I’ve always been a little unclear as to the exact role of the Fed and Treasury. From finance courses I have a general understanding of what actions they may take to promote economic growth and stability, but I’ve never heard an in-depth analysis about the limitations of their power and influence.
For the past year, the Fed and Treasury have felt like the behemoth financial arms of the executive branch, which we know has the responsibility of enforcing laws. But how much power does the President have in directing the Fed and Treasury? And who limits these departments when they overstep their bounds? Wouldn’t that require the executive branch to regulate itself?
Because of these concerns, I’ve been very happy to hear about the group of investors attempting to block the Chrysler merger. They are a group of three Indiana pension funds (making up less than 1% of Chrysler bondholders), who assert that they will receive less than $0.29 for each $1.00 of their $42 million investment - which would effectively bankrupt them. Because their investment was secured, they feel the government’s intervention and “reorganization” of the priority of lenders is unfair. Further, they believe that it was unlawful for the government to use TARP money to finance Chrysler, as this would not fall under its Congressionally approved uses.
I’d like to go one step further – it’s unconstitutional.
The priority of lenders is governed by contract law, which has been built and refined out of years of fighting for the scraps of fallen companies. It’s not perfect, but it’s not arbitrary. As I see it, when the government intervened and reorganized the priority of the debt and equity holders, this violated contract law. Further, I find it ironic and dangerous that in order to save the jobs of auto workers, President Obama is willing to bankrupt pension funds of Indiana fire and policemen.
Maybe President Obama is trying to channel Nixon. You know, “When the President does it, its not illegal.” ??
Last 3 posts by Eric B.
- Nassim Taleb on the Economy - June 25th, 2010
- Full Circle - May 3rd, 2010
- The Dark Side :) - April 5th, 2010
