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Is TARP Legal?

For all the back and forth over the Troubled Asset Relief Program (TARP) - its price tag, its sloppy administration, and its seemingly endless list of beneficiaries - few have earnestly questioned Congress's authority to create the program in the first place. Legal scholars who did so in the beginning were often crowded out of the popular press by louder, more colorful dissenters in the business community. Now, months since the Treasury Department unloaded its final $350 billion, a prominent libertarian think tank is preparing to challenge TARP and its governing legislation, the Emergency Economic Stabilization Act, in federal court.

The organization, FreedomWorks, will allege that Congress created TARP in violation of the "non-delegation principle," a doctrine limiting the lawmaking authority Congress can properly hand over to executive agencies, in this case the Treasury Department. Instead of confronting difficult policy questions relating to the distribution of bailout money - how much, to whom, and under what circumstances - the lawsuit will allege that Congress offered a list of open-ended pronouncements and invited Treasury to dispense the money in accordance with its own guidelines. In short, Congress turned Treasury into a mini-legislature and furnished it with a quarter of the annual budget with advice against spending it all in one place.

Libertarian academics are as familiar with this line of reasoning as they are frustrated by the cold reception it traditionally receives in court. Suffice it to say that FDR was in his first term the last time the Supreme Court invalidated a regulatory program on the basis of improper delegation. That's not to say the doctrine is a dead letter. As FreedomWorks observes in its legal analysis, the Court has preserved kernels of this original principle in its holdings over the years, retaining its authority to strike down sweeping statutory delegations even as it routinely upheld the same.

This all makes for a strong, if cloudy, presumption in favor of delegation. Scholars have tried to distill the presumption into a hard and fast standard, but with little success. We do know the strength of the presumption will vary inversely with the size and scope of a particular delegation. The smaller the segment of the economy a particular policy judgment affects, the easier it will be for Congress to punt it away. For larger, market-wide programs like TARP, courts will be on the lookout for an "intelligible principle" in the governing statute, which is a slippery way of saying they would prefer some basic guidelines. Lawmakers rarely think twice about this requirement. Courts, they understand, have a way of locating "intelligible principles" in the least intelligible of statutory schemes. On the rare occasion when a court takes issue with a delegation, it is far more likely to cure the infirmity than it is to strike down an entire administrative structure. What's left, then, is a laugh test of sorts, a tradition of judicial forbearance for all but the most naked abdications of legislative responsibility.

Today, with the financial sector awash in TARP runoff, news headlines are bringing some of the more glaring abdications into focus. In raising hell over the AIG bonuses, for instance, members of Congress gave the lie to the proposition that clear limits on executive compensation were in place when EESA left Capitol Hill. For financial institutions in which Treasury takes a "meaningful equity or debt position," the Secretary must require that the company comply with "appropriate standards for executive compensation and corporate governance." The law is opaque, if not willfully evasive, as to whether these "appropriate standards" cover non-fraudulent cash bonuses paid out in accordance with a financial institution's contractual obligations. That determination, with all of its political hazards, was left for the Treasury Department.

So too with the meaning of "financial institution," which Congress effectively passed off when it inserted "but not limited to" in the term's definition. Treasury, as we know, took the extra slack and ran, dipping into TARP to finance an auto company bailout. It also made the most of EESA's invitingly loose definition of "troubled assets," which became the legal foundation for a range of extra-financial programs, including an ambitious campaign to provide lending support for homeowners and credit-worthy borrowers. Whatever the merits of these programs, courts will be primarily concerned with whether congressional intent was sufficiently fleshed out to allow for accurate and honest administration. Was Treasury, in other words, implementing the law pursuant to an "intelligible principle," or was it forced to make the law itself?

Congress's approach to TARP - perhaps to this entire crisis - is encapsulated in a list of factors the Treasury Secretary must consider in exercising his discretion. The list, which resounds with the commonplaces of a political platform, includes preventing the "disruption to financial markets," "the long-term viability of the financial institution," and, a personal favorite, the "interests of taxpayers." If you have trouble reading these "guidelines" without laughing, who's to say the same won't be true of a federal judge?


Previously by Sam Singer:
* Taking Government Out Of The Marriage Business


Sam Singer is a third-year law student at Emory University and a resident of Northbrook. You can reach him here.


Posted on March 19, 2009

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