A lawyer friend IMs "I would be fascinated to know on what authority the Fed is claiming the right to do this." It's probable that they don't actually have the legal right to do anything like this. Their authority is this: who's going to stop them? No one wants to take on responsibility for this mess themselves.
True, the Fed statute says that loans can be issued with conditions….But the Fed statute does not say that the Fed can purchase businesses, and it seems reasonable to interpret the statute to forbid the Fed to purchase businesses. So here's the question, is the AIG deal a purchase or a loan? I suspect the deal is a loan in form but a purchase in substance. Unfortunately, the details are not available, but the press accounts suggest that the Fed is receiving AIG equity (more precisely, the option to obtain equity) as collateral for the loan but that it's going to exercise the option more or less automatically. Here's an analogy. Suppose that I lend you $100 and we agree that all of the equity in your business will be collateral for the loan. The contract provides, however, that you must pay me interest of a gazillion dollars, due one second after closing, and that if you fail, that counts as a default, whereupon the collateral is mine. The parties use the loan form but substantively a sale occurs. A court would almost certainly interpret the transaction as a sale, not a loan, if tax or other legal consequences turned on the distinction. If the AIG loan is like this, then it's illegal. So: why aren't our rule-of-law friends yowling?
I wonder if this was the September revamp talked about in July
In each case, industry and government officials have justified the bailout as cheaper in the long run than doing nothing. But critics contend that bailouts often encourage bad behavior by relieving underperforming industries of the consequences of their ineptitude.
In addition, sometimes the government can end up as an investor in companies that are the target of regulatory action, creating a conflict of interest. The government's potential ownership of AIG could put policymakers at cross-purposes with their own efforts to regulate a variety of financial transactions in which the company participates.
Are we socialists yet? No, no. Relax. We couldn't possibly be socialists. Socialists only nationalize successful businesses.
And from a Hit & Run comment thread downstream, here's a bleak thought from John Kluge:
The ownership society is sold as a way to get people to embrace the market and oppose government control of the market. I think the opposite is going to prove true. As more and more people are dependent on the market doing well, the political pressure to ensure that no one loses in the market will be greater and greater.