September 20, 2008
The Bailout Statute
Posted by David Zaring

The terms of the mega-bailout are out there, and they are interesting.  I have never seen a shorter statute that commits $700 billion taxpayer dollars.  Generally, if Congress legislates in the economy, it can do whatever it wants, usually underscored by a vague allusion to the commerce clause.  No such allusion here, but probably no matter (you'd have to stretch the point to get there with the use of the phrase "commercial mortgages," and anyway, the statute permits intervention in residential mortgages too.  Clarence Thomas is the only localist I can think of who might be bothered by residential mortgages, and by paying much attention at all to the commerce clause, we are digressing.). 

Congress bailed out S&Ls before, and survived constitutional challenge then, I can't see why it wouldn't be able to bail out other financial institutions now.  So: can it do this?  Yes.  However:

  • Has Treasury been delegated an unconstitutionally broad amount of power?  This question always gets asked, and the answer to it is always no, but the exercise is worth a little attention here.  The statute is clearly focused on a topic: bailouts.  That's good for cabining Treasury's authority.  It also directs Treasury to protect the taxpayer as well as provide stability to the markets (also a sign that the statute is focused on particular goals), but it does, in authorizing the bailout, permit the secretary to run banks (or appoint the employees to do so), buy stuff, issue regulations, and so on.  These powers are broad, and because of a weird clause in the preamble of the statute, not the only things Treasury can do: "The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation" sales, appointments, regulations, etc.  It's that "without limitation" language - suggesting that the powers granted to Treasury are examples, rather than limited authorizations, that might give a nondelegation afficianado a little pause.  You know, can Treasury take this new sovereign wealth fund and buy anything it likes?  Isn't that unconstitutionally broad?  Maybe so .... but your first presumption is that broad grants of power haven't been held to be unconstitutionally broad since 1935.  I think this easily passes muster.
  • Treasury is allowed to sell "securities" to raise the $700 billion necessary, and can't go above that number ("The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time.")  Let's hope the crisis isn't a $1.5 trillion crisis, as some are saying
  • There's a two year sunset clause, sunset clauses being something Congress now wisely does as a matter of course.
  • And there's no judicial review. ("Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.")  Courts don't like these clauses - but particularly in civil or constitutional rights cases (see the Supreme Court and GITMO).  And for constitutional questions like non-delegation or commerce clause violations, they'd probably just ignore this clause.  But otherwise, for run-of-the-mill review of how Treasury implements this scheme, I can't see there being a problem keeping the courts out.  Heck, judges probably want to be cut out of the supervision of Treasury's supervision of the economy.

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Comments (17)

1. Posted by Bobby Bartlett on September 20, 2008 @ 12:02 | Permalink

Hi David,

Thanks so much for following this. It's a great public service.

On the statute, what's the administrative law standard for interpreting the discretion built into the limit of "$700 billion outstanding at any one time"? In particular, is this to be measured at cost or at FMV? To my contracts-oriented eye, this seems like a gaping hole to me if there is any room for an FMV argument. Frankly, it seems more than a little ironic that the valuation difficulty that got us into this mess seems to have been overlooked by the drafters (or might this be intentional?).

2. Posted by David Zaring on September 20, 2008 @ 12:40 | Permalink

Good question ... didn't think about it because of my administrative law perspective, under which, not that this is reviewable, Treasury would have the discretion to make reasonable interpretations of what $700 billion means. Does it mean $700 billion cost? The rest of the statute doesn't suggest a particular metric, I think. But the fact that valuing this upper limit is not specified, is, I agree, completely ironic.

3. Posted by fedgovernor on September 20, 2008 @ 14:36 | Permalink

Make no mistake about David ... we're looking at WAY more than $1.5 trillion.

Pay attention to how the Treasury funding is worded: "The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time."

The key phrase is " ... at any one time." This means the Treasury will have a revolving line of funding. As it sells off old debts it acquires, it can purchase new bad debts.

In this way, the total pricetag can far exceed $700 billion ... essentially there is no legislated cap on how much the cost can be.

Now, imagine you're a banker with your own greed as your only moral compass. Wouldn't you stuff as much or your questionable debt off onto the government as you possibly could?

That's exactly what's going to happen. Debt that was never envisioned to be funded by this bailout will be purchased by the government.

