December 14, 2008
Can The TARP Be Pulled Over Detroit?
Posted by David Zaring

As the administration considers whether to use TARP money to bail out the automakers, what does the statute have to say? 

The Secretary is authorized to establish the Troubled Asset Relief Program (or ‘‘TARP’’) to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary

Since auto companies wouldn't appear to be financial institutions (indeed, GM has sold most of its financing arm to Cerberus), one might think this primary directive would be problematic.  However, the good news for the auto companies is that "financial institution" is defined with an out - an out that would seem to mean that the "financial" part of the term could be, for all intents and purposes, dropped:

'The term ‘‘financial institution’’ means any institution, including, but not limited to, any bank.....[and other financial institutions incorporated in the US]

So there appears to be a textual basis that could be used to bring auto companies under the TARP.  Is it a good idea to do so?  We're just lawyers here at the Glom, so perhaps we will simply point you to some economists.  Richard Posner still thinks a bailout would be a good idea (or the best of a bad set of alternatives, anyway), while Gary Becker would prefer bankruptcy.

Both expressed some skepticism about executive compensation earlier this year, and many legal observers have wondered whether the exec comp rules in the TARP could possibly be enforced.  The WaPo weighs in today with a story about how - at least from a tax perspective - the equity injections mean that they cannot.

Perhaps true, but it's still the case that the Obama administration could pursue radically restrictive exec comp for the rest of the recipients of the bailout money ... though there may not be quite as much to give by January 20 as said administration probably hoped.

UPDATE: I don't know how I missed this, as the University of Chicago Faculty blog is one of my favorites (love the workshop summaries, btw), but Randy Picker engaged in a similar but wiser analysis of the language of financial institutions, with a similar wry pun in the title ... on December 12, two days ahead of me, and a lifetime in internet years.

UPDATE 2: Mike Rappaport over at The Right Coast makes the case that all those listed financial institutions had to qualify what the term meant in some way.  Andrew Grossman at Heritage agrees.  But Mike R grudgingly suspects the auto companies can get in through their financing arms.  Anyway, it's a full on debate over there, with a couple of good comments on the post (including one from Randy P).

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Comments (4)

1. Posted by JohnF on December 14, 2008 @ 23:36 | Permalink

Just because "financial institutions" are not limited to banks does not mean it includes auto companies.

In addition to banks, it could include insurance companies, brokerages, and other FINANCIAL institutions, rather than manufacturers.

2. Posted by David Zaring on December 15, 2008 @ 6:47 | Permalink

It's a decent argument, and it is true a court would assume that the "financial" part of "financial institution" was put in by Congress for a reason.

3. Posted by in_awe on December 16, 2008 @ 13:52 | Permalink

Really? So this is what we have come to in this country? Really?

The intent of the Congress and the administration could not have been clearer during what passed for debate. TARP was to bailout institutions that functioned primarily in financial transactions. There was no sidebar that TARP was actually intended to cover all industries from pet food to automaking to ski resorts.

I know that the attorneys and the courts have been perfecting for years now the art of ignoring legislative intent. But that has mostly involved intent and commentary of the long dead Framers of the Constitution - it is easier to brush those aside with an intervening 200 years. But it takes real hutspah to disavow intent with only 2 months since passage of the legislation.

Do lawyers seriously wonder why they are so distrusted by the public?

4. Posted by Broken Record on December 17, 2008 @ 8:30 | Permalink

To the extent that the TARP can be pulled over the auto industries -- and it can, not just because of loose language, but because equitable relief of any sort with regard to the secretaries actions under 101,102,106 and 109 are forbidden excepting on constitutional grounds -- ironically those are more or less the constitutional grounds for the entire program to be struck down under the non-delegation doctrine. Even though largely moribund and dormant the tARP has to be the most blatant violation of the principle since the new deal and seems the obvious challenge, though I can't figure out why it has yet to be brought - esp. in light of the auto bailout -- although I thought it equally valid before. It will be even more throughly recognized as a bureaucratic blank check if treasury extends this to the auto industry.


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