Legal Scholars: Bailout Unlawful

The bailout of GM and Chrysler was nothing compared to the giant TARP thrown to bankers and brokerages, or so the argument goes. A panel of constitutional experts, convened at a Stanford Law School conference about the constitution and bailouts, has a totally different opinion: Bank rescue o.k., car rescue not o.k.

“Their consensus: the Troubled Asset Relief Program, which sprayed some $475 billion into banks and finance companies, could stand up to the ghosts of Jefferson, Madison and Hamilton. The bailouts of GM and Chrysler, however, largely failed the constitutional test, said a number of scholars from across the political spectrum. They simply “were not plausible” under the law, according to one conservative scholar, University of Virginia’s Saikrishna Prakash.”

That is the bottom line drawn by the Wall Street Journal, a publication generally not opposed to money given to the private sector.

The Dodd-Frank Act gives a step-by-step guide for the triage of sick financial institutions. The scholars think that that act was violated. The first draft of the $700 billion TARP bailout fund, written in just a few pages by former Treasury Secretary Hank Paulson, definitely looked unconstitutional, said Mariano-Florentino Cuéllar, a Stanford Law professor. Congress denied Paulson’s original version. A 157 pager was created and approved. Even that was a bit iffy, but the legal experts think the rescue of financial institutions was within the emergency powers of presidents Bush and Obama. “Those powers would be difficult to grant in today’s political climate,” says the WSJ, especially when a Sarah Palin calls it “morphing into crony capitalism at its worst.”

The GM and Chrysler package was a totally different matter. The TARP money was for “financial institutions” as “established and regulated” under U.S. law. The law mentions banks, credit unions, insurers and broker-dealers. “It doesn’t, however, come close to naming industrial companies as beneficiaries,” says the WSJ, summing up the opinions of the assembly of professors. Columbia University law professor Metzger doubted the legality when “the executive branch engages in aggressive interpretation of statutory authority in ways that Congress prohibited.”

Prof. Prakash clearly said that the auto bailouts were illegal. Neither Bush nor Obama said TARP would cover autos “until they decided they did.”

Was the bailout against the law or was it not? Some Chrysler creditors tried to bring a case to the Supreme Court. The court declined to hear the case. Even the Detroit Free Press, also no enemy of automakers, has to concede:

“For now, nobody is legally challenging the water that already passed under this bridge. But the next time Detroit automakers find themselves in crisis, they might.”