Bankruptcy

Another Day, Another Private Corporation Taken Over by the US Government

By J. Michael McBride

Again as with Fannie Mae and Freddie Mac, today’s takeover of a private corporation by the federal government (with your tax dollars) is not being challenged or even seen as out of the ordinary. Has there ever been more intervention in private corporate affairs by the US government in the history of this country? Amazingly, there are no outrage from those who espouse the “free market” as the answer to all ills. There is no cry of social-ism hitting our shores from those who call themselves “conservatives”. Nothing. Perhaps the action of the government is appropriate, perhaps not; but what is most interesting is the utter lack of voiced opposition. These events are more than historic, they are cataclysmic. Again, should all of these acts avoid the major melt (read: significant and sustained deflation) then the Federal Reserve and the present leaders of the Treasury Department will be hailed as hero’s; should these hugely interventionist acts simply be a slowing of an inevitable “major melt” then someone will be looking to put the blame somewhere (see, the S & L “crisis” which followed de-regulation and the criminal prosecutions which followed that melt down) then look no further than … the Federal Reserve and the present leaders of the Treasury Department.

“The U.S. government seized control of American International Group Inc. -- one of the world's biggest insurers -- in an $85 billion deal that signaled the intensity of its concerns about the danger a collapse could pose to the financial system.

The step marks a dramatic turnabout for the federal government, which had been strongly resisting overtures from AIG for an emergency loan or some intervention that would prevent the insurer from falling into bankruptcy. Just last weekend, the government essentially pulled the plug on Lehman Brothers Holdings Inc., allowing the big investment bank to go under instead of giving it financial support. This time, the government decided AIG truly was too big to fail.…

It puts the government in control of a private insurer -- a historic development, particularly considering that AIG isn't directly regulated by the federal government. The Fed took the highly unusual step using legal authority granted in the Federal Reserve Act, which allows it to lend to nonbanks under "unusual and exigent" circumstances, something it invoked when Bear Stearns Cos. was rescued in March.”

Here is a link to this article:
http://online.wsj.com/article/SB122156561931242905.html

Michael

Full post as published by Texas Lawyer Blog on September 17, 2008 (boomark / email).