On July 27,2009,I posted a note ( below: Rémunération des cadres bancaires : les $100 millions d’Andrew Hall ) on the debate raging around Andrew Hall’s right to a $ 100 million bonus,the topic now of David Segal’s front page article in Sunday’s New York Times ( August 2,2009) .In my note I stated that while there were sound reasons to reform the remuneration of traders to avoid excessive risk-taking and to adjust it to account for risks spread over a long period ( the classic problem of long tailed distributions such as Pareto or Lévy ones) there are even sounder reasons for the provision in the U.S. Constitution prohibiting the passing laws that affect contract rights retroactively. These reasons were best articulated by James Madison, writing as Publius, in 1788 ,No44 The Federalist Papers:
“Bills of attainder, ex post facto laws, and laws impairing the obligation of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation. The two former are expressly prohibited by the declarations prefixed to some of the State constitutions, and all of them are prohibited by the spirit and scope of these fundamental charters. Our own experience has taught us, nevertheless, that additional fences against these dangers ought not to be omitted. Very properly, therefore, have the convention added this constitutional bulwark in favor of personal security and private rights; and I am much deceived if they have not, in so doing, as faithfully consulted the genuine sentiments as the undoubted interests of their constituents. The sober people of America are weary of the fluctuating policy which has directed the public councils. They have seen with regret and indignation that sudden changes and legislative interferences, in cases affecting personal rights, become jobs in the hands of enterprising and influential speculators, and snares to the more-industrious and less informed part of the community. They have seen, too, that one legislative interference is but the first link of a long chain of repetitions, every subsequent interference being naturally produced by the effects of the preceding. “
President Madison’s wise observations deserve to be heeded by those who now seek to retroactively modify contract rights.