Truth or Dare: McCain Says He Was Misled Regarding the Bailout

Senator John McCain, who faces a tough reelection battle, says that he was misled regarding the details of the bailout. McCain says that he believed that the bailout would focus on the housing crisis, but that the money went to Wall Street companies, like AIG, and to the auto industry.

But Wall Street firms, including AIG, helped to create and were negatively impacted by the housing crisis. Also, the bailout legislation is drafted broadly and allows the government to purchase bad assets from "financial institutions" and other companies, regardless of whether the assets are mortgage-related.

Wall Street in Recovery

The New York Times is reporting that Wall Street is having a robust recovery -- thanks to generous financial assistance from the federal government.

Question for the extreme right: What "socialist" would pump money into the very financial institutions that fuel global capitalism? Hint: None!

Media Is More Interested in Rightwing Racism Than Rightwing Distortion, Deception, Lies, and Hypocrisy

I am a law professor who teaches Constitutional Law, Civil Rights, Race and the Law and other areas related to equality. I have spent nearly two decades researching and writing about race relations and public policy. With respect to the rightwing attacks on President Obama, however, I find the issue of race largely uninteresting.

I think it is safe to say that most Tea Party marchers, rightwingers, Joe Wilson, and many other anti-Obama types are not progressive on issues of race. Indeed, many of the participants in the protest marches have carried signs or made statements that show racial hostility. So -- yes -- some of Obama's critics harbor racial bias.

Nevertheless, it is impossible to psychoanalyze the entire opposition to Obama. Discussing this issue will do nothing but take the public's attention away from more important public policy concerns. Race is definitely an important social, political and legal concern, and the issue of race and access to healthcare is extremely important. But in this setting, there are far more pressing matters than the racial motivation of Obama's opponents.

Furthermore, even though racism informs some of the opposition to Obama, rightwingers have exhibited lunactic opposition to liberal and even moderate policies in the past (think Bill Clinton). Glenn Greenwald (of Salon) and I have both analyzed this topic.

What to Talk About Instead of Race
For over a month, conservatives have advanced gross distortions regarding healthcare reform. They have described it as socialism, Nazism, and totalitarianism, and they have argued that it would establish "death panels" to decide whether to "pull the plug on grandma." They have portrayed healthcare reform as an effort to harm seniors -- even though Republican John McCain proposed the very same cuts to Medicare that Obama has proposed. They have also condemned "government-run" healthcare, while pretending to support Medicare and TRICARE; these two programs, however, are forms of government-run healthcare.

Moreover, many of Obama's opponents have blasted "big government," but they want the federal government to reform tort laws in every state and to veto a doctor and patient's decision regarding abortion. Many of them also supported the unnecessary war in Iraq and the increasingly unpopular war in Afghanistan. They also endorse governmental regulation of some of the most intimate human relations, such as sex among consenting adults.

Conservatives blame Obama for the financial sector and auto industry bailouts -- even though the Bush administration proposed both bailouts and ushered the legislation through Congress. Bush also sharply increased the rate of government spending -- while cutting taxes. That disastrous fiscal policy turned a surplus into a record deficit.

I am not even intrigued by Joe "You Lie" Wilson's racial mindset. His prior work for Strom Thurmond and his reaction to the "unseemly" possibility that Thurmond had a "black" daughter indicate that Wilson is not the most advanced mind on issues of race and sex. But focusing on this obvious fact detracts from the content of Wilson's own "lies."

Wilson, for example, has rallied his conservative constituents against the inclusion of a public plan option in healthcare reform. Wilson makes typical Republican arguments regarding this issue, claiming that a public plan would interfere with doctor and patient relationships and reduce the level and quality of care. Wilson, however, has spoken quite fondly of TRICARE -- the government-run health system for military personnel, veterans and their families. Wilson and his children and their families are all on TRICARE. Wilson has said that TRICARE delivers "world class" medical care. Wilson has also noted that TRICARE receives high marks from participants.

TRICARE also establishes treatment options (just like private insurance) that define the contours of a doctor-patient relationship for patients who lack private insurance or the ability to self-pay. Wilson's contradictory positions on this subject are far more important than whether he hates Obama because he is black.

Conclusion
The issue of race has become the latest nonpolicy distraction for the media. Earlier, the media covered violence and mayhem at healthcare town hall discussions -- rather than the substance of reform. It then covered the conflicts between moderate and liberal Democrats (rather than the substance of reform). Now, it is exploring whether the opposition to Obama is racist (rather than the substance of reform).

Here's a thought: Analyze the substance of reform -- rather than the subjective emotions that shape its opposition. The media cannot tell us whether most of Obama's opponents are racist, but it can certainly unveil the hypocritical and deceitful nature of that opposition.

IMPORTANT NEWS ALERT: Former President George W. Bush Apparently Suffering from Acute Amnesia

An article in today's Washington Times indicates that former President George W. Bush is suffering from acute amnesia. The article covers a speech Bush delivered in Erie, Pennsylvania. After the speech, Bush answered questions from the audience.

