September 25, 2008
The Agreement on Principles: Not Without Problems
Posted by David Zaring

UPDATE: unless there isn't a deal at all.

The agreement on principles for the bailout is out there, and it is vague.  Based on the principles themselves, it looks like:

  • there may be a presentment clause problem with the funding (UPDATE: but probably not, see Lederman);
  • the arbitrary and capricious review that Congress got would appear to mean that each bailout decision goes straight to the courts of appeals - a potentially huge number of complicated claims for quite financially inexpert appellate judges and law clerks to evaluate;
  • the deal delegates all the executive compensation standards to the Treasury Secretary.  You can bet that Paulson will try to get his standards promulgated well before January 20.

Some point by point reactions below.

The plan

Requires Treasury Secretary to set standards to prevent excessive or inappropriate executive compensation for participating companies

I've characterized this as a congressional punt before.  Which it is.  If the legislature was serious about executive compensation, it'd pick some standards.  But it's still a real delegation of power to the Treasury Secretary, in unprecedented ways.

The plan,

To minimize risk to the American taxpayer, requires that any transaction include equity sharing

A victory for the Paul Krugmans and Swedophiles of the world; I'll leave comment to the economists.  Missing, though, is the mechanism.  Will Treasury take warrants?  Preferred shares?  Voting equity?  It's also a lot to leave up to the Secretary, as Eric Posner has noted.

The judicial review:

Treasury Secretary is prohibited from acting in an arbitrary or capricious manner or in any way that is inconsistent with existing law

This is the standard language of the Administrative Procedure Act.  John Carney says it's a favorable standard for the government, and he's not wrong, but there's favorable, and then there's favorable.  In reported APA decisions, the government wins somewhere between 55%-65% of the time, according to estimates I've seen from Sunstein and Miles and others.  I do wonder how, exactly, the courts of appeals are going to handle reviews of these deals.  It will be a test of their financial sophistication, which is less of a problem if you're running things through a qualified administrative board.

I won't go into the other oversight mechanisms, except to say that they are pretty standard, though there sure are a lot of them (an IG and GAO and an oversight board, and legislative reporting, &c), and - as Treasury knows, as the chair of CFIUS - regular congressional reporting on matters of controversial and specific investment decisions can lead to heavy congressional intervention in particular decisions.  I expect that the bailout's too big for too much legislative flyspecking - but expect some cause celebres.

Finally, the funding:

Treasury Secretary’s request for $700 billion is authorized, with $250 billion available immediately and an additional $100 billion released upon his or her certification that funds are needed ... final $350 billion is subject to a Congressional joint resolution of disapproval

Under current law, I don't see how Congress could authorize $700 billion, have the president sign off on it, and then undo the second half of the deal by a joint congressional resolution (UPDATE: Or at least I couldn't because I didn't recognize the term - joint resolutions are - who knew? - presented to the President - see here and here).  That would be flatly inconsistent with INS v. Chada, which prohibited these sorts of legislative vetoes because of a somewhat literalist reading of the presentment clause (which says that all bills have to be presented for presidential signature before they become law).

Chadha has often been criticized, and Congress has, after it was decided, passed plenty of statutes with legislative veto provisions, suggesting, in effect, that it thinks the Supreme Court got that one wrong, and might not .  But the legislature hasn't actually exercised the veto.  If Treasury goes past $350 billion, and Congress passes a resolution of disapproval, constitutional law professors would vibrate with excitement until the Supreme Court either overruled itself or decided to spend $350 billion of the people's money on mortgage backed securities.

We'll need to see the final text to evaluate how this does on three basic, but very hard to win constitutional arguments: is this an unconstitutional delegation of power from Congress to the Treasury (and, I'm sticking with no, though it is absolutely enormous)?  Is this a violation of Congress's Commerce Clause powers (nope)?  And, I suppose, does the scheme of gun-to-your-head bailouts for a lot of equity and the government's other tough terms, violate due process?  Congress's piling on of process and oversight will make that latter case, as well as the nondelegation case, easier to make (as will the basically voluntary decision to go into the program).

The House and Senate legislative offices, not to mention OLC (has that office done anything so far?  If it looked at the Paulson plan, it certainly didn't change it any, there was no OLC-like language in there anywhere) will nonetheless have some work to do putting this all to paper. 

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