Illegal Lending Practices

Bush's plan to help carmakers is not authorized by law.

Jacob Sullum | December 17, 2008

Even Americans whose knowledge of the legislative process is limited to the "I'm Just a Bill" episode of Schoolhouse Rock know about the veto: If Congress approves legislation the president doesn't like, he can refuse to sign it, in which case the law can be enacted only by a two-thirds vote of each chamber. President Bush's plan to aid the auto industry relies on a more obscure maneuver: If Congress rejects a bill the president likes, he can act as if the vote went the other way.

This maneuver, unlike the veto, is illegal by definition, not to mention unconstitutional, violating the separation of powers and the rule of law. But it is business as usual for Bush, who has shown no compunction about ignoring the law when it prohibits him from doing what he considers necessary in response to what he considers an emergency.

The day after the Senate declined to approve a bill giving General Motors and Chrysler what one Republican senator aptly called "a bridge loan to nowhere," White House Press Secretary Dana Perino observed: "Congress spoke last night. They don't have the votes to do anything." Perino said the administration therefore was looking for "a short-term mechanism to help prevent a disorderly bankruptcy that we think could devastate further an already very weak economy."

In other words: Congress spoke; we have decided not to listen. A Treasury Department spokeswoman put it even more clearly than Perino did. "Because Congress failed to act," she said, "we will stand ready to prevent an imminent failure until Congress reconvenes and acts to address the long-term viability of the industry."

This is the argument of every strongman, dictator, and president-for-life who has ever overriden uncooperative legislators: They won't let me do what I want to do, and this is an emergency, so I'm going to do it anyway.

The one "short-term mechanism" that Perino mentioned, using money from the Troubled Asset Relief Program (TARP), is plainly at odds with the intent of Congress. The Emergency Economic Stabilization Act, which created TARP, authorized Treasury Secretary Henry Paulson "to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution," the aim being "to restore liquidity and stability to the financial system."

Paulson already was stretching the law when he decided instead to purchase stakes in banks (presumably on the theory that shares of their stock constituted "troubled assets"). But a carmaker is not a "financial institution," and loaning it money is not purchasing "troubled assets."

In case anyone wants to argue that G.M. and Chrysler are financial institutions because of their car loan divisions, it's worth noting that GMAC and Chrysler Financial are no longer wholly owned subsidiaries of the automakers. A consortium of investors owns a controlling interest in GMAC, while Chrysler Financial became an independent company in 2007.

At any rate, a manufacturer with a finance division clearly is not what Congress had in mind when it authorized TARP. By the same logic, all businesses that extend credit, including department stores, jewelers, cosmetic surgery practices, and neighborhood bars, would qualify as financial institutions eligible for TARP money.

President Bush himself, while urging Congress to approve loans to G.M. and Chrysler, repeatedly rejected suggestions that he use TARP funds for that purpose, saying the money was intended for the financial sector. Now he has reversed himself, confirming that he views the law as clay to be molded for whatever purpose is at hand.

President-elect Obama, who claims to have a less expansive view of executive power and a greater respect for the law than his predecessor, has not weighed in on the propriety of Bush's plan to help the automakers, instead urging the White House and Congress to work together on a loan package. But if Obama, under pressure to keep the nearly bankrupt carmakers afloat, resorts to unilateral action when he takes office, we will know his promises of change were empty.

© Copyright 2008 by Creators Syndicate Inc.

Comments

edna|12.17.08 @ 7:48AM|#

oh yeah, illegality and unconstitutionality have always debarred government action. (rolls eyes)

T|12.17.08 @ 9:32AM|#

Well, shit, if we're gonna get all picky and stuff, somebody show me the where Congress has the authority to bail out banks.

Jeff|12.17.08 @ 9:49AM|#

This happened like a week ago. I think we've cried "foul!" and moved on.

|12.17.08 @ 10:04AM|#

I mentioned this on another website, but it might be a good idea.

I'm talking about "legislating from the bench" here, go get some shark to get an injunction based on the fact the president DOES NOT have the power under the TARP bill to kick the Bailing 3 scratch.

|12.17.08 @ 10:18AM|#

"I'm talking about "legislating from the bench" here, go get some shark to get an injunction based on the fact the president DOES NOT have the power under the TARP bill to kick the Bailing 3 scratch."

