pageok
pageok
pageok
AIG, the War on Terror, and Executive Power.

Whether the Fed (and/or the Treasury) acted unlawfully depends on whether the transaction with AIG falls within the statute that authorizes the Fed to make loans to non-banks during emergencies. It is clear that the transaction mixes elements of debt and equity. The Fed probably will get the residual value of AIG—everything if its assets appreciate less than 8.5%, and 80% of the balance if they appreciate more than 8.5%. The Fed probably has almost complete control as well: it kicked out the old CEO and replaced it with a new CEO and although the Fed has not yet exercised its equity warrants, clearly this new CEO knows that the Fed can, whereupon its control will become de jure as well as de facto. Still, we don't know for sure, I suppose; in particular, I can't tell whether some condition must be met before the Fed can exercise its warrants or whether they are limited in some other way. But if, as some have argued, AIG was worth nothing at all, then it would be pretty crazy for the Fed to accept anything less than full ownership in the substantive sense, and we can reconcile ourselves to the fact that somehow the AIG shareholders were left with an ownership stake with the comforting thought that their shares have (almost) no value. (As long as AIG is on life support, there is a non-zero probability that its value will appreciate to the point that shareholders get some return.)

What is more interesting is the strong parallel—which I hinted at before—between the current situation and the situation post-9/11. No one expects Congress to act in any meaningful sense. The executive has nearly unlimited discretion, relies on mostly secret information, and therefore its actions cannot be evaluated by outsiders. We can only trust that executive officials know what they are doing. People say, at least, we can trust Henry Paulson and Ben Bernanke. They seem competent and have the country's interests at heart. But that's what people used to say about Dick Cheney and Donald Rumsfeld. We really have no idea whether Paulson and Bernanke are making wise decisions, dumb decisions, or even politically motivated decisions—say, bailing out firms in which political allies have interests and not otherwise, or firms with lots of workers in politically important swing states. Sometime in the future, we may be able to evaluate their decisions, at which point our sole means of expressing our displeasure if those decisions were bad ones would be by voting against the person chiefly responsible for their appointments, George Bush—um, never mind.

Meanwhile, right now niceties of statutory construction must be ignored because the people who drafted the statutes did not anticipate the nature of this emergency though of course they knew that emergencies could happen. Back in 1932 (the most recent amendment was in 1991), Congress apparently believed that the Fed could respond to a financial crises solely by making loans so there was no need to give it the power to purchase businesses, a power that could be abused. Turns out this belief might have been wrong. Some loans may not be wise unless the lender can more or less control the borrower and can earn a portion of the upside, which just means that the Fed should have the power to purchase equity as well as debt. Going forward, all that Congress can do is provide even greater statutory discretion by expanding old authorities, so that next time round there will be no doubts about legality, and hope that the Fed does not abuse this discretion. There is, and can be, no serious debate about the best way to respond to the emergency in advance of it, and no time to have a debate during it. So Congress proves itself again an utterly helpless institution. It can whine today, hold oversight hearings tomorrow, and dutifully hand over more authority to the Fed on the next day. In the meantime, bad decisions by our government during this financial crisis, and future ones as well, will harm Americans and people around the world just as much as bad war-on-terror decisions do. Sorry, my libertarian friends; this is the world we live in. And there is no conceivable alternative.

NatSecLawGuy:
Professor,
What reforms do you suggest (if any?)? Is there a system in which the checks can exist in an emergency? If so, does that system preserve the balance struck by the Constitution?

This chasm of emergency powers seems to take new dimensions, and of more dire concern, greater lengths of time each time they are exercised. Its a troubling sign, but nevertheless, may be inevitable given that the co-equal branches are designed to run slow.
9.19.2008 10:27am
A.S.:
I continue to be baffled by Prof. Posner's commentary on the AIG loan.

He states: "The Fed probably will get the residual value of AIG—everything if its assets appreciate less than 8.5%, and 80% of the balance if they appreciate more than 8.5%."

