How dare the Fed

Atlantic columnist Megan McArdle wonders how the Federal Reserve Bank can legally buy AIG. That’s a good question: under what authority does the Fed lend money to an insurance company?

Turns out that section 13(3) of the Federal Reserve Act is a loophole that basically allows the Fed to do whatever it damn well pleases:

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:

In other words, in “exigent circumstances”, the Fed could bail out hair salons, used car lots, or major league baseball teams, if it wanted to.

In the words of Samuel L. Jackson’s character from Jurassic Park, “Hold on to your butts.” Word on the street is that a buyer is being sought for Washington Mutual before it folds.

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