I can't see how you'd show standing.

T|12.17.08 @ 10:34AM|#

I can't see how you'd show standing.

Yeah, that's the neat trick they pull with most of the unconstitutional horseshit they pass. No one has standing to sue.

Kolohe|12.17.08 @ 10:58AM|#

he can refuse to sign it, in which case the law can be enacted only by a two-thirds vote of each chamber.

Um, refusal to sign is not quite the same thing as a veto. The prez has to return it stating his objections for it be a veto. If he just refuses to sign it, it becomes law within 10 days if Congress is in session, or gets 'pocket vetoed' if congress adjourns within this time.

Kolohe|12.17.08 @ 11:05AM|#

Although to be fair that school house rock episode didn't make that distinction either.

Kolohe|12.17.08 @ 11:06AM|#

possibly because 'pocket veto' isn't something you want to say in a kid's show, even in the late 70's

|12.17.08 @ 11:12AM|#

I can't see how you'd show standing.

One bunch of concerned parties could sue: Auto-company creditors. The way they are talking about loaning these outfits money also has the caveat that the government's loan becomes senior debt. Everyone else goes to the back of the line for the eventual scramble for crumbs.

That has got to be a contract violation of some kind with the current creditors who "enjoy" - if you can call it that in this situation - senior status in any standard bankruptcy proceeding. If the government kicks them off by fiat, it would violate the contractual obligations the creditor agreed to before they lent the money or purchased the bonds. They are getting ripped off if the gov. moves in, and they have every standing to sue.

|12.17.08 @ 11:29AM|#

I would think the taxpayers who are financing the bailout would have standing, no?

|12.17.08 @ 12:02PM|#

"I would think the taxpayers who are financing the bailout would have standing, no?"

Ha, if you really wanted to get the parties involved who are paying for the Big Three loans, versus "financing" the loan or "spending" the loan...call the Chinese Embassy. They probably have a fiduciary stake in this as much as anyone else!

Paul|12.17.08 @ 12:06PM|#

Interstate commerce. Next subject...

|12.17.08 @ 12:24PM|#

Goldman Sachs would have standing: "They tuk urr BAILOUTS!"

Mr. X|12.17.08 @ 1:06PM|#

I've been thinking about the standing problems for the past few days. Taxpayers generally have no standing to sue for illegal government spending.

The party with the best standing argument is probably a bank or other financial institution eligible for TARP funding. They are injured because TARP money spent illegally on auto companies will not be available to potentially be distributed to them.

Another possibility is that the Congress could sue the Secretary of the Treasury to enjoin his action, since it's their law being ignored. However, there's a strong chance that such a suit would be dismissed under the "political question" doctrine, i.e. courts don't like to get in the middle of pissing matches between the legislature and the executive.

|12.17.08 @ 1:17PM|#

What about GM's current creditors? They would have standing as their Senior Debt status would be abrogated by the government loaning money and becoming the senior creditor. This would constitute a material impact to the current senior creditors.

Of course, those senior creditors are probably banks that are already hitting the Patriot Crack pipe that is TARP, so maybe they don't want to imperil continued access to their fix...since the dealer gets to pick his customers.

All the gov has to say is "have you checked Lehman Brother's stock price lately?" and I am sure everyone will get in line, no one wants to get cut off by the dealer. Withdrawl sux.

Naga Sadow|12.17.08 @ 1:30PM|#

SWEET JESUS!!! Why won't they just let em' die if they're gonna die?!?!?! They even admit they don't know if it will even help!

|12.17.08 @ 1:38PM|#

GWB ... blah, blah, blah ... incompetent boob ... yada, yada, yada ... worst president of my life ... #@%&*%! ... fiscal conservative my ass ...

|12.17.08 @ 1:53PM|#

Professor Eric Posner points out [ http://volokh.com/archives/archive_2008_12_14-2008_12_20.shtml#1229437549 ] that 31 U.S.C. 5312's definition of "financial institution" includes any "business engaged in vehicle sales, including automobile".

|12.17.08 @ 2:12PM|#

"Professor Eric Posner points out that 31 U.S.C. 5312's definition of "financial institution" includes any "business engaged in vehicle sales, including automobiles"."