Huh? This makes no sense at all. The Feds get everything (through foreclosing on the security for the loan - i.e., all of AIG's assets) if AIG's assets, less its liabilities, do not at maturity exceed the the amount of the loan that was drawn down. Where does this 8.5% Prof. Posner talks about come from? Does it have something to do with the interest rate charged? But that makes no sense - the interest rate isn't 8.5%, it's LIBOR plus 8.5%. But in a larger sense, the interest rate on the loan doesn't make that much of a difference in determining whether AIG will be able to repay the loan in full (assuming that AIG even draws down the loan - and we don't know if it has or will). The real determining factor in whether it will be able to pay back the loan, is what AIG will be able to get in return for its asset sales over the next 24 months, as well as the value of its underlying assets.

I don't disagree with the greater thrust of the post, that, given the structure of our government, in emergencies we'll just need to hope that the executive branch is successful. That said, I don't see why there isn't "any conceivable alternative" to the current structure - what if statutes simply forbid the Fed and the Treasury from engaging in these types of actions (whether emergency economic actions like these or emergency war-time actions in the case of 9/11)? That's conceivable. It may not be preferable (then again, it might be), but it is certainly conceivable.
9.19.2008 11:26am
dearieme:
"there is no conceivable alternative": that's a sweeping assertion. Would you care to justify it?
9.19.2008 11:32am
Anderson (mail):
I detect a heavily underlined copy of Carl Schmitt under Posner's pillow.

The principal fallacy, if I can distinguish only one, is to assume that the responses to 9/11, and to the present Wall Street crisis, were either effective or the best possible responses.

If in fact those responses turn out to have been woefully incompetent and lead to more trouble down the road, then that won't quite justfy the authority-worship of the Posner crowd.
9.19.2008 12:19pm
titus32:
The principal fallacy, if I can distinguish only one, is to assume that the responses to 9/11, and to the present Wall Street crisis, were either effective or the best possible responses.

Actually, not only does Prof. Posner does not make this assumption, he suggests the administration made some bad decisions.
9.19.2008 12:24pm
Jon Roland (mail) (www):
Robert Schulz of We the People Foundation today filed a federal lawsuit in United States District Court in Albany seeking to halt the execution of the emergency bailout of American International Group, Inc. (AIG) by the United States Government and the Federal Reserve.

The lawsuit asserts that the commitment of public funds and credit for the direct benefit of privately owned AIG is an ultra vires action by the United States Government and Federal Reserve, i.e., beyond the limited legal authority granted by the Constitution.

Read the Complaint, the Memorandum of Law supporting the TRO, and Schulz's Declaration.
9.19.2008 12:30pm
cboldt (mail):
-- Robert Schulz of We the People Foundation today filed a federal lawsuit ... --
.
Heh. Even if he's right, he won't win. "The system" can't permit itself being unmasked. Thanks for the news and links ... it'll be interesting to read the opinion and order of the Court.
9.19.2008 12:47pm
Nunzio:
Jon,

Motion denied, and Complaint dismissed with prejudice. No standing to bring this lawsuit.

Thanks for the grandstanding though.
9.19.2008 12:51pm
Milhouse (www):

Robert Schulz of We the People Foundation today filed a federal lawsuit

Sorry, that's all I needed to know in order to skip the rest of the piece.
9.19.2008 12:56pm
Grant Colvin (www):
Hhhmmm. I'm not an attorney, much less an attorney specializing in regulatory or financial law. But, as I understand the language of the relevant statute, the Fed is authorized to extend a loan, at its discretion, to any person (natural or legal), provided that the loan is secured to the Fed's satisfaction, in circumstances where the recipient of the loan demonstrates that it cannot obtain credit from other institutions. Esssentially, AIG has mortgaged itself to the Fed. I don't understand how making a collateralized loan falls outside of the Fed's authority.

