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.
In other news, the Obama campaign is furiously searching for the mole who leaked their “first 100 days” action plan.
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/
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.
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.
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.
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