GM isn't technically in the business of vehicle sales. Vehicle sales are handled by its former subsidiary, GMAC. GMAC is already converting to a commercial banking institution to get on the TARP crack pipe as we speak. Which is an odd contradiction of the law cited above, given they should be free to pull right up to the crack pipe and take a big fat hit without changing their corporate structure.

The controlling interest in GMAC ironically is Evil Hedge Fund Cerberus, which owns Chrysler.

This law would also suggest that Bob's Crazy Car lot down the street is eligible for Patriot Crack, and all those Hummer H2's can be classified as "distressed assets." I see a future where some barren locale in the Great Basin is littered with row after row of Jeep Patriots (fittingly named) that are now owned by good ol' Uncle Sam.

|12.17.08 @ 2:22PM|#

You know, after writing my last post here it got me thinking. If a suit is brought, and the government's defense is that obscure piece of code defining a "financial institution," by their own admission the US Government would be saying that EVERY CAR DEALER in the United States is potentially eligible for Patriot Crack.

If you go on to haggle over the definition of "vehicle" this could also potentially include planes, trains, and ships. Holy shit what a can of worms that would be.

|12.17.08 @ 2:27PM|#

Here's a simple question what law makes it illegal for the president to not bail out the auto industry, I'm personally against it, but please what law and if congress doesn't like it they have actions they can take because if it's truly criminal they can sue or pass a law to supperced his actions just like they could with his signing statements if they were actually illegal.

|12.17.08 @ 2:43PM|#

"Here's a simple question what law makes it illegal for the president to not bail out the auto industry."

1) appropriations clause of constitution requires congress to appropriate money before president can spend it. If President cannot find an appropriation legally available for that purpose, then he cannot spend the money.
2) 31 USC 1341- Antideficiency Act, violating this statute is actually a crime

So, essentially, you're asking the wrong question. It isn't, what law prohibits him from doing it. It's, what law affirmatively permits him to do it.

|12.17.08 @ 2:47PM|#

"Here's a simple question: What law makes it illegal for the president to not bail out the auto industry?"

I don't think there is an express law that says the President can't bail out the auto industry. But the President by increasingly irrelevant constitutional constraint cannot spend tax dollars on whatever he wants, it must be apportioned by the Congress. Legalese aside, the TARP bill is designed to bail out Paulson's buddies, not failed industrial enterprises.

There is a significant legal precedent set by the Congress shooting down the auto-bailout. Congress indicated by its own process and actions that no public money would be apportioned to the bailed auto-makers. Hence, the President's options are the TARP money, and finding a legal excuse to give some of Paulson's buddy-slush-fund to the automakers.

Another important caveat here is the TARP money is to PURCHASE things. Its already been noted the legal stretch Paulson engaged in to buy stock in these banks, not the "distressed assets" the banks hold. No TARP money has been loaned to any financial entity and I believe there is no language in the TARP bill that contemplates loans vs. purchases (AIG's bail-out line-of-credit is not part of TARP, for instance).

So even with all other things aside, the President's options might be to either buy GM stock with TARP money (which wouldn't do any good because I don't think GM owns any of their own stock), or buy GM vehicles from GM directly or its dealer-network, and stash them in the Great Basin or give them away or whatever.

But loans? I don't think so. GM could convene a midnight board meeting where they agree to issue some special, weird class of stock certificate that only the U.S. Treasury can hold, with the U.S. Treasury on conference-call ready with China's debit card to promptly buy all the new preferred "shares" in the company. This would be I think an appropriately slimy but pseudo-legal way of kicking down some Patriot Crack to Wagoner and the boys to take some hits on.

But I really think loaning them the money out of TARP could be demonstrated as illegal to a judge.

|12.17.08 @ 3:38PM|#

You can make a pretty compelling case that GM common stock is a "distressed asset".