Obviously, the transaction, if only by its magnitude, is unusual, to say the very least. But, in my humble opinion, we truly are in a situation that is a dire emergency, a situation that threatens a meltdown of the entire financial system in the United States (and, um, the entire world).

Since my college days I have always been persuaded that Milton Friedman was correct in arguing the the Fed turned a garden variety contraction into the Great Depression by permitting a precipitous and disastrous drop in liquidity.

Under the current circumstances the Fed absolutely must employ the authority it possesses (and if necessary obtain additional authority), in order to preserve liquidity throughout the entire system. Absent the kind of action that has been taken thus far, and the kind of further action now contemplated, a catastrophic contraction, quite possibly deserving the label "depression," would be not only possible but quite likely.

Harry Reid the other day justified the forthcoming Congressional recess in the face of the financial crisis by saying "No one knows what to do." Well, clearly Reid doesn't know what to do, and maybe members of Congress don't know what to do, but, fortunately, the are some other people in Washington who do know what to do, and they are presently doing it. We are, fortunately, now witnessing a display of what Publius so long ago insisted upon: energy in the executive.

When a building is on fire, first put it out. Then set about to identify and punish the arsonists.
9.19.2008 1:11pm
SenatorX (mail):
"But in a larger sense, the interest rate on the loan doesn't make that much of a difference in determining whether AIG will be able to repay the loan in full (assuming that AIG even draws down the loan - and we don't know if it has or will)."

Sure we do, they drew 28 Billion of it yesterday. They also maxed out other lines like this 6.5 Bil. I'm sure all that money went to useful places, like growth.
9.19.2008 1:20pm
Randy R. (mail):
The next time I hear anyone say that we can't afford universal health care coverage....

(Or we can't afford to replace our bridges, or invest in high speed trains, or combat global climate change)
9.19.2008 1:40pm
commontheme (mail):
Actually if people who are knowledgeable about the law (like, say law professors) had spoken up earlier against the Bush administration's power grab, we might not be in the situation we are in today.

Perhaps it is not too late to prevent further erosion of the constitution.
9.19.2008 1:41pm
Jon Roland (mail) (www):
Keep in mind that all this money is being created out of thin air, backed by nothing but the "full faith and credit" of the United States. What does that mean? It means the ability of the U.S. government to use income and other taxes to withdraw from circulation enough money to offset the amounts being created and put into circulation, to keep the money supply from growing too rapidly and causing runaway inflation that would hurt investors. It represents the socialization of savings and investment that should be left to individuals.

Credit-based currency will inevitably result in collapse, because economic growth cannot be sustained indefinitely in a finite world. When growth falters, the overleveraged economy falls.
9.19.2008 1:53pm
Jon Roland (mail) (www):
commontheme:

Actually if people who are knowledgeable about the law (like, say law professors) had spoken up earlier against the Bush administration's power grab, we might not be in the situation we are in today.

Perhaps it is not too late to prevent further erosion of the constitution.

The current financial crisis doesn't have a party label on it, unless it would be "Demopublican". Both parties have allowed the problem to develop over several decades, as have the governments of other nations, because this is not just a U.S. problem, and does not have only a U.S. solution.

What was missing was someone taking a long-term view and warning of how things could go wrong, then planning for what to do if it does. Markets are great for short-term economic decisionmaking, but long-term thinking is something we all need to help do as a civic duty.
9.19.2008 2:00pm
Minitruth:
Why is this odd. We are looking for a concept known as "leadership". It is not a quality that must be present every second of every day. But when adversity arises, and action is required, leadership becomes the quality that is supposed to save the day.
9.19.2008 2:19pm
A.S.:
SenatorX - thanks. Hadn't seen that.
9.19.2008 2:20pm
Bob from Ohio (mail):

The next time I hear anyone say that we can't afford universal health care coverage....

(Or we can't afford to replace our bridges, or invest in high speed trains, or combat global climate change)


After 1 trillion is spent on this, we won't.

