Why the Legality of the Chrysler Bailout Won't Matter

As Damon Root noted this morning, three Indiana state funds that invested in Chrysler are asking the Supreme Court to stop the automaker's government-imposed merger with Fiat. Among other things, they argue that the Treasury Department is illegally using money from the Troubled Asset Relief Program (TARP) to support the deal. TARP, they note, "provides funds only for the purchase of troubled assets from financial institutions," and "Chrysler is an automotive company, not a financial institution." The Bush administration not only acknowledged but insisted on this distinction. In congressional testimony on November 18, for example, Treasury Secretary Henry Paulson said: "I feel a great responsibility to stick with the purpose of the [fund], to stabilize and strengthen the financial system. Auto companies fall outside that purpose." The administration did a 180 a month later, right after Congress declined to allocate money for an automaker bailout, at which point Paulson said Chrysler (and G.M.) qualified for TARP money after all. "That complete reversal of [the Treasury Department's] prior admission is plainly without merit," the Indiana funds say.

I've been arguing since December that the TARP-funded automaker bailout is illegal, so I am naturally inclined to find the creditors' arguments persuasive. But the audacity of the Bush administration's reversal on this issue (a reversal heartily endorsed by Barack Obama) continues to impress me. The Emergency Economic Stabilization Act of 2008 (EESA), which created TARP, authorized the treasury secretary "to purchase…troubled assets from any financial institution," the aim being "to restore liquidity and stability to the financial system." Recognizing how implausible it was to argue that loaning money to car manufacturers should be viewed as purchasing troubled assets from financial instititutions, Paulson boldly argued that the law authorized him to give money to pretty much anybody:

The Treasury Department now ignores the statutory language, intent, [and] purpose,…its own prior determinations and the failed auto bailout bill, proceeding on the remarkable position that TARP funds can be used to purchase assets of "any institution" that is "established and regulated under the laws of the United States and [has] significant operations in the United States."…The Treasury Department has simply, and improperly, read out of the definition of "financial institution" the word "financial" as well as the list of representative financial institutions that confirms the limits on the scope of TARP….The Treasury Department's "interpretation" eviscerates the clear Congressional intent of TARP and is squarely at odds with well-settled principles of statutory construction concerning the definition of "financial institution" as set forth in the EESA. If the phrase "any institution" were to be interpreted to mean literally any institution of any nature, regardless of whether it was financial in nature, the qualifier "financial" and the listing of types of financial institutions that follows would be utterly meaningless and effectively written out of the statute.

Notably, U.S. Bankruptcy Judge Arthur Gonzalez did not address this issue. In a ruling that was upheld on Friday by the U.S. Court of Appeals for the 2nd Circuit, he said the Indiana funds did not have standing to challenge the Treasury Department's interpretation of EESA. Assuming they were injured by the New Chrysler deal, he said, they would have been injured even if TARP money hadn't been used. If the Supreme Court takes a similar view, or simply declines to intervene, the lack of statutory authorization will not stand in the way of a New Chrysler. Members of Congress, who mostly want a bailout but don't want to take responsibility for it, do not seem inclined to object.

Look for our coverage of the automaker bailout's legal, moral, and economic shortcomings in the August/September issue of Reason.