Why The AIG Bailout Is Not Like Chrysler
Tuesday night, the Federal Reserve provided an $85 billion line of credit (otherwise known as a loan) to AIG, backed by the US treasury. AIG is the largest insurance company in the country and one of the largest financial firms in the world. In exchange, taxpayers get 80% of the company, and AIG's management gets the boot.
The differences are enormous. There is no precedent for what the US Treasury Department and the Fed did Tuesday night.
- Scale: In today's dollars, the loan guarantee for Chrysler would be about $4 billion. The AIG bailout is 20 times larger.
- Instrument: In the Chrysler bailout, the government guaranteed private loans ... and required that Chrysler come up with other loans and/or cost savings measures. In the AIG bailout, the loan is coming directly from the Fed, guaranteed by the US Treasury.
- Ownership: Taxpayers had no ownership or managerial control with Chrysler. We do with AIG. Moreover, we "have the right to stop payments of dividends to shareholders."
- Authority: Congress had to write legislation authorizing the Chrysler bailout. The Fed chair and Treasury Secretary seem to have acted with carte blanche, courtesy Section 13(3) of the Federal Reserve Act. (There are no quotes from the President in the stories I've read so far, and while there are protests from Senate banking committee members and the Speaker of the House, those protests don't argue that the White House needs Congressional approval.)
- Global Impact: Had Chrysler gone bankrupt in 1980, the main folks hurt would have been vendors and employees. Although there would have been a global impact, it would have been small. With AIG, with assets of $1 trillion, however, failure would impact 401Ks and other retirement plans ... as well as people and businesses around the world. European banks own three-quarters of the $441 billion in unregulated complex security instruments protected by AIG. Moreover, "had AIG gone into bankruptcy, the financial industry would have faced losses of up to $180 billion."
Both firms got caught by poor management decisions, but it's AIG that reflects a much bigger problem: America buys more than it produces (imbalance of trade) and is spending a heck of a lot of its cold hard cash on imported petroleum.
Where they are all too much alike is in the arena of government regulation, or, more accurately, deregulation. Just as automakers fought efforts to develop strict CAFE standards, the financial sector has argued that those Depression-era constraints on co-mingling banking, finance and insurance were simply too behind the times for the digital age.
What can you do?
Get to know presidential candidate positions on the economy. This article at The Moderate Voice is a good start as is this overview by Kimberly Amadeo.
Talk to your Congressmen about the tax code. Too often, the tax code encourages spending rather than encourages saving. We need to save more; our savings rate is the lowest in the developed world. And the argument that we're "saving" by building equity in our homes has been rendered moot, blown away like the house owned by the first of the three little pigs.
Talk to your Congressmen about the debt and the deficit ... and about the $2 trillion Congress has moved from the Social Security trust fund to the general fund, with no plan for paying it back.
Work at paying off your debt, if you haven't already done so. Unfortunately, few of us are considered "too big to fail," especially after Congress changed personal bankruptcy laws at the request of, you guessed it, the financial sector.
Comments
Thanks, Kathy, for the quick work in explaining the strangeness of this issue. My first thought upon hearing about it was that this was another extraordinary grab of power by the Executive Branch. The question that immediately comes to mind is: has the government ever “taken over” a publicly-traded firm before?
One answer that comes to mind is Harry Truman’s attempted “nationalization” of the steel industry. That case wound up in the Supreme Court as Youngstown Sheet and Tube v. Sawyer, where Sawyer was the Secretary of Commerce, seizing the steel mills under an Executive Order.
In one of its most frequently cited decisions on the limits of executive power, the Court found that the seizure “was not authorized by the Constitution or laws of the United States; and it cannot stand.” I’m not a Constitutional law expert, and certainly not an expert in commerce and financial law, so I don’t know if there have been any changes in US law in the past half-century which would have legitimized actions such as Truman’s.
One thing I do know is that Justice Jackson’s concurring opinion with the majority in Youngstown gave a framework for evaluating the enumerated powers of the President. That framework, which should have stopped this Administration dead in its tracks on the issue of circumventing FISA , has been routinely ignored by the President, Congress, and the Supreme Court.
Thanks, evano …
Wow, Youngstone Steel never even crossed my mind.
The first thing I thought of was Chrysler, and then I learned that my memory of what happened was sketchy and wrong. So I wrote about it. It helps to be on the west coast when east coast news breaks late.
I need to do more research on Section 13(3) of the Federal Reserve Act.
And obviously, I need to read the Youngstown decision. Thanks.
What we all need to be doing is contacting the offices of our representatives in Congress to ask them where in the Federal Reserve Act or – any other act of Congress – the FED is given the power to do this without an approval from Congress.
Our (sic?) Congress is on the spot now to prove to us that they have more actual authority than the one installed in Iraq.
Funnily enough, the Chinese are now complaining that their own government (supposedly socialist) has not followed the US government in helping their financial sector and their building sectors that are also badly hit by the market crunch. How ironical, isn’t it? Citizens of a socialist country complaining that their socialist government is less socialist than an ultra-conservative one.
Hi, Jim — I’m pretty sure it’s in the laws passed after the S&L crisis.
And Alphast — this point is one that needs to be made more directly. Thanks for reminding me that I planned to write about what this act does to our “moral” position as a global leader.
Kathy (uspolitics),
I’d like to think the FED is behaving legally, but Senator Bunning seems to think the FED overstepped its powers. If they have powers in this area, I’m going to bet they are based on a self-determined stretch interpretation of some gray area clause put in place during the Great Depression.
Also, there was an unexplained aside in the Sept 14th WSJ article “Wall Street Crisis Hit Stocks.” It seemed to indicate that investment firms can now pledge the private brokerage accounts of their customers to relieve the firms’ liquidity requirements.
Does this mean my brokerage account funds can now be loaned out without my authorization in order to prop up my broker? I’d like to think I am reading too much in to what was written, but with the AIG deal as a reference point, I feel I have to ask for clarification.
Dear Kathy,
There is no such thing as a moral position for the USA any more. Maybe in ten years time, if Dems manage to stay in power long enough and not screw up. But I won’t hold my breath. When Americans talk from a moral position or about it, people who are polite smile gently and people who are less polite laugh loudly. The USA (like most countries in the world) has no moral position. It is simply a very powerful country with an agenda and a violent imperialistic behaviour.
Please note that I am all the way in favour of exporting democracy and Human Rights. I just think that there are better ways of doing it. Taking a moral stance for a lone nation is not that way.
If I remember correctly Chrysler paid back all the loans plus interest. If these companies survive to live another decade, does that mean that they must pay the government back their loans? To me that is the biggest issue. Thanks.
The FED is against the constitution. Why do people keep forgetting that?
The constitution does not give Congress the ability to give away its power to print money.
Hi, Dave – yes Chrysler paid back the loans plus interest. TO date, that’s not been the case when the gov’t bailed out BANKS.
Hi, Perry – I know that your position about the Fed is a common theme among Ron Paul supporters. However, I’ve not read/researched the subject enough to have an opinion about that opinion!