As for the suit in Albany, who thinks the courts want to be responsible for the possible collapse of the financial system? To wrote someone famous, that is "above their pay grade".
9.19.2008 2:22pm
Jon Roland (mail) (www):
Minitruth:

We are looking for a concept known as "leadership". It is not a quality that must be present every second of every day. But when adversity arises, and action is required, leadership becomes the quality that is supposed to save the day.

Leadership can only work when there is action that can work and the action can be perceived by the leader, and understood well enough by the followers to choose the right leader.

Human beings are not adequate for managing complex systems over a long span of time. The current financial crisis has resulted from abandoning principles of sound economics laid down more than 200 years ago, and at this late stage there may be no alternatives left that can avoid collapse. The actions needed were needed more than 40 years ago.
9.19.2008 2:38pm
Justin (mail):
Posner's point is that there's nothing we can do about it. It's a grudging endorsement of the current strategy. Or more to the point, it's non-normative, simply descriptive.

And I think it's a very insightful point.
9.19.2008 2:40pm
PLR:
Posner's point is that there's nothing we can do about it. It's a grudging endorsement of the current strategy. Or more to the point, it's non-normative, simply descriptive.

I agree, but the end of it was a bit confusing:
Sorry, my libertarian friends; this is the world we live in.

I don't know why Eric thinks apologies are necessary. Despite the veneer of libertarianism, there haven't been many objections to the expansion of executive power on this site.

Maybe Eric was thinking of Jack Balkin's site.
9.19.2008 2:57pm
Iraq Updates (mail) (www):
HI,

The fed just made about 80+ Million dollars today by owning 79% of AIG stock. Not bad for one day...or the tax payers of the world.

I have a question....

Is there any "pre-pay penalty"...Can AIG pay back the 2 year loan before two years? With over 1.1 trillion in assets...I am sure they could pay back the entire 84 Billion with in 3-6 months...thus avoiding the about 11.5% interest payments.

Thanks for your reply's in advance.

Peace,
Dan
Iraq Updates
9.19.2008 4:10pm
Duncan Frissell (mail):
Sorry, my libertarian friends; this is the world we live in. And there is no conceivable alternative.

How about rnding fractional reserve banking and reestablishing the Gold Standard. -- Just kidding.
9.19.2008 4:15pm
Iraq Updates (mail) (www):

Robert Schulz of We the People Foundation today filed a federal lawsuit in United States District Court in Albany seeking to halt the execution of the emergency bailout of American International Group, Inc. (AIG) by the United States Government and the Federal Reserve.



Problem is...The Government did NOT "bailout" AIG. They just loan them money for two years @ 11.5% interest rate.

AIG put up plenty of collateral for this "LOAN"....with 1.1 Trillion Dollars in total assets.

That is not a "Bailout"....its a great business deal for the government.

____

Fannie and Freddie was a "Bailout"....Two entirely different deals.

Peace,
Dan
9.19.2008 4:24pm
NickM (mail) (www):

Human beings are not adequate for managing complex systems over a long span of time.


In that case, I for one welcome our new insect overlords.

Nick
9.19.2008 4:52pm
Jon Roland (mail) (www):
NickM:

Human beings are not adequate for managing complex systems over a long span of time.

In that case, I for one welcome our new insect overlords.

The insects don't want to be overlords. They just want to pick our bones.

Proposed epitaph for humanity: "They were smart enough to create problems for themselves they weren't smart enough to solve."

In fairness, the problem is not the lack of individual intelligence, but the lack of collective intelligence. Or at least, that is reported to be the assessment of the space aliens. Collectively, we have trouble making constitutions work over long time periods. If we could, we might be accepted into the society of starfaring civilizations. :)
9.19.2008 8:36pm
Tony Tutins (mail):
Back in 1932 (the most recent amendment was in 1991), Congress apparently believed that the Fed could respond to a financial crises solely by making loans so there was no need to give it the power to purchase businesses, a power that could be abused.

