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Four Ways to Rationalize the AIG Deal --

1. It really is a loan, not a purchase. 2. It's a purchase but it's called a loan and words like "interest rate" are used, so therefore the Fed can do it under the terms of the statute. 3. Even if it's a purchase, the statute does not literally say that the Fed can't purchase things and therefore (presumably under Chevron), the Fed has the authority to purchase (see Marty's comment on my earlier post). 4. It's an emergency, and a Schmittian state of exception is in play. No one really cares whether the transaction is lawful or not, just do something! Cite something in the Constitution -- Article II, somewhere. I mean go to #3 and cite the canon of avoidance just to be sure! (Indeed, this post suggests that the executive branch is really pulling the strings.)

#2 is silly; #3 is a respectable type of legal argument, according to which every grant of authority to an agency for limited purposes turns into a grant of vast discretionary authority unless Congress very very busily lists all the things the agency can't do; #1 remains possible but unlikely; #4 is most plausibly the truth. We might call #3 the polite version of #4, but to find out for sure I agree we'd need a test case where the Fed actually broke a clear rule -- arrested AIG shareholders and put them in Guantanamo Bay or something like that. Maybe tomorrow.

mls (www):
Speaking for all AIG shareholders, we could use the free accomodations.
9.17.2008 1:12pm
A.S.:
As I posted on the prior thread - the correct way to understand this is not any of these four. Instead, the correct way to understand it is that that the Fed made a loan, and charged a fee for making the loan. AIG paid the fee in stock, not cash.
9.17.2008 1:12pm
zippypinhead:
...we'd need a test case where the Fed actually broke a clear rule -- arrested AIG shareholders and put them in Guantanamo Bay or something like that. Maybe tomorrow.
I'm not quite sure I heard it correctly, but I think the soundbite from Senator McCain they played on the news 15 minutes ago basically said he was in favor of just that. And the competing soundbite from Senator Obama suggested he wants to criticize McCain for giving the AIG principals too much due process.
9.17.2008 1:14pm
js5 (mail):
perhaps we can just look at it as an unelected body using government resources to meddle with private corporations. someone remind me what that's called again?...
9.17.2008 1:29pm
Malibu Drew (mail):
perhaps we can just look at it as an unelected body using government resources to meddle with private corporations. someone remind me what that's called again?...

The judiciary
9.17.2008 1:42pm
taxpayer (mail):
Washington continues to give away our money like candy to calm a crying child. This is your money, my money, our money. The first candidate to effectively convey this message would gain a tremendous amount of support.
9.17.2008 1:47pm
js5 (mail):
not when the government resources are taxpayer dollars. the Judicial Branch decides cases, they don't send checks to help out ailing businesses. Try again.
9.17.2008 1:53pm
darelf:
AIG is being loaned $85 billion. The loan has interest. It is for a period of 24 months. It gives the Fed the right ( since it is stock ) to cancel dividend payments. AIG will sell assets to pay back the loan... with interest. The AIG board will be kicked out. AIG has an estimated $1 trillion in assets.

At the end of the day it will either remain as a diminished but completely private company, or it will sell all its assets and close its doors.

More like this, please.
9.17.2008 1:57pm
Nathan_M (mail):

At the end of the day it will either remain as a diminished but completely private company, or it will sell all its assets and close its doors.

At the end of the day the Fed will own 79.9% of AIG. When the government owns four fifths of a company I don't think it's "completely private" any more.
9.17.2008 2:01pm
Pensans:
Isn't all of this just the only admission that you and I will ever get that this is a command economy, that the government is one with the business men, that the game is rigged and you are I are stupid stiffs?

Slaves in honest traditional societies were paid only the honesty of being told that they were caddies. For you and me, this present discomforture of the elites -- which surely manifests only some kind of minor internal dispute -- is the only recognition of our status that we are likely to get. This is the highest human moment of our servile existence.

If you and I fail, we get the lash. If they fail, they get the bailout.

The only existentially honest reform is fire.
9.17.2008 2:05pm
David M. Nieporent (www):
perhaps we can just look at it as an unelected body using government resources to meddle with private corporations. someone remind me what that's called again?...
"The New Deal"
9.17.2008 2:12pm
Sarcastro (www):
Pensans: Slaves that can post to the internet! What will they think of next?

If only we were truly free like in days of yore. I can't think of the specific date, but I'm sure at one point normal people could do whatever they wanted, and the rich often got totally screwed when they were dumb.
9.17.2008 2:12pm
Nunzio:
Better yet. There's no practical way to challenge this so there's no jurisdiction for a court to hear it, even though #4 is the most likely answer.

