Friday, January 16, 2009

Stretching the TARP

On September 20, 2008, the text of a legislative proposal the Treasury Department had delivered to Congress to deal with the ongoing financial crisis became available on the internet. It was a short document -- 3 pages. It was also breathtaking in the non-reviewable authority it gave the Secretary.

Alan Blinder was so flabbergasted by the proposal that he said on the Diane Rehm show (a radio talk show produced by Washington, DC's WAMU and also heard on other NPR stations) that Secretary Paulson "should be dismissed." He went on to say that the Constitution was more "precious" than the financial system.

The legislation enacted on October 3, 2008, setting up the Troubled Assets Relief Program ("TARP") was considerably longer than 3 pages and dealt with other issues in addition to TARP. However, as it turned out, the legislation could be interpreted broadly, probably more broadly than many in Congress realized.

While the legislation is clearly aimed at providing the Treasury the authority to purchase mortgage-related assets, the Treasury up to now has not used the TARP money to do that. The definition of "troubled asset" in the Act allows the term to mean, in addition to mortgage-related instruments, "any other financial instrument that the Secretary, after consultation with the the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress." That provision is apparently what was used to justify the use of TARP money to inject equity into banks. (Nouriel Roubini posted an interesting account on his RGE Monitor website of how a colloquy on the House floor between Congressmen Jim Moran and Barney Frank to create legislative history on this point was arranged. See "How authorization to recapitalize banks via public capital injections (“partial nationalization”) was introduced - indirectly through the back door - into the TARP legislation." Registration may be required to read the whole post, but there is no charge for this.)

The justification for using the TARP money for loans to General Motors and Chrysler is dicier, and it is probably one of the reasons that the Administration urged Congress to pass separate legislation on helping the auto companies.

The authority granted to the Secretary is to use TARP funds "to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution..." Making a loan, I suppose, can be viewed as the purchase of a "troubled asset," even if a newly created one, but one doesn't usually think of GM and Chrysler as "financial institutions."

The definition of financial institution in the legislation reads as follows: "The term ‘financial institution’ means any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States, the District of Columbia, Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands, Guam, American Samoa or the United States Virgin Islands, and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government."

As far as I can tell, the Treasury has not provided a rationale for GM and Chrysler being financial institutions under this definition, but Professor Randy Picker of the University of Chicago Law School has ("Can You Put Cars Under the Tarp?"). His argument is that, according to this definition, a financial institution is "any institution," with some foreign exceptions. He does not address the meaning of "established and regulated."

In other words, according to this reading, the word "financial" is to be ignored and the non-exclusive list of financial institutions does not really mean much. In any case, the professor argues, the Treasury, as the agency entrusted with administering the Act, is owed "Chevron deference."

Well, it seems a bit of a stretch, whatever one thinks of the merits of bailing out the auto industry. As one might expect, there was criticism from the right -- for example, see Rich Lowry's post, "Paulson’s Pliable Plan." But Robert Reich, a supporter of helping the auto industry was also troubled as he said in a posting on his blog -- "The Big Three and TARP: What Happened to Democracy?" He essentially argues that this use of the TARP money made it a slush fund.

The Treasury probably did not want to be this aggressive in using the TARP authority, but top Treasury officials probably thought that, as long as they had an argument, they had to do this.

It looks to me that Senator Corker and others wanted to break the UAW. Nobody blinked, and the Administration felt it could not let GM and Chrysler file for bankruptcy on their watch. The Republicans probably pressed too hard against the union. After all, the UAW will be less powerful for some time because it has been unsuccessful in organizing the foreign-owned factories and because of the financial condition of the U.S. car companies. They know this.

I doubt that very many members of Congress thought they were giving the Treasury Secretary the power to make a loan to any U.S. entity that is an "institution" when they passed the TARP legislation. Congress will probably be motivated to be more careful about their drafting on this subject in the future. I think this will be more a political issue rather than a legal one, since I don't think the courts will be asked to decide it.

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