Of course, if Treasury was seen to be buying, the price would skyrocket.

|12.17.08 @ 3:43PM|#

If the government just bought a controlling interest in GM on the open market, (which would be much, much, much cheaper than this absurd nine billion dollar "bridge loan") they could then fire whomever they pleased, starting with the board of directors, Wagoner, and everybody else who reports directly to him.

That's what I'd do.

|12.17.08 @ 4:30PM|#

P Brooks, socialist?

|12.17.08 @ 4:46PM|#

Financial institutions?
See the clip on Reason TV with Judge Napalitano.

"""But I really think loaning them the money out of TARP could be demonstrated as illegal to a judge."""

The Bush admin wants to do what it wants, screw anyone else. We all knew this type of behavior was coming. Why else would one push for no judical review.

""""If the government just bought a controlling interest in GM on the open market, (which would be much, much, much cheaper than this absurd nine billion dollar "bridge loan") they could then fire whomever they pleased, starting with the board of directors, Wagoner, and everybody else who reports directly to him. """"

Isn't that still a form of nationalism. Does it really matter who owns a company if the state can apply it's will against upon it?

|12.17.08 @ 4:53PM|#

"""1) appropriations clause of constitution requires congress to appropriate money before president can spend it. If President cannot find an appropriation legally available for that purpose, then he cannot spend the money.
2) 31 USC 1341- Antideficiency Act, violating this statute is actually a crime""""

Yeah? Who's going to arrest him? Bush hasn't cared one bit if he's violating any statutes in his entire time. Why would he start on his way out? Congress isn't going to impeach him, so he has a free pass to do whatever he wants.

|12.17.08 @ 5:07PM|#

It would unquestionably be socialism; it would definitely be cheaper, and possibly more successful, than simply throwing money at proven incompetents.

You don't have to buy all the stock to get control. GM's stock price right now is (an astronomical!) $4.37/ share, putting market cap at $2.67b (via Google finance). They are asking, I believe, for nine billion, to get them to the end of March. Which makes more sense?

Spoiler Alert: NEITHER!

Chuck|12.18.08 @ 12:15AM|#

Sullum misreads Youngstown Sheet & Tube. Congress not approving something is not the same as Congress saying no to something, at least as far as executive power is concerned. Failure to get past a 60-vote hurdle that's nowhere to be found in the Constitution is not the same thing as an affirmative "no" from Congress. Bush has more power here than the column hints, though I wish he wouldn't use it.

Craig|12.18.08 @ 1:02AM|#

Bush has more power here than the column hints...

Maybe so, but he doesn't have the power to spend money that wasn't authorized in a bill that wasn't passed, or to spend money from a bill that did pass on things that bill doesn't authorize. There's a Constitutional restriction on spending money -- it has to be authorized by Congress, in a bill originating in the House of Representatives.

I would love to see Obama spend his first few days issuing arrest warrants and subpoenas for this crew, but I suspect we'll see pardons and "let's let bygones be bygones" instead.

Craig|12.18.08 @ 1:07AM|#

possibly because 'pocket veto' isn't something you want to say in a kid's show, even in the late 70's

Why not? I remember all those ads for the "pocket fisherman"....

|12.18.08 @ 11:16AM|#

Thanks to all who gave an answer to my questions, especially since no one called me an idiot for not knowing like a lot of other sites would do. That being said I think the reason congress doesn't go after Bush for illegal spending is because they do the same thing all the time, even our state governments are always taking money allocated for one thing and using it for another, ie: gas taxes that are supposed to go to roads, so crooks won't punish crooks and we need a watch dog group that could do that for use. Thanks

DannyK|12.18.08 @ 4:41PM|#

First he gave money to Halliburton, then he gave money to Iraq; but when he gave money to Detroit, THEN we knew he was going too far...

Alan|12.18.08 @ 8:40PM|#

RE: SWEET JESUS!!! Why won't they just let em' die if they're gonna die?!?!?!

Double digit unemployment. SWEET JESUS, then we would see some legislative action.

Alan|12.18.08 @ 8:42PM|#

RE: even our state governments are always taking money allocated for one thing and using it for another...

I don't know the specifics in any one case, but allocation for a specific purpose is basically a legislative function, and changing the allocation is their perogitave.