September 28, 2008
The Bailout Compromise
Posted by David Zaring

As Eric Posner says, a quick skim offers few surprises:

  • As an exercise in the development of legislation, note what has happened to the bill, drafted to be three pages long, with absolutely no attention paid to the fact that the program would have to be implemented (and so maximum discretion given to the Treasury Secretary, who was to decide how to implement it later), to something 110 pages long, with savings clauses, detail, compromises, and many fewer obvious legal problems.  Those interested in parsimony might dub this a triumph of legalese.  But lawyers have always told themselves that they solve problems with their contributions.
  • I don't claim that all problems are solved here.  The secretary has the power to hire, fire, contract, issue regulations, "establish vehicles" to hold assets (a new one to me - I suppose it's true what they say, this really is a sovereign wealth fund) and so on - and his powers under this section are only subject to limited judicial review.
  • The Secretary is directed, however, to consult with various agencies (a weak constraint), to issue regulations (though that can come after he starts bailing out whomever), and that he "shall take such steps as may be necessary to prevent "unjust enrichment," which is sorta specified as meaning the Secretary can't pay more for the asset than the financial institution did when it bought it.  The bill also says that the Secretary "shall take into consideration" nine worthy factors (serving the underserved, protecting families, saving money, ensuring stability, &c) when implementing the program - it's going to be easy for Paulson to pay lip service to these, and there are just too many of them to have much bite.  Rather than cabining flexibility, sometimes multi-factor tests enhance it.
  • Some of the new additions only make sense, and haven't been talked about much - the Secretary probably should set conflict of interest regs, for example, and under the bill, he must.
  • Clawbacks and golden parachute bans on executive compensation are in there, and in there in a difficult to ignore way (the Secretary shall promulgate regs, which must do these things).  Lucian Bebchuk must be pleased.
  • And the oversight board - though sorta strange - it's Treasury, the SEC, the Fed, an obscure federal housing regulator ... and the Secretary of HUD? -  is free of obvious constitutional problem.  UPDATE:  Andrew Grossman of the Heritage Foundation is pondering the fact that three of these five officials can only be fired for cause ... which does limit the President's ability to oversee the overseers, which is not without constitutional moment.  See this case for more on that. 
  • The joint resolution disapproving of the second half for the $700 billion is kept, and fast-tracked (that is, little debate, no amendments) through both houses.
  • Judicial review is done APA style, though the statute doesn't direct the review to the courts of appeals (as it does for APA rulemakings - which would be tough).  The powers given the Secretary under section 101 are not subject to injunctive or equitable relief, and yet the statute carefully limits injunctive relief in some cases ... and I can't figure out what Congress is worried about there.  I still think that APA style review is injunctive and equitable relief - at least, it's not damages relief - and a clear statement about whether individual purchasing decisions by the Secretary are subject to judicial review or not might be useful.  Currently:
    • "Actions by the Secretary pursuant to the authority of this Act shall be subject to chapter 7 of title 5, United States Code [that's the APA linked to above], including that such actions shall be held unlawful and set aside if found to be arbitrary, capricious, an abuse of discretion, or not in accordance with law."
    • But "No injunction or other form of equitable relief shall be issued against the Secretary for actions pursuant to section 101 [that's the power granting section] ... other than to remedy a violation of the Constitution."
    • The section by section notes prepared by the drafters say only that the section"[p]rovides standards for judicial review, including injunctive and other relief, to ensure that the actions of the Secretary are not arbitrary, capricious, or not in accordance with law." You tell me, dear reader, whether the Secretary's run of the mill decisions will or will not be subject to arbitrary and capricious judicial review under the statute.

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Comments (15)

1. Posted by fedgovernor on September 28, 2008 @ 20:36 | Permalink

It's 110 pages so that the key provision can be safely hidden in plain site.

When reading this legislation, you should keep one thing in mind: it does nothing to remedy what got us here. It is all about how we give out $700 billion and who we give that money to.

Once all those bad loans are bought up however, there is nothing in this bill that prevents a new batch of bad loans. Nothing which regulates credit swaps; nothing which reins in the Community Reinvestemtn Act; nothing which stops companies from selling as an unregulated security something which is really regulated insurance.

But the worst part of this bill is the part they want hidden in plain site: Section 132.

This is the section which gives the SEC the power to wish the problem away by suspending accounting rules.

The SEC will now have the power to wish away financial problems by changing the accounting.

2. Posted by Jimmie on September 28, 2008 @ 20:41 | Permalink

Why is the Secrtary of HUD on that board?

To make sure that "affordable housing" is protected, of course. I will bet you bottom dollar that was a Democratic addition.

3. Posted by Lily on September 28, 2008 @ 20:51 | Permalink

Bingo Fedgovenor: It does nothing to remedy what got us to this point in the first place. But the congress never wanted to do that. They are committed to loans for low income borrowers regardless consequences.

4. Posted by Loweeel on September 28, 2008 @ 21:02 | Permalink

I'm just having the most trouble with the clawbacks. Under the Eastern Enterprises v. Apfel line of cases, I don't see how the government's abrogation of existing contracts through statute can be legal without payment of just compensation.

5. Posted by TmjUtah on September 28, 2008 @ 21:04 | Permalink

The bailout does not address the causes of this event.

We've got Charles Manson not only investigating the Tate Murders, but he's also designing the legislation to prevent a repeat offense.


We are just enabling these crooks.

Throw them out (as many as are exposed come this November) and make damned sure the survivors know they are under the microscope until their turn comes, too.

Watching Pelosi and Reid and Frank acting like this is just another day in the halls of power is... tragic, because really, it is just another day.

Their criminal acts have for so long been ignored that they rightfully hold no fear whatsoever of what tomorrow brings. They have their cover in the media, they have their friends in the lobbies, and all they have to do is go back to the rubes every couple or six years, and they are UNTOUCHABLE.

Throw them all out. No bailout. If there must be a collapse, let it be now. Not in a week or a month with another layer of Potemkin Communism added on.

The Bailout is their dry run to the Revolution. If we'll bend over for this, then we'll bend over for anything else.


6. Posted by David Zaring on September 28, 2008 @ 21:08 | Permalink

Lowell, that's true about the clawbacks - they do seem retroactive, and that's a red flag. Whether takings or due process is the right way to analyze the issue ... that's a technical question.

7. Posted by GK on September 28, 2008 @ 21:36 | Permalink

Is the joint resolution thing problematic under INS v Chadha?

8. Posted by David Zaring on September 28, 2008 @ 21:40 | Permalink

I wondered about that too, GK:

9. Posted by GK on September 28, 2008 @ 21:49 | Permalink

But doesn't Lederman's interp mean you read the statute to have Congress present a bill to the President to sign? I'm not sure that's the right reading - and I don't see why he would sign, seeing as how he has to certify the need for funds in the first place.

10. Posted by JinnyB on September 28, 2008 @ 22:03 | Permalink

No bailout. Not one single penny. I will support the opposing campaign and work against or vote against every politician I can that signs off on this Obama-Bush-Pelosi-Dodd-Reid bailout bill obscenity.

If John McCain signs it, I will not vote for Obama, but I WILL stay home and not vote at all - in protest. That would amount to being a vote for Obama by default, since I vote Republican.

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