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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