September 17th is Constitution Day.  Here is a portion of President Bush's proclomation regarding the day:

Americans are united by the ideals of equal justice, limited government, and the rule of law. On Constitution Day and Citizenship Day and during Constitution Week, we remember the vision and determination of the Framers to build a free society, and we celebrate the historical document they created to achieve that goal.

More than two centuries ago, our Founding Fathers gathered in Philadelphia and produced a charter that would promote justice and preserve the liberty of all our citizens. The Founders established three separate branches of Government with a system of checks and balances among them. Ours is the oldest written constitution in the world, and the American experiment remains the world's best hope for freedom.

A couple years ago I mused that July 4th isn't actually America's birthday (as many people like to say), but rather is the day when American got knocked up. We then had a painful pregnancy (the Revolutionary War), followed by our birth as a nation with the ratification of the Constitution.  So what do you get a government that already has everything for it's birthday?  Why not an insurance company?

The U.S. government seized control of American International Group Inc. -- one of the world's biggest insurers -- in an $85 billion deal that signaled the intensity of its concerns about the danger a collapse could pose to the financial system.

The step marks a dramatic turnabout for the federal government, which had been strongly resisting overtures from AIG for an emergency loan or some intervention that would prevent the insurer from falling into bankruptcy. Just last weekend, the government essentially pulled the plug on Lehman Brothers Holdings Inc., allowing the big investment bank to go under instead of giving it financial support. This time, the government decided AIG truly was too big to fail.

Businessmen leave an American International Group office building Tuesday in New York.

The U.S. negotiators drove a hard bargain. Under terms hammered out Tuesday night, the Fed will lend up to $85 billion to AIG, and the U.S. government will effectively get a 79.9% equity stake in the insurer in the form of warrants called equity participation notes. The two-year loan will carry an interest rate of Libor plus 8.5 percentage points. (Libor, the London interbank offered rate, is a common short-term lending benchmark.)

The loan is secured by AIG's assets, including its profitable insurance businesses, giving the Fed some protection even if markets continue to sink. And if AIG rebounds, taxpayers could reap a big profit through the government's equity stake.

Sean has some good commentary on the matter if you're interested.  But beyond the why, and whether it's good for the market is... under what legal authority can the government do this at all?

Amazing dilution. No, I can't recall the government having ever done this before.  And yes, this sort of invitation to trade credit for equity is utterly unprecedented in the Fed's use of section 13 of the Federal Reserve Act.  The below analysis of this administrative action reserves all M&A questions to other corporate experts.

There's really no statutory authority for the AIG takeover (the Fed and Paulson went to the Hill, and got nothing, not that they possibly could have in a couple of Tuesday evening hours).  I won't bother noting that the DC Circuit, were it to sit in judgment on whether the Fed could buy the world's largest insurer, would undoubtedly conclude that the plain language of its governing statute (which is to make emergency loans, not require takeovers in exchange) would not permit the takeover under Chevron USA v. NRDC.
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Does the very fact that the insurer hoped for Fed action suggest that the Fed could act?

Hmmm.  The other defense would be that emergencies are emergencies, and when that happens the rules go out the window, and hopefullly regular elections mean that the officials the people trust are dealing with the emergency.  Abraham Lincoln adopted that reasoning, and he won the Civil War.  I suspect we're at the "anything goes in an emergency" stage of things.  But maybe reasonable minds could disagree.

Or as Megan McArdle put it:

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.

In other words... might makes right, and the government can eventually do whatever it damn well chooses, with no legislative authority from a body representing the people.  Last night they decided to do it, and today it's done.

Happy Constitution Day.