Secret signing statement?

Agree that Prof. Posner's statement "unless the AIG deal miraculously turns out to be profitable" is really uninformed.

Okay, so fill us in where the media has failed. What, precisely, is the plan for paying the money back if it's a loan? On what date can we expect AIG to have repayed the government's -- our -- money? How much profit can we expect to make on this transaction?

The money is to be repaid by selling off various chunks of AIG's assets. The loan nature of the transaction is reflected in the punitive nature of the interest (LIBOR + 8.5), which would be the profit we expect from the transaction. I can't remember the "date" we're looking to recover "our" money right now.

Okay, so fill us in where the media has failed. What, precisely, is the plan for paying the money back if it's a loan? On what date can we expect AIG to have repayed the government's -- our -- money? How much profit can we expect to make on this transaction?

The term of the loan is 24 months. We, the taxpayers, can expect to make a profit off the loan through payment of interest (LIBOR + 8.5%, which is ridiculously high), plus our ownership of 80% of AIG's equity. We have a security interest in all of AIG's assets. And we expect AIG to be able to pay the loan back (to the extent the loan is drawn down at all) through sales of its assets, which we control. Let's remember that, as of June 30, AIG had assets of $1,049,000,000,000.

I bet if the Fed wanted to syndicate that 85B loan they'd have a lot of takers, though I doubt they'd be able to offload the whole thing. The problem is that there isn't enough "loose" money around right now, which is why the Fed had to do this deal instead of private parties in the first place. But it is a very good deal and will make money for the Fed.

SenatorX. That is pure speculation. I would suggest that they had no time to properly look at the books. They also know it is better to wait. It appear the US Gov. made a great deal on AIG and will likely make a big profit once things stabilize. The Fed is just babysitting while the parents are sick in bed...once the parents get better they will want their kid back.

which is why the Fed had to do this deal instead of private parties in the first place

iirc, a private party offered AIG the same deal, but they figured they could get a better deal from the Fed. Long live the free market.

Jeff Lipshaw (hat tip, the Conglomerate) talks about why he looks at the AIG deal as a loan.

If all else fails, we can always fall back on the Commander in Chief power.

Wow, Jeff Lipshaw has an actual case cite and legal analysis, informed by actual practice experience. Maybe someone on this site should try that, though I know pure snark is more fun and less work.

If all else fails, we can always fall back on the Commander in Chief power.

Or the AUMF since it seems to cover everything else. Are you with us or with the terroristic financial markets?

[ "I'm sorry, Professor Posner, but doesn't that presuppose some quaint notion like "rule of law" or something ? " ]

{posted by "Obvious"}

____________

...yes, it's indeed a very old-fashioned notion to even mildly question the specific legal authority for Federal government actions of any type.

The 'Federal Reserve', of course, has absolutely zero authority to lend or buy to AIG.

But then the 1913 Federal Reserve Act ... and the Federal Reserve itself are completely non-constitutional (illegal) entities.

Thomas Jefferson correctly stated in 1791 that such a central bank created by Congress was without any authority under the U.S. Constitution.

Presumption of 'rule-of law' on any of the huge, current Federal
financial acrobatics is amusing.

what are these assets that are going to be spun off? is it worthless paper? what are we going to get-30 cents on the dollar?

what are these assets that are going to be spun off? is it worthless paper?

AIG actually owns a big fleet of airliners (747's and the like) under leaseback deals with the airlines. It's estimated this business could be worth as much as $50 Billion on the high end.

Eric, here's a blog post that argues for statutory authority, and directly engages your argument that the deal is illegal: Is The AIG Bailout Legal?

A taste:

The Fed is claiming authority for the AIG bailout under Section 13(3) of the Federal Reserve Act, which provides in pertinent part:

In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank ... to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange ... . Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions.

There's no relevant statutory or regulatory definition of "unusual and exigent circumstances," but it should be pretty clear that the current circumstances would qualify as "unusual and exigent." Obviously, AIG is a corporation, so it satisfies the "individual, partnership, or corporation" requirement.

And contra your argument:

UPDATE: Eric Posner thinks the AIG bailout is illegal because a court would hold that the transaction is a sale rather than a loan, and the Fed doesn't have the authority to purchase an insurance company:

[T]he Fed statute does not say that the Fed can purchase businesses, and it seems reasonable to interpret the statute to forbid the Fed to purchase businesses. So here’s the question, is the AIG deal a purchase or a loan? I suspect the deal is a loan in form but a purchase in substance. Unfortunately, the details are not available, but the press accounts suggest that the Fed is receiving AIG equity (more precisely, the option to obtain equity) as collateral for the loan but that it’s going to exercise the option more or less automatically.

This strikes me as wrong. Sure, if this were a normal transaction executed in the course of every-day business, a court might hold that it's a sale rather than a loan. But this is, by definition, an "emergency loan," executed in "unusual and exigent circumstances.

As Instawhathisface says, read the whole thing. (If this is old news to you Eric, sorry.)

Ah, Damn. Misread your post. You're asking for Treasury's statutory authority. The stuff is my previous post probably was old news to you. Sorry.

It is a bit amusing to see the mounting outrage on the AIG bailout among people who self-identify as conservative/libertarian.

Where was this outrage over the past 7 years as the executive branch disregarded inconvenient elements of the constitution and derided treaties like the Geneva convention as outdated and quaint?

If it is permissible for the Executive Branch to kidnap and torture people around the world, to imprison and torture American citizens, why can't the Fed throw a few billion dollars here and there?