Probably Congress wanted to limit the powers of a future Socialist President. Who could have guessed a Bush administration would be first to nationalize vital corporations? GW Bush -- an American Clement Atlee.
9.20.2008 1:49am
Litigator-London:
Sorry Mr Tutins: Atlee was educated at Northaw School, Haileybury and University College, Oxford, where he graduated MA in Modern History in 1904. Attlee then trained as a barrister he was called to the Bar in 1906. He saw active service in WWI ending the war with the rank of Major. He taught at the London School of Economics until 1923.

I cannot think of anyone further away both in terms of war service and of intellect from your Toxic Texan Chickenhawk.
9.20.2008 1:46pm
Elliot123 (mail):
Posner: "In the meantime, bad decisions by our government during this financial crisis, and future ones as well, will harm Americans and people around the world just as much as bad war-on-terror decisions do."

It's also quite fair to say the good decisions our government makes during this financial crisis will benefit Americans just as much as ridding the world of Hitler did.

I wonder if some folks resent the fact that our laws don't always work, and people actually have to step up to the plate and make some decisions.
9.21.2008 1:49am
alkali (mail):
@Eric Posner: No one expects Congress to act in any meaningful sense. ... So Congress proves itself again an utterly helpless institution. It can whine today, hold oversight hearings tomorrow, and dutifully hand over more authority to the Fed on the next day.

It would be helpful in responding to this if it were clearer whether you thought these statements are particular features (or mis-features) of Congress at this point in American political history, or would be true of any national legislative body in the modern era.
9.21.2008 7:24pm
Gabriel McCall (mail):
And there is no conceivable alternative.

Is it so hard to conceive of a world where markets operate naturally, without manipulation by government central banks? Where poorly run businesses fail as they should, so that their market share and resources can be claimed by companies that are actually good at what they do? A world where people simply don't make low-income loans to high-risk customers, instead of diverting useful fiscal resources down a black hole of insolvency and relying on the public trough to profit from their folly?

That's really not conceivable? I want to cry.

This crisis has been brewing since either 1971 or 1933, depending on how you score it. The solution to every economic problem since then has been to print more money. Which generally solves the problem in the short term, but makes the underlying problem worse and worse and worse as time goes on. Now things have gotten to the point where the Ponzi tower of creditcards simply can't be held aloft any longer... and it's "inconceivable" that the answer might not be to print yet more money?

The longer we postpone the inevitable adjustment, the worse it's going to be. We should have let the tower collapse years or decades ago, and now we're facing the consequences of not having done so. But the fact that the adjustment is going to be pretty damn awful if we let it happen now, does not justify prolonging the agony further and making it that much worse in a few years. Are we going to keep printing more and more money until the collapse entirely destroys the US dollar, or are we going to push it further and take down industrial civilization altogether? is it really inconceivable that we need to take our medicine now, the sooner the better?
9.21.2008 9:28pm

Post as: [Register] [Log In]

Account:
Password:
Remember info?

If you have a comment about spelling, typos, or format errors, please e-mail the poster directly rather than posting a comment.

Comment Policy: We reserve the right to edit or delete comments, and in extreme cases to ban commenters, at our discretion. Comments must be relevant and civil (and, especially, free of name-calling). We think of comment threads like dinner parties at our homes. If you make the party unpleasant for us or for others, we'd rather you went elsewhere. We're happy to see a wide range of viewpoints, but we want all of them to be expressed as politely as possible.

We realize that such a comment policy can never be evenly enforced, because we can't possibly monitor every comment equally well. Hundreds of comments are posted every day here, and we don't read them all. Those we read, we read with different degrees of attention, and in different moods. We try to be fair, but we make no promises.

And remember, it's a big Internet. If you think we were mistaken in removing your post (or, in extreme cases, in removing you) -- or if you prefer a more free-for-all approach -- there are surely plenty of ways you can still get your views out.