What Would the Constitution Say About the Auto Company Bailouts?

By Charles Lane
Sunday, June 14, 2009

Nationalizing General Motors, and part of Chrysler, may or may not turn out to be a good deal for the taxpayers. I have a different concern, though: Was it constitutional?

With hundreds of thousands of jobs on the line, this may seem a churlish question. Then again, the temptation to bend the rules of democracy is always greatest in a crisis. It wasn't so long ago that a president claimed the power to do all sorts of questionable things -- from waterboarding to electronic surveillance -- because the country faced a crisis.

Bailing out Detroit is not in the same category, morally, as torture. Still, a presidential decision to federalize a vast sector of the U.S. economy affects the country's vital interests and, potentially, the rights of its citizens. Such an extraordinary measure should rest on the firmest possible foundation of democratic legitimacy. Does President Obama's rescue of GM and Chrysler meet the test?

The classic statement on such matters comes from Supreme Court Justice Robert H. Jackson's opinion in a case about another crisis-driven assertion of executive power: President Harry S. Truman's seizure of steel mills in 1952. Truman wanted to prevent a strike during the Korean War; the court blocked him.

In Jackson's analysis, the president's power is at its "maximum" when he "acts pursuant to an express or implied authorization of Congress." The Obama administration argues that it has such authority today, under the Emergency Economic Stabilization Act of Oct. 3, 2008. This law established the $700 billion Troubled Assets Relief Program (TARP), the source of the $30 billion the Obama administration pumped into GM as well as the $8 billion it has committed to Chrysler.

The only problem is that the law doesn't give "express" authority to buy a car company. At the time Congress approved TARP -- grudgingly -- everyone assumed it was to buy up Wall Street's toxic mortgage-backed securities, which are the only class of assets named in the law. (The law did contemplate other, unspecified asset purchases.) The statute says that "financial institutions" -- defined as banks, savings associations, credit unions, security broker-dealers and insurance companies -- can get aid.

What about "implicit" authority? The law says its definition of financial institutions is "not limited to" banks. The Obama administration emphasized this point to the Supreme Court in a memorandum defending its actions against Indiana pension funds that hold Chrysler bonds. And GM and Chrysler do finance dealer inventories and consumer purchases, a bank-like function.

But if Congress meant TARP for the auto companies, then why did it leave them off the law's list of "financial institutions"? Why did it spend much of December trying -- and failing -- to pass a separate auto bailout? In its court filing, the Obama administration insists that Treasury's interpretation of the law's "ambiguous" definition is "entitled to judicial deference." In other words, if Treasury wants to call a car company a bank for the sake of the economy, the courts should let it.

Yes, the law's purpose was to "restore liquidity and stability to the financial system of the United States," and saving GM and Chrysler might do that. But the administration's argument comes dangerously close to reading "by any means necessary" into the law.

So were the Indiana pension funds right? Not quite. It's true that, according to Jackson, executive power is "at its lowest ebb" when the president's action is "incompatible with the expressed or implied will of Congress." But, even if the GM-Chrysler deal doesn't fit the language of the law, it's not necessarily "incompatible" with Congress's will.

Indeed, when the auto companies began collapsing in December, Democratic leaders in Congress urged the Bush administration to save them with TARP money. Though they duly buttressed this demand with a legal opinion from none other than the acting comptroller general, basically it was opportunistic: House Speaker Nancy Pelosi preferred to use TARP rather than the Bush administration's choice: previously authorized energy-efficiency loans.

Still, with its proposal going nowhere in Congress, a presidential transition at hand and Detroit tanking, the Bush administration relented; it released $17.4 billion from TARP loans to GM and Chrysler. This set a precedent for Obama, which the Democratic Congress has cheerfully allowed to stand.

A political veteran as well as a constitutional scholar, Jackson anticipated situations like this. He described "a zone of twilight" in which "the President acts in absence of either a congressional grant or denial of authority" because "congressional inertia, indifference or quiescence may sometimes, at least, as a practical matter, enable, if not invite, measures on independent presidential responsibility."

In other words, sometimes the president can get away with stretching his authority because Congress would rather not be held accountable for formally defining it.

The GM-Chrysler deals appear to be such an instance. But the constitutional ambiguity surrounding this use of TARP may prove tolerable only as long as the policy itself is. If GM and Chrysler start gobbling up even more funds -- or if additional non-financial companies get bailouts -- more Americans might question the president's power to select certain firms for federal rescue. Fortunately, the TARP statute expires at the end of this year. Let's hope the next version is a little less open to interpretation.

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