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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