Eric Posner on the (il)legality of the AIG takeover by the Fed

All glee aside (born out of my being directly affected by this mess), over at the Volokh Conspiracy (a libertarian blog presided over by various luminaries of the legal profession), Eric Posner (Judge Posner's son and an eminent lawyer himself) has the following to say (edited):

The AIG Deal.
True, the Fed statute says that loans can be issued with conditions. As a commenter asks, what loan doesn’t have 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?

Update: more on this here.