Today, I was reading through the AIG bailout terms from the Fed’s press release on September 16 (last Tuesday, seems like eons ago), and came across some fine print that could have killed the whole deal.
Here is the announcement: “The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.” And here is the key part of section 13(3): “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.” Normally there are seven members of the Board of Governors, where each member is nominated by the current President and ratified by Congress. Should be a seamless deal, right? Well, the political game of dodgeball that goes on between President Bush and the Democratic House and Senate almost scrapped the whole AIG deal.
Pres. Bush nominated two bankers to fill the last two seats on the Board of Governors in May 2007, Elizabeth Duke and Allan Klane. A stalemate between Bush and Congress left those two seats unfilled until August 5 2008, where just 3 weeks later, Frederic Mishkin resigned, leaving again just 5 Governors on the Board.
Good thing that Congress could finally muster up enough dignity to ratify the nomination of Elizabeth Duke – just 1.5 months ago – because if they hadn’t, the Board of Governors could not have satisfied the required 5-member affirmative vote (because there would have been just four) to bail out AIG.
Politicking: In this case, it really could have ruined the economy!