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.

Comments

[Paul]

Ah ah aahh... Paul Krugman said it is a financial institution.

[Ramesh Porunini]

Why do all you republicans have you undies in a bunch over saving 55,000 jobs? Where was this breast beating and outrage about the legality and morality of it all when your pals in wall street destroyed the economy and were rewarded with billions of tax payers money?

[John]

"Where was this breast beating and outrage about the legality and morality of it all when your pals in wall street destroyed the economy and were rewarded with billions of tax payers money?"

You mean like Robert Rubin who decided CitiBank should get into credit default swaps. You mean those pals?

[squarooticus]

Where are these "republicans" of whom you speak?

[Xeones]

Hey Ramesh, no offense, but you're, like, severely mentally handicapped aren't you?

[R C Dean]

Where was this breast beating and outrage about the legality and morality of it all when your pals in wall street destroyed the economy and were rewarded with billions of tax payers money?

New here? It was posted right here, with our strong opposition to TARP even as a financial institution bailout, last fall.

[shrike]

GMAC is a financial institution.

So is it still illegal to send TARP to a financial subsidiary? Probably.

At least American Express changed status to become a depository bank - as did Goldman and Morgan. Its peculiar how the best two Wall St firms desperately wanted TARP.

Since when does the executive branch abide by the strict letter of the law anyway?

[John]

"Where was this breast beating and outrage about the legality and morality of it all when your pals in wall street destroyed the economy and were rewarded with billions of tax payers money?"

It is a good thing The Obama stopped all of that and discontinued TARP as soon as he took office isn't it?

[Tulpa]

The Poruninis and Ponnurus have been squabbling for centuries, fellas. Let's not get in the middle of this.

[Tulpa]

shrike,

GMAC and Chrysler Financial aren't owned by GM and Chrysler. Otherwise, spot on analysis.

[P Brooks]

Only little people have to pay attention to what the law actually says.

[R C Dean]

At least American Express changed status to become a depository bank - as did Goldman and Morgan.

My recollection is that Goldman was basically forced to take TARP money to provide cover for all the banks that were insolvent. I certainly don't recall Goldman taking extraordinary steps to become eligible, especially since Goldman has been trying to pay it back almost since the day they got it.

[Paul]

Why do all you republicans

what republicans?

have you undies in a bunch over saving 55,000 jobs?

I believe the talking points are 'creating or saving' 50,000 jobs. I'm assuming this is a joke. Moving on.

Where was this breast beating and outrage about the legality and morality of it all when your pals in wall street destroyed the economy and were rewarded with billions of tax payers money?

You mean the breat beating outrage we had the whole time Wall Street was destroying their own back yard and then Bush and Obama rushed to give them billions of dollars? That outrage? You must be new here. My question for you: Why does Obama love corporate welfare?

[spambot]

Yeah Ramesh, it is good to hang out on a board for a little bit and find out who you are talking to. Learn about their beliefs before slinging insults. As it stands you are just a troll FAIL.

Most of us here don't like Bush OR Obama and don't subscribe to the Red / Blue bullshit. I'll pause while your partisan head explodes.

Teachers in the Hoosier State recently learned that the Indiana State Teachers Association's (ISTA's) Insurance Trust has effectively gone bankrupt. Regulators revealed that the trust, which pays benefits for disabled teachers, owes $86 million in liabilities and has only $19 million in assets. The FBI has begun investigating.

Much of the portfolio's value apparently vanished in high-risk investments. The investment broker managing the trust made 4,000 trades over a nine-month period, perhaps motivated by the 50 percent hike in commissions on trades that ISTA's executive director, Warren Williams, authorized.

As investigators sort out responsibility, school districts and the state government are examining what the fund's shortfall will mean for teachers and taxpayers, who could be on the hook for a bailout to ensure that teachers are insured. Williams has resigned, and the National Education Association announced that it has taken over the Indiana State Teachers Association.

The insurance-fund crisis demonstrates the importance of transparency. Union members deserve to know how their unions spend their money so they can hold the unions accountable. As insurance commissioner Dan Clark argued: "They need to open their books. We don't think ISTA membership is aware of how serious this situation is, and we don't even know how well-informed their board is."

Sunlight protects against corruption and unethical practices. Congress passed the Labor Management Reporting and Disclosure Act (LMRDA) in the wake of scandals in the 1950s involving ties between organized labor and organized crime. Congress believed that workers had a right to know how their unions spent their dues. Lawmakers hoped that transparency would discourage kickbacks to the mob.

For over 40 years, however, the Department of Labor barely enforced the law. The disclosure forms allowed unions to list multimillion-dollar line items for "other" and "miscellaneous" expenses with no further details. In practice, the law did nothing to hold unions accountable.

Elaine Chao, President Bush's labor secretary, made changing that a priority. Her Labor Department enacted reforms that required unions to itemize their expenses and meaningfully disclose their finances. By the end of her tenure, Secretary Chao (who now works with us as a distinguished fellow at the Heritage Foundation) had updated the LM-2 union financial disclosure form, the LM-30 conflict-of-interest-reporting form, and the T-1 forms for union trusts.

