eventually modified through discourse and dialogue between the Senate, the House, the Treasury, the affected firms, and the President so as to bring enacted regulations for executive compensation into alignment with legal requirements applicable to contract agreements, thus incorporating the systematic (the rational) with desired consequences (the reasonable).

That the economic downturn of 2008-09 was precipitated by flawed lending practices and the collapse of the housing market is well known. AIG was one of the earliest companies to suffer a liquidity crisis when it was required to post additional collateral, could not do so, and its credit ratings were downgraded.

When the firm then reported after the government bailout in the Spring of 2009 that it was planning to pay out $165 million in executive bonuses, there was an uproar of public protest in response. (2) In a statement on March 16, President Obama responded:

I want to comment on the news about executive bonuses at A.I.G. This is a corporation that finds itself in financial distress due to recklessness and greed. Under these circumstances, it's hard to understand how derivative traders at A.I.G...