President Bush's Auto Bail Out is Illegal

Introduction

The Emergency Economic Stabilization Act of 2008 (EESA) gives the Secretary of the Treasury the authority to pump money into financial institutions using the "Troubled Assets Relief Program" (TARP) that authorizes the purchase of troubled assets from any financial institution.

Unfortunately, the Treasury lacks the statutory authority to direct TARP dollars to Detroit automakers. While the purpose of the EESA is to restore liquidity and stability to the financial system by promoting home ownership, jobs, and economic growth, it does not grant the Treasury unfettered spending discretion. Auto manufactures are not financial institutions and therefore do not qualify for assistance under TARP.

Discussion

12 USC §5202 of the EESA defines the term "financial institution" as "any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company."

A very broad (and incorrect) reading of the statutory language would suggest that the Big 3 auto makers are "financial institutions" since "any institution" can be a "financial institution" since the statutory language says "any institution, including, but not limited to, any bank" are "financial institutions".

First, the plain meaning of the term "institution" suggests a formal, regulated organization which serves some sort of public purpose. The word "finance" refers to the concepts of time, money and risk and how they are interrelated. Thus, a "financial institution" would be a state regulated organization that manages time, money, and risk by creating various financial assets and instruments. Thus, it is clear that the plain meaning of "financial institution" includes banks and insurance companies since they sell products that manage risk, time and money. An average ordinary person does not think of automobile manufacturers as "financial institutions". Thus, the plain meaning of "financial institution" does not include automobile manufacturers. Automobile manufacturers make and sell cars, plain and simple.*

Second, the textual canon of ejusdem generis dictates that interpretation of a general term should reflect the same kinds of objects reflected in the more specific terms accompanying it.** In this case, the general term is "any institution" and the more specific terms are "any bank, savings association, credit union, security broker or dealer, or insurance company." So while asset management firms and building societies are not listed specifically in the statute, they are so closely related to banks that they should be considered "financial institutions".

Thus it follows that if Congress intended to mean absolutely any institution, they would have included non-financial institutions from other sectors of the economy, like farms, retailers, and manufacturers.

Third, the Whole Act Rule presumes that every provision should be read by reference to the whole act so that the act will be coherent when read as a whole. Throughout the EESA, financial activities are mentioned. The statute explicitly mentions regulating mortgage foreclosures, market transparency, margin requirements, mark-to-market accounting, and mandating FDIC oversight.

The EESA does not mention automobile manufacturing, retail, farming or any other economic sectors. Therefore, since no other economic sector besides finance is mentioned, the EESA can only be understood as regulating financial activities.

Lastly, separation of powers creates a presumption that a statute will not unconstitutionally delegate authority to the executive branch without specific guidelines. Congress never gives the President carte blanche to spend money however he pleases. Spending bills are specific and discretion to spend is usually carefully laid out. If Congress had intended that the Treasury could bail out non-financial institutions, it would have explicitly mentioned other economic sectors. In the absence of a clear statement of congressional intent for a broader bail out, a narrower interpretation should be presumed.

Conclusion

Congress should stop President Bush from abusing his power by exercising its legislative muscles. Both the Senate and the House should immediately pass legislation to clarify the definition of "financial institution" to specifically exclude or include other sectors, such as manufacturing. Politically, it is unlikely to happen, so the only solution will be litigation. However, by the time the money has been disbursed by the Treasury, recovering the money will all be but impossible, since getting a temporary restraining order or an injunction will take too much time, and then the money will have already been spent by the auto makers.

*An interesting question is whether the financing arms of the Big 3 would qualify for TARP. I see no reason why GMAC should not qualify for funding. GMAC is its own corporation, which provides automotive financing, insurance, banking services and mortgages to its customers, which clearly falls into the broad definition of "financial institution" provided by Congress. The Heritage Foundation is very wrong in its partisan analysis of this issue.

**There is much confusion about how the canon of ejusdem generis should be used. It is often misinterpreted as only applying when a general term is followed by particular terms. This is clearly not the case since ejusdem generis has been used by the courts and described by scholars like William N. Eskridge as a canon used to define general terms based upon the meaning of specific terms surrounding it, not solely following it.