These reforms have already borne fruit. Investigative reporters examining the revised LM-2 forms found serious corruption in the Service Employees International Union (SEIU). The president of the Los Angeles local, Tyrone Freeman, stepped down after reporters found that it had paid hundreds of thousands of dollars to companies owned by Freeman's family members, for little apparent benefit. Annelle Grajeda, the executive vice president of the national SEIU, stepped down after investigations revealed that the union had paid her boyfriend tens of thousands of dollars.

Organized labor fought these transparency measures every step of the way. The Alabama Education Association and 31 other state teachers unions - including the Indiana State Education Association - filed suit against the Department of Labor, contending that the government should exempt them from disclosure. After several rounds in court, they lost - but not before delaying the implementation of the reforms by several years.

In hindsight, it's clear why the now-former head of ISTA opposed increasing union transparency. While the regulations that the union leadership attempted to block didn't apply to the Insurance Trust, how likely is it that this was the only incident of fraud or mismanagement in ISTA? Transparency and accountability protect union members from abuses of power by those who should represent them.

Unfortunately, the Obama administration is moving in the other direction - undoing Secretary Chao's transparency reforms at the behest of organized labor. High on the AFL-CIO's transition wish list was rolling back the new union disclosure requirements. And Obama has delivered.

The Labor Department has begun rescinding the revised LM-2 disclosure forms and has announced it won't enforce the new conflict-of-interest reporting requirements. The Obama administration is also widely expected to begin the process of rescinding the union-trust reporting requirements this fall - well before unions would have to file the first forms next year. The Labor Department seems intent on ensuring that union members know as little about how their union spends their money as possible.

President Obama wants greater transparency from businesses, banks, the government - everyone except the union movement. This clearly benefits the union leaders, who will become less accountable to their members. But it's hardly the change Obama promised to bring to Washington.

[spambot]

Union leaders aren't really saints that have their members best interests at heart? Man you are going to tell me Santa Claus isn't real too aren't you? I have had my suspicions.

[shrike]

From fiercefinance.com -

It's hard to think of Goldman Sachs and Morgan Stanley as deposit takers. But they have become just that. Goldman Sachs has plans to expand its Utah-based bank for private clients. It has also applied for a bank charter in New York. As for Morgan Stanley, plans were well underway, according to CNNMoney. It has raised $3 billion in certificates of deposit (CDs) in the last four weeks. The New York City-based firm added that it would market other savings account products to its financial advisory clients next year. So it would appear that the two are moving toward something like a universal bank model--albeit one with less of a retail focus and more investment banking pop--that has proved so hard to make work for the likes of Citi. It's a whole new world, that's for sure.

As for GMAC as not a sub of GM - that is news to me but I quit looking at GM years ago after they dumped Hughes and Direct TV.

[R C Dean]

shrike, that quote doesn't even make the claim that Goldman became a depository bank in order to get TARP money.

[Brandybuck]

Obama wants it, so it doesn't really matter much if it's illegal or not.

[robc]

Ginsburg has issued the stay.

[Norbert Sluzewski]

As a civilized society we establish rules which, once have been agreed upon, become our dependable benchmarks for behavior. If we can not rely upon the basic principle rules such as the law of contracts, we greatly regress as a society. When standing on shaky ground, we end up spending our energy on keeping our balance as opposed to leaping forward toward new accomplishments. Afraid to take any steps forward, we freeze motionless awaiting the next groundswell of uncertainty.

For the benefit of the great nation that we once were and can be again, let's not let this temporary bout of insanity derail us from preserving the constitutional principles on which this great country was founded and has made it the envy of the world.

Read more insightful articles on liberty and our constitutional principles at http://www.nakedliberty.com.

[R C Dean]

let's not let this temporary bout of insanity derail us from preserving the constitutional principles

Norbert, I think at this point we are talking more about restoring constitutional principles. There's not much still in operation to preserve.

[Paul]

I think at this point we are talking more about restoring constitutional principles. There's not much still in operation to preserve.

It's a llllllliiiiivinggggg document! Weeeeeeeeeeeeeeeeeeeeeeeeeeeeeee!

[Hazel Meade]

Why do all you republicans have you undies in a bunch over saving 55,000 jobs? Where was this breast beating and outrage about the legality and morality of it all when your pals in wall street destroyed the economy and were rewarded with billions of tax payers money?

Obvious Sock Puppet.
It was the Republicans who were responsible for voting down EESA in it's first attempt.

Until they were bought off by the Democrats with pork a week later.

Still, it's always been the Republicans who have been most vociferous in opposing the various bailouts.

[mark]

ramesh dissed all of you, and you got offended. it was funny!

[mark]

on second read, perhaps ramesh really did just click over from some other site. still, i like when anyone uses 'republican' to make fun of libertarians, it's funny.