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The legal status of the takeover
Here is one opinion:
I imagine that the legal answer to that question depends on a nice distinction between practice and plain language. Under the plain language of the statute, interpreted imaginatively, the Fed can extend credit, upon the right showing, to any company or individual, and so why not insist on conditions on the loan? Heck, why couldn't EPA, in the name of fishable swimmable rivers (that's Clean Water Act language), ban all pesticides, including dishwasher detergent, or nationalize water users like the steel industry? Maybe it can! Which might be good news for environmental activists.
I thank David Zaring for the pointer to this very interesting analysis. So far I haven't seen a more detailed post, nor has Google, but please let us know in the comments if you are aware of other serious treatments of the question. The question is justifying the ownership, not the lending. I'll update this post if I learn more of relevance. I've also posed the query over at Volokh.com. Marty Lederman adds comment. Eric Posner thinks it is fishy and that the "collateral" for the loan would legally count as a sale.
Posted by Tyler Cowen on September 17, 2008 at 08:08 AM in Law | Permalink
Comments
In other news, the Obama campaign is furiously searching for the mole who leaked their "first 100 days" action plan.
Posted by: at Sep 17, 2008 8:31:08 AM
The analogy to the EPA betrays almost complete ignorance of the Clean Water Act. One of the Act's express goals is, indeed, swimmable and fishable waters. But the other provisions of the Act impose substantial limitations on the mechanisms EPA can utilize to achieve those goals. I cannot tell you whether the Fed had the legal authority to bail out AIG, but I can tell you that EPA does not have the legal authority simply to ban all pesticides or nationalize industries under the Clean Water Act. Even if it did possess such authorities, political pressures would prevent it from exercising them. At least under the current Administration, the agency has been far more interested in pleasing its industrial "clients" than environmental activists.
Posted by: Dan Cole at Sep 17, 2008 8:58:13 AM
The WSJ did a blog post about this; there's some sort of "unusual and exigent" circumstances clause.
http://blogs.wsj.com/economics/2008/09/16/fed-invokes-unusual-and-exigent-clause-again/
Posted by: bla blab at Sep 17, 2008 9:00:51 AM
Is dishwasher detergent really a pesticide? Time for some happy fun science experiments!
Posted by: at Sep 17, 2008 9:26:13 AM
Thanks to bla blab for the WSJ link.
The blustery/panicky comments by WSJ subscribers are interesting [scary?] to read -- but a lot of chaff relative to the comments one might find here at MR.
Posted by: ZBicyclist at Sep 17, 2008 9:26:26 AM
Here's former Fed vice chairman Alan Blinder comparing the current financial situation to Japan in the '90s -- a decade of stagnant growth. Is this an accurate comparison?
http://www.youtube.com/watch?v=uzg0e5IY3V4&eurl=http://www.dailyprincetonian.com/
Posted by: '09er at Sep 17, 2008 9:30:04 AM
I gave my (admittedly cursory) legal analysis here:
http://economicsofcontempt.blogspot.com/2008/09/is-aig-bailout-legal.html
As for Zaring's analysis, the Fed can certainly insist that AIG put up equity as collateral. In fact, the language of 12 CFR 201.4(d) implies that the Fed can insist on ANY type of collateral for emergency loans to non-depository corporation, as long as it gets approval from at least 5 members of the Board of Governors beforehand.
Posted by: Economics of Contempt at Sep 17, 2008 9:32:31 AM
Tyler,
I'm surprised you didn't comment on this part of the statement you quoted:
Heck, why couldn't EPA, in the name of fishable swimmable rivers (that's Clean Water Act language), ban all pesticides, including dishwasher detergent, or nationalize water users like the steel industry? Maybe it can! Which might be good news for environmental activists.
Yes, socialism is GREAT news for environmental activists. That's why the Soviet Union had such clean lakes and rivers. (Irony intended.)
Best,
David
Posted by: David R. Henderson at Sep 17, 2008 10:37:39 AM
The Fed's deal with AIG is a voluntary contract. Since it includes not a cent of consideration, it can't be a sale. The ownership of the assets behind the collateral seems to transfer only if the terms and conditions of the loan are not fulfilled. Since the contract insists on full repayment of capital with a nice chunk of interest, I think it must be a loan contract.
I guess that if the Fed had a credit rating, a deal on these terms would tend to put it up. One way or another, the Fed will probaly make money out of this. How it will split the loot with the US taxpayer seems to still be under negotiation.
David Henderson and swimmable, fishable rivers reminds me of a train journey from Prague to Berlin in the spring of 1990. For 100 kilometers down river from Prague, no one was fishing in the river. The reason was that the water engineers who manged the city supply of Prague were paid according to the quantity of water treated and pumped into the city supply. The excess water (despite a very leaky system) washed the city sewage through the sewage works before it could be treated. Capitalists find it hard to imagine the marvels of practical socialism.
Posted by: David Heigham at Sep 17, 2008 12:43:58 PM
As a non original thought, the original came from the very creative minds behind
the movie "National Treasure". Which by the way is something we, (I'm including
myself)"Americans" and I chose that word loosely, because I am afraid we have sold
our souls to the devil. To leave that cliche, maybe had I said sold our freedom for
the "comfort of safety" or "we have relinquished our responsibility to own freedom" that
statement might have more meaning. Americans, an ideological term that causes me to wonder
if we still have the right to call ourselves.As a people we have traded our treasured Bill of
Rights, all the sacrifice it took to pen it, and surrendered to an ever growing,
towering, almost an insurmountable task master. I am ashamed that I am one who
has sat back and contributed through my own complacency the continued oppressive
growth of the present government of what is known as the United States.(I know in
writing this I am utilizing what may well be one of the last of those tenets of
rights, perhaps the most obvious and therefore the most difficult for this present
government to quench, the freedom of expression.)
I am somewhat amused by this blog's title "Marginal Revolution". (To anyone who has
read this far, I commend you.) Not to be critical of this blog, but we "citizens" the
"Standard Bearers" of liberty have marginalized ourselves near the point of no return.
Our complacency has by allowing this once beloved limited (in power) representative
government through oppression steadily force us the citizens near to the point of a more
aggressive stance, as in the movie "National Treasure" and I quote "...to do what we know is
wrong in order to do what know is right". Truly our God given rights as stated in
The Constitution of this Republic is our most valued National Treasure. It is ours
to fight for or to surrender.
I believe I will stop for now and observe the response so far....
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