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What's the Law of the A.I.G. Loan?

By Jack M. Balkin

The Federal Reserve Board has authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG). The New York Times reports that Treasury Secretary Henry M. Paulson Jr. and the Fed chairman Ben S. Bernanke convened a meeting with House and Senate leaders on Capitol Hill this evening to "explain" the rescue plan, but they did not request any new statutory authority for the bailout.

Matt Yglesias is understandably "a little surprised to learn that this is legal without some kind of legislation."

But according to the Fed, there already is such legislation, namely, the Federal Reserve Act of 1932, section 13(3) of which provides:

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, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal Reserve bank: 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. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe.

As today's decision demonstrates, this New Deal law apparently gives an extraordinarily broad authority to the Fed to "discount" notes, drafts, and bills of exchange, without limit. Recall also, unitary executive fans, that the Fed could have made this loan over the objection of the President, although in this case the Treasury supports the Fed's decision.

UPDATE: David Zaring wonders, not about the legal basis for the loan, but about the legality of the conditions the Fed is imposing on A.I.G. According to the Fed:

The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm?s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.

Zaring asks: Loan authority, sure. But from where does the Fed get the authority to trade credit for equity? I would think that it is implicit in the statutory loan authorization that the Fed can insist on collateral in order to protect the taxpayers' interest -- and this is simply a dramatic example of such collateral, necessitated by the enormity of the loan itself. I am not at all familiar, however, with this statute or the way it has been construed and implemented for 75 years, so that's simply a guess.

Thoughts?

Full post as published by Balkinization on September 16, 2008 (boomark / email).