In the late 1800s, several railroad companies because of bad management were on the verge of shutting down. Many railroad owners contemplated tearing up their tracks, melting them down and selling them for scrap metal. American bankruptcy law intervened and convinced the creditors that by accepting adjustments in the short term to obligations due they could recover more in the long term for their investments. Such is the gist of Chapter 11 bankruptcy procedures in American history.
In 2008, American auto manufacturers were caught in the financial meltdown in what can best be described as a perfect storm building against them. Years of producing inferior cars, a decreased market share compared to foreign manufacturers and exorbitant deals with unions had caught up with them. Throw in the financial crisis and the rest is history. When they first came crying to Washington, they were turned down by a skeptical Senate (the House had approved a bail-out). Part of it was bad public relations and part was good politics.
Undeterred, they persisted and Bush, along with Henry Paulson, diverted TARP money as bridge loans to Chrysler and General Motors cognizant of the fact it would only put a Band-Aid on the problem. In fact, the bleeding started anew in March 2009, only this time there was a new president with a different agenda.
The legal problem ensues because Obama sidestepped normal bankruptcy proceedings by, in essence, purchasing shares of GM and Chrysler stock and becoming part owners. In effect, he had nationalized the auto industry except for Ford Motors. But, what makes this potentially illegal?
In December 2008, the House of Representatives voted and approved a $14 billion bailout of the auto industry. That bill was rejected by the Senate. TARP, on the other hand, was a $700 billion bailout of, as the name suggests, “troubled assets.” Like any bill, it does not authorize the Treasury to spend the appropriated funds on just anything. The definition of “troubled assets” was broad, but where the funds could be spent was narrow. Two things define a “troubled asset.” The first was residential and commercial mortgages and their derivatives. The second definition was any other financial instrument the Treasury Secretary and Federal Reserve deemed necessary to promote financial market stability.
The second definition allowed Paulson to purchase ownership stakes in banks although he told Congress the funds were designated for mortgage backed securities. Of course, these securities are issued and traded by financial institutions like banks. TARP gives the Treasury some wiggle room in defining troubled assets, but there is no authority to purchase, for example, food or tea cups.
This is the reason Bush went to Congress and asked for the $14 billion auto bailout since automakers, like tea cups and food, are not financial institutions. Thus, the Bush request was stand alone legislation and stood on firmer legal ground.
This is a simple concept. Since TARP did not authorize anyone to spend funds on auto makers, the president cannot expend appropriated TARP funds on auto makers. The Constitution phrases it: “No money shall be drawn from the Treasury, but in consequence of appropriations made by law…” Even an interventionist liberal like Robert Reich questioned the constitutionality of using TARP funds to bail out auto makers. In response to a question posited to Obama press secretary Robert Gibbs, he essentially declared it legal because the Obama administration determined it was legal.
TARP money was appropriated for specific institutions: banks, credit unions, insurers, and broker-dealers. It did not authorize use of funds for industrial actors. Today, most proponents of the bailout cite two facts. First, the Supreme Court refused to hear an appeal by some Chrysler creditors challenging the bailout. The reasons for denying a case are generally never published except in very rare instances. A simple minor flaw in the filing can be cause for denial of review. Because the Supreme Court denies a case does not transform the negative into a positive. That is, refusal to hear the case does not necessarily make the action legal or constitutional. The second reason given is that it is a moot point because the bailout was a success. That definition of “success” is still very much in flux and the jury is still out.
Regarding the second half of the charge- that Obama violated bankruptcy law- one can certainly conclude that if even if he did not technically violate the law, he violated long-standing convention that all debtors similarly situated get treated equally. In bankruptcy, secured debtors get a seat at the head of the table. The Obama plan turned this tenet on its head. Instead of getting first dibs on the reorganized company, they were essentially pushed to the back of the line and existing shareholders at the time got, on average, 35 cents on the dollar. Some analysts, in hindsight, note that this was a more than fair deal and they received considerably more than if a bankruptcy court had liquidated the assets of GM and Chrysler. Of course, as the saying goes, hindsight is always 20/20, but in this case we will simply never know if they got a good deal as opposed to the other options.
We do know, however, given the lawsuits filed, that some of these secured creditors would have taken a potentially “bad deal” in bankruptcy court, or that they were at least willing to take that chance. In short, the auto bailout essentially intervened in an effort to circumvent the orderly system put in place to deal with corporate bankruptcies- a system of bankruptcy law which is, again, one of the enumerated powers of Congress. Like the immigration laws, the Obama administration simply substituted what they thought was fairness in bankruptcy proceedings for what Congress specifically laid out in bankruptcy laws.
Furthermore, when auto worker unions are given shares of stock in the reorganized company, it is simply nothing other than a pay back for past political support. Unfortunately, it was done with US taxpayer money and the strong arm of an administration hell-bent on remaking the American auto industry in its green Utopian image.
Most importantly as concerns this topic, the use of TARP funds- monies appropriated for a rather specific purpose with specific restrictions- is clearly against the will of Congress and the strict wording and definitions within the law. Some have argued that the Executive Branch is afforded wide latitude under the law under a doctrine called the “Chevron deference.”
This arises from a very important 1984 Supreme Court case. In the majority opinion, Justice Stevens wrote:
(1) First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the Court and the agency must give effect to the unambiguously expressed intent of Congress. If the Court has determined that Congress has not directly addressed the issue at question, the court does not simply impose its own interpretation of the statute. Rather (2) If the statute is silent or ambiguous with respect to the specific question, the issue for the court is whether the agency’s answer is based on permissible construction of the statute.
The use of TARP funds was clearly specified in the legislation. At no point are industrial actors mentioned as permissible recipients of the appropriated funds. The Obama administration’s interpretation is so tenuous that it puts their argument on the knife’s edge under the Chevron deference principle. Although it is understandable and it was possible that a GM and/or Chrysler bankruptcy would have so rankled the already unsteady financial markets in 2008-2009, it is also a fact that there existed viable bankruptcy laws to deal with these very real threats.
Usually, I am big at placing fault on Congress for ill-advised and ambiguously worded laws which allows the Executive branch to run roughshod over their interpretation of legislation. But that is not the case here. Congress could not be more clear as exemplified by their listing of acceptable recipients of TARP funds. Clearly, the Obama administration, despite the “ends justifies the means” arguments, violated the clear wording of the law and it is a violation for which he can be held accountable.