It is the biggest payday ever for the banking industry in America. They must be just heady with glee over how this is shaking out, and absolutely further convinced that the way to keep the profits rolling in is to lend irresponsbily and make damn sure you have bribed every politician you can find with campaign contributions up the yazoo.

If you can do that, and just remember the rules, you'll never go bankrupt.

Lend hand over fist to any schmuck you can dredge up and bribe as many politicians as you can find! That's the plan.

4. Posted by David Zaring on September 20, 2008 @ 14:42 | Permalink

It's a nice point - it's not $700 billion max, just $700 billion at a snapshot. And I agree - Wall Street wins ... with the exception of Bear, Lehman, and AIG.

5. Posted by Jake on September 20, 2008 @ 19:53 | Permalink

I wouldn't be too certain about that "no judicial review" part. There are all too many lawyers with agendas who are willing to search all 90+ federal districts for the one judge who might exercise judicial review over the issue of the day.

6. Posted by Brian on September 20, 2008 @ 21:10 | Permalink

Not being a lawyer, I'm sure I'm just not aware of the case law in which the judiciary agreed to abdicate their responsibility on demand, but doesn't congress making laws that include provisions that the execution of such laws is not reviewable by the judiciary sort of fly in the face of separation of powers? I mean, we might as well just dispense with that whole constitutional charade and have ourselves a king!

7. Posted by fedgovernor on September 21, 2008 @ 2:46 | Permalink

We have a King.

His name is Ben Bernanke.

8. Posted by GWB on September 21, 2008 @ 12:01 | Permalink

It does not strike me that bankers are going to behave as fedgovernor suggests. The statute says that mortgage related assets can be purchased by the Treasury on whatever terms it sees fit. That won't be face value. And whether the Treasury makes money and whether the "bankers" get such a great benefit that they will want to dump all their underperforming assets depends upon whether Treasury makes a good deal, and on whether Treasury simply buys whatever the bankers want to sell or is selective. Remember that the purchasers from the RTC were felt to have made out like bandits, and the S&Ls themselves felt that they had been robbed.

9. Posted by Elizabeth on September 21, 2008 @ 13:51 | Permalink

While we have some data on how and when Treasury Secretary Paulson might use the powers delegated to him by this bill, we have no idea who the Treasury Secretary will be come Jan. 20, 2009 and how he will use such authority. The vast majority of the two year term for these powers will not be under Paulson but under some unknown quantity. I am not certain that it is wise to give such unfettered powers to whomever McCain or Obama select to be the Treasury Secretary, particularly after the bumbling comments that both campaigns have made this past week regarding the current crisis.

10. Posted by fedgovernor on September 21, 2008 @ 16:03 | Permalink

"... S&Ls themselves felt that they had been robbed."

They felt that way because their S&Ls were taken over by the government, closed, and the management fired. That's how the RTC got S&L assets.

Under this bailout however, things will be different. The financial institution isn't going to be put out of business. It's just going to be able to package up all of its non-performing inventory and sell it to the government, at whatever terms they can get. They'll love to get any money for these worthless instruments.

Let's restate the problem: Financial institutions today can't get ANY TERMS from ANYBODY at ANY PRICE because EVERYBODY understands that the value of what's being offered by these firms is 0. (It's probably less than $0.00).

There is no value. That's the "illiquidity" of which Paulson speaks. These securities can find no market. If financial institutions were to be forced to admit this, they would have to restate their balance sheets in such a way that would guarantee massive bank failures.

Right now, it is only the fiction of value that is supporting banking institutions' representations to their owners and keeping them from having to either find vast new sources of capital, or be forced from the banking industry.

Solution: The government is going to create liquidity and value for things that have no value. It will create a market, by buying things that have no value in the market except for the value that's created by the governmen now being willing to purchase things nobody was willing to purchase before.

To the bankers, this is a payday. To the bankers, that which yesterday was worth less than 0 is today worth more than 0. They are ecstatic. You would be too if you could sell thin air to the government and there was a law that said the government must purchase your thin air.

There are bankers far smarter than the Treasury Secretary that got us into this mess by his own stupidity, who are, at this very moment, gaming the new system to their advantage.

They are masters of the universe and the smartest men on the planet. They figured out how to get the government to buy up all their bad loans when nobody else would, so they must be pretty smart.


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