No taxpayer has standing under Article III to challenge this, and, athough perhaps a member of Congress could file suit complaining the executive has usurped congressional power, I doubt anyone of them (except maybe Ron Paul) would do that in an election year.
9.17.2008 2:25pm
CB55 (mail):
If the government owns industries, and provides a social safety net, that's Socialism. Which is bad. If the government subsidizes industries, bails them out when they fail, and generally provides for industries the type of safety net that it shouldn't provide for people, that's good? What Big Media under states is that we are happy that China, Japan and Europe has loaned us the money so that we can bail out our failed policies, our failed banks and investments house and still believe that we can also have our cake. Thanks to China we can continue to believe that we can live with out taxes, build and maintain a standing army, make war and buy Arab oil at always yesterday low prices.
9.17.2008 2:29pm
Randy R. (mail):
The root problem isn't that the gov't is taking over AIG. The root problem is all those idiots who were so pro-deregulation that this allowed to happen. Where is Phil Gramm now?
9.17.2008 2:38pm
Lior:
Are insurers like AIG subject to provisions similar to the Community Reinvestment Act? If the government forced AIG to insure bad mortgages (liked it forced banks to issue them) then the government ought to rescue the company then the chickens come home to roost.
9.17.2008 2:41pm
Jim Hu:
IANAL, but from the few posts I've skimmed on the law and econ blogs, it seems like people aren't impressed by the legal basis for this. So... how long before a Federal suit is filed to block it? Even if neither party wants to take responsibility for blocking a bailout, I'd think that there would be someone out there on th e fringes who would try. Who has standing?
9.17.2008 2:54pm
Anderson (mail):
arrested AIG shareholders and put them in Guantanamo Bay or something like that.

Change that to "directors &officers," and I'll start editing the Yoo memos accordingly.
9.17.2008 3:05pm
CB55 (mail):
Randy R.:

Gramm is an unofficial adviser to McCain, but then the American people can never have too much misery because they have a high tolerance for the stupid.
9.17.2008 3:18pm
Dan Weber (www):
The root problem is all those idiots who were so pro-deregulation that this allowed to happen.

Which regulation(s) was removed that caused this, and who removed that regulation(s)?
9.17.2008 3:24pm
CB55 (mail):
Lior:

This is the new frontier and I think the Fed and the Bush Admin are making new law and precedent as we go along. Some of the old laws just do not apply or they do not cover all bases of instance. I think the governing elites feel the more secrecy the better.

My car is covered by AIG and when I called the state about AIG before the bail out their spokesman just blew hot air - he said that I need not worry but be happy because the AIG failure has nothing to do with my car insurance and I can file a claim with the state if AIG fails.

Right now my state is broke, they fired all temps/contract workers and it has not had a budget for over 70 days. The Terminator has made a threat to lock down the state if he does not get his way with a Veto. Filing any claim with my state is a horrible exercise.
9.17.2008 3:30pm
darelf:

At the end of the day the Fed will own 79.9% of AIG. When the government owns four fifths of a company I don't think it's "completely private" any more.


I will accept your challenge, Nathan_M. If at the end of the loan period ( 24 months ), AIG still has equity out as collateral to the Fed for this loan, then I will concede that you were correct.
9.17.2008 3:33pm
CB55 (mail):
Dan Weber:

Kevin Philips and David Cay Johnston state in their books that we have Democrats and the GOP to thank for re-regulation.
9.17.2008 3:33pm
David Warner:
If the Feds wanted to do something flagrantly unconstitutional, why didn't they just force AIG to take the deal they refused a couple days ago?
9.17.2008 4:45pm
CB55 (mail):
David Warner:

Because fear and influence trumps the Constitution on any given day.
9.17.2008 4:50pm
Crunchy Frog:
CB55: I have no idea what Schwartzenegger hopes to accomplish with a veto of the state budget. It took a 2/3 majority to pass, and that same 2/3 majority is sufficient to override. Maybe he's just pissed because nobody cares about his opinion anymore.
9.17.2008 5:36pm
Thales (mail) (www):
"Which regulation(s) was removed that caused this, and who removed that regulation(s)?"

I'll bite (though it's certainly not a unicausal explanation nor does it guarantee that in the presence of regulation some bad outcome would have been avoided):

It's decades of failure to regulate the over the counter derivatives industry, which failure has been encouraged by corporate lobbyists and pressure on Congress, the CFTC and SEC. Since no one can fully evaluate the depths of AIG's (and Bear Stearns', and like institutions') counterparty risk in credit default swaps and bond insurance (including instruments written for hedging subprime MBS) because of the lack of any disclosure requirements, the lack of an exchange with its own rules for these instruments, lack of regulatory capital requirements, evasion of such requirements through formal (and perfectly legal) accounting tricks, etc., the result is a massive shadow economy of very high leverage and systemic, interdependent risk. When the music stops, and the credit of even well-run insurance companies and investment banks temporarily evaporates because of this veiled risk that lenders cannot assess, the result is simply a high tech run on a bank. It's possible that one could have all the capital and disclosure requirements in the world, and still have outsize risk taking and complicated instruments impossible to evaluate--but it does seem that some sensible regulation, i.e. not the current Wild West, could have at least smoothed out the impact or let people see it coming a lot earlier.
9.17.2008 5:44pm
titus32:
If the Feds wanted to do something flagrantly unconstitutional, why didn't they just force AIG to take the deal they refused a couple days ago?