Welcome to the unitary executive branch.

I have a question which I hope someone can answer. Suppose the Fed/Treasury action succeeds, &AIG is able to emerge as a going concern, say a year or so down the line. Suppose further at that point some of the current shareholders go to court, saying that the Fed/Treasury action was illegal, and, by arguments similar to that of Prof. Posner, convince the courts. What happens then? The shareholders get their equity back?

Seriously?

Yes. See, for example, these posts by Ilya and Michael Rappaport.

I would imagine that Professor Yoo has written some memo somewhere justifying this, because (1) Congress passed the AUMF and (2) the President's inherent powers as Commander in Chief, permit the Treasury Secretary to go into the insurance business. Here is the Yoo-like reasoning: if the economy collapses, the government will have less revenue. If the government has less revenue, there will be less money to spend on the Global War on Terror. Ergo, the President's inherent authority as Commander in Chief permits him to underwrite insurance policies on my car.

What is so hard to understand Mr. Poser, have you not been paying attention these past 8 years?

I have a question which I hope someone can answer. Suppose the Fed/Treasury action succeeds, &AIG is able to emerge as a going concern, say a year or so down the line. Suppose further at that point some of the current shareholders go to court, saying that the Fed/Treasury action was illegal, and, by arguments similar to that of Prof. Posner, convince the courts. What happens then? The shareholders get their equity back?

The missing step here is the Fed exercising the warrants, in which case I doubt the dilution claim would hold, the result would be that AIG had issued a huge chunk of new stock in exchange for $85B cash equity.

We're talking about the Federal Reserve, not the Treasury.

uh...

On what statutory authority does Treasury Act? Unlike the Fed, the Treasury does not bother to explain where its authority comes from in its press release and I have found no other sources with this information

It is a bit amusing to see the mounting outrage on the AIG bailout among people who self-identify as conservative/libertarian.

Where was this outrage over the past 7 years as the executive branch disregarded inconvenient elements of the constitution and derided treaties like the Geneva convention as outdated and quaint?

The outrage has been pretty consistent and apparent, at least among libertarians.

If it is permissible for the Executive Branch to kidnap and torture people around the world, to imprison and torture American citizens, why can't the Fed throw a few billion dollars here and there?

Anyone who thinks those actions are "permissible" in any sense other than that there isn't much he can do to stop it, isn't a libertarian.

Does anybody remember where those operations in that Dubai Ports World case a couple years ago went? AIG picked those up. AIG has its metaphorical fingers in so many metaphorical pies that perhaps a bit of divestment is prudent. To see AIG go down would have dragged seaport operations in quite a few ports along with it as well as other lease-back assets that hold up other industries.

Letting AIG tank would have been crippling not only in the financial sector but also the transportation sector. While having a "Consolidated Inc." business might be nice for garnering profits, it is fairly dangerous in case one part of the house drags the rest under. Mixing a bail-out with dismemberment might help stabilize more than just financial services.

I am not a lawyer and do not play one on television either. The statutory let alone constitutional authority for this is pretty sketchy. A failure like this would not only harm the financial services sector but could screw up US Postal Service mail carriage contracts due to airplane ownership issues as well as making foreign trade increasingly impossible as ships do not unload themselves. Since there is the chance for AIG to be dismembered, I have less trouble with a bailout. The only authority or reason behind doing this was that it would have been suicidal otherwise. To say that AIG is just an insurance company is to look at it through glasses painted flat black.

WASHINGTON — Treasury Secretary Henry Paulson says the government is crafting a plan to rescue banks from bad debts that are at the heart of Wall Street's worst financial crisis in decades.

Paulson said late Thursday the plan will need congressional approval. He and Federal Reserve Chairman Ben Bernanke briefed lawmakers on the options they are considering.

Senate Majority Leader Harry Reid, D-Nev., said he expected the administration and the Fed to have a proposal to lawmakers in a matter of hours, rather than days.

Paulson, Bernanke and Securities and Exchange Commission chair Christopher Cox asked lawmakers at the session to pass legislation giving the government power to buy distressed assets.

"It will be the power — it may not be a new entity — it will be the power to buy up illiquid assets," Rep. Barney Frank, D-Mass, said.

Frank said there was "virtually unanimous agreement" among lawmakers in attendance that such legislation was needed.

Well, I guess sometimes you don't need Congress and sometimes you do. My bet is that Congress will jump at whatever is offered as our honored representatives have no clue what to do and this way they can blame someone else if it goes wrong and take the credit if it goes well.

The multibillion dollar bailout of AIG might not even be necessary if it were not for federal accounting regulations that made it impossible for private banks to toss it a lifeline.

Former FDIC Chairman William Isaac argues in the September 19, 2008 Wall Street Journal that a logjam has been created in financial markets by the SEC through application of accounting regulations (so-called Fair Value Accounting Rules and Basel II capital rules) that he believes require that assets "be marked to unrealistic fire-sale prices" and require banks to "mark the assets to market even though there is no meaningful market." See William M. Isaac, "How to Save the Financial System," Wall Street Journal, Sept. 19, 2008, at page

Holman Jenkins in his September 17, 2008 Wall Street Journal column pointed to "accounting rules that may or may not paint an unrealistically dire picture of [banks'] existing loans . . . so these banks are not in a position to do what might be a very lucrative piece of business floating AIG the bridge loan it needed." See Jenkins, "Are We Running Out of Rescue Cash?," Wall Street Journal, Sept. 17, 2008.