Is anyone saying the Feds did something unconstitutional? I thought the claim was that the transaction was not authorized by statute. I think Congress would have the power under the Constitution to authorize the Fed to carry out the loan (or purchase) of AIG.
9.17.2008 6:10pm
Thales (mail) (www):
"Is anyone saying the Feds did something unconstitutional? I thought the claim was that the transaction was not authorized by statute. I think Congress would have the power under the Constitution to authorize the Fed to carry out the loan (or purchase) of AIG."

I think the claim by Prof. Posner and others is that the Fed's exercise of power in this case is extra-constitutional, and that Congress did not in fact authorize it in the statute (though if Congress had, you are quite correct). It's a separate question whether we nonetheless permit such acts in emergencies (that's the reference to the Nazi jurisprude Carl Schmitt's state of exception).
9.17.2008 6:23pm
Jacob Wintersmith (www):
Question: Assuming that the AIG takeover is illegal, who would have standing to file suit to stop it? Would every taxpayer have standing? Would no one have standing?
9.17.2008 6:33pm
titus32:
Well, maybe not extra-constitutional, but extra-legal. In other words, the argument I've seen is not that the bail-out violates the Constitution, but that it is not authorized by statute. Again, I would think Congress could pass a law mandating the bail-out and that law would be constitutional as necessary and proper under the commerce clause (and probably some other clauses as well).
9.17.2008 6:35pm
Thales (mail) (www):
Wintersmith: the federal courts don't generally think much of the taxpayer standing concept. I would think those investors who took a short position on AIG, directly or through credit default swaps, would have a better claim, but good luck convincing a court that the rest of the world should suffer to redress an injury to speculators.
9.17.2008 6:39pm
Randy R. (mail):
"Which regulation(s) was removed that caused this, and who removed that regulation(s)?"

The Glass Steagell Act was repealed in 1999 due to the urging of Phil Gramm as a lobbyist for the banking industry so that they wouldn't have to worry about the feds looking over them.

Additionally, we have seen anti-trust regulation either gutted or not enforced since the Reagan years.

And of course, McCain was a part of all that:

"Back in 1989, McCain, along with four other Senators, was accused of improperly aiding Charles Keating, chairman of the failed Lincoln Savings and Loan Association, in efforts to hamper regulators from intruding on the industry's risky investment practices. McCain, who had received over $100,000 in campaign contributions from Keating, was ultimately rebuked for "poor judgment" but not for violating the law. He has claimed an ethical revival since then, pushing campaign finance reform as an example of a mistake learned."
9.17.2008 7:38pm
Randy R. (mail):
Suppose Republicans had their 'ownership society' and were able to allow people to invest in the stock market and other securities with their Social Security funds? What would be the likely result today?

Good thing *that* never happened, and we dodged that bullet. I'm wondering though if any of those supporters have the guts to admit that if they succeded, it would have been a bigger disaster for people.
9.17.2008 7:41pm
titus32:
Suppose Republicans had their 'ownership society' and were able to allow people to invest in the stock market and other securities with their Social Security funds? What would be the likely result today?

Probably similar to the millions of Americans with money in 401(k) accounts. How well they've done would just depend on when they bought, and what they bought.
9.17.2008 7:50pm
CB55 (mail):
After the elections, congress will no doubt hold hearings, but then no blame will be assigned, no one will be forced to take an oath. In the end many will get jobs as advisers, lobbyist, executives, golden parachutes and promotions with a good conduct medals. They will pass laws made with ham and Swiss cheese, and no one can find a Defendant guilty of stealing this sandwich guilty in any court of law. The courts will toss and or reduce any law suit. After the hearings lawyers and professors will smile and state how well the system of due process works, and the new president will mouth justice for all.

If you are near 50 you might put off getting old until you are 72 and maybe getting a 2nd job. If under 50 how about telling Junior he should think about a bottom floor job at WalMart and not State U.
9.17.2008 8:28pm
CB55 (mail):
Crunchy Frog:

My sister in-law the school teacher said that Arnold can rant and get away with it because the budget problem does not as of yet impact parents until later this year, but if or when it does parents will sign on to recall him. He can act and play like Conan the King until then
9.17.2008 8:34pm
Asher (mail):
Better yet. There's no practical way to challenge this so there's no jurisdiction for a court to hear it, even though #4 is the most likely answer.

No taxpayer has standing under Article III to challenge this...


I'm really ignorant on these matters, but I gather the shareholders' shares are heavily diluted by this deal. Wouldn't they have standing?
9.17.2008 11:24pm
Thales (mail) (www):
"I'm really ignorant on these matters, but I gather the shareholders' shares are heavily diluted by this deal. Wouldn't they have standing?" They might, but since AIG was about to collapse, they almost certainly would have lost much more had the deal not gone through. And of course, dilution is not ordinarily even a cognizable injury to common shareholders--they would have to have some sort of preferred stock that prevented the corporation from issuing additional shares. Buying ordinary shares is an acceptance of the board or management's authority (under the corp.'s organic documents) to raise capital and grow the company by prudent means, and if that means diluting your stake with additional equity, that's a risk you are compensated for with whatever expected return the shares deliver (all this assumes normal, non-fraudulent behavior by management).
9.18.2008 1:44pm

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