The article reports that Bush, adhering to protocol that governs former presidents, declined to criticize President Obama directly. Bush's defense of many of his policies, however, implicitly criticize Obama (or at least validate many conservative critiques of Obama).

A closer reading of Bush's comments reveals that he is apparently suffering from acute amnesia. Bush, for example, stated that:

I know it's going to be the private sector that leads this country out of the current economic times we're in. . . . You can spend your money better than the government can spend your money.

This simple truism, however, hides some important issues, like the fact that Bush -- not Obama -- proposed TARP (or the "bailout") and signed it into law. Bush and Treasury Secretary Paulson advocated the passage of TARP on the grounds that pumping nearly $1 trillion of "our money" into the private sector would help end the financial crisis.

Furthermore, even after many Republicans criticized the idea of providing federal financial assistance to the automobile industry, President Bush (not Obama) proposed using TARP funds to bail out Detroit. TARP for banks and car companies began during the Bush administration, not with Obama.

To his credit, Bush resisted the opportunity to criticize Obama for closing the Guantanamo Bay detention center. Prior to leaving office, Bush said that he wanted to close the facility as well.

Nevertheless, Bush's comment on the danger of terrorists leaves the impression that he suffers from amnesia. For example, Bush stated:

[T]here are people at Gitmo that will kill American people at a drop of a hat and I don't believe that -- persuasion isn't going to work. Therapy isn't going to cause terrorists to change their mind. . . .

Although Bush mocked the idea of using therapy to reform terrorists, he sent many Saudi detainees from Guantanamo Bay to Saudi Arabia in order to participate in the "Prince Mohammed bin Nayef Centre for Care and Counseling" program, which uses a 12-step program, combined with therapy, to rehabilitate terrorists. The program enjoys mixed reviews, and some of the detainees Bush referred to the program have resumed their participation in Al Qaeda.

Furthermore, Bush seems unable to recall that President Obama apparently agrees with his comments about the dangers of Guantanamo Bay detainees. Obama, like Bush, has decided to use military tribunals, in addition to civilian courts, to prosecute suspected terrorists. Obama has also stated that the government will use the controversial practice of "preventive detention" for "dangerous" individuals who do not face prosecution in either civilian or military courts. The Washington Times article does not mention whether Bush acknowledged the overlap between his policies and Obama's policies related to terrorism, nor does it report the contradictions between Bush's words and his policies.

Finally, Bush seems unable to comprehend current proposals for health care reform. For example, he said that:

There are a lot of ways to remedy the situation without nationalizing health care. . . .I worry about encouraging the government to replace the private sector when it comes to providing insurance for health care.

Of course, President Obama has not proposed "nationalizing health care." Instead, at most, he supports a public plan option that will serve alongside private insurance. If this represents "nationalized" health care, then the country already has a nationalized system, because the federal government and the fifty states already serve as public payers of health care, under Medicare, Medicaid, the VHA, SCHIP, and various other programs. Although conservatives argue that an additional public plan option would cause the collapse of private insurance, this point is debatable, and it certainly is not a specific piece of Obama's proposals.

George Will Comes Clean, Demands "Judicial Activism"

Earlier this year, George Will wrote a column blasting the bailout as an unconstitutional delegation of legislative power to the president. Historically, the Supreme Court has been extremely reluctant to invalidate legislation as violating the "nondelegation doctrine." Furthermore, the Constitution clearly gives Congress power over the economy and the president the power to execute laws passed by Congress. Moreover, the bailout has received support during two sessions of Congress, from two presidents, and from two Secretaries of the Treasury. Consequently, after Will published his article, I described it as a demand for "judicial activism" from a conservative -- which seems to violate a sacred conservative principle. Nevertheless, Will has now come clean and made explicit his demand for an activist "conservative" Supreme Court.

See: More Judicial Activism Please.

Will is not the first conservative to demand judicial activism recently. Many conservatives, for example, have criticized certain rulings by Sonia Sotomayor, which closely follow the law, but reach outcomes that conservatives politically oppose.

Startling Discovery: Banks Want Federal Financial Assistance Without Strings Attached

The Washington Post has made a startling discovery: Banks want federal financial assistance without strings attached.

Earlier this week, Goldman Sachs announced that it would soon repay its "bailout" (or "TARP") loan and abandon the controversial program. But even though Goldman has pledged quickly to repay $10 billion it owes the federal government, the company has not promised rapid repayment of $28 billion in government-secured loans it received from private investors.

When financial markets froze last year, the government enacted TARP in order to provide direct financial assistance to banks. But in a separate program administered by FDIC, the government acts as the guarantor of loans made to banks by cautious investors. If the banks default on the loans, the government must pay the outstanding balance.

In addition, the Federal Reserve sponsors a discount lending program, which provides banks loans at a below market interest rate. The Federal Reserve does not disclose the list of beneficiaries.

After Goldman announced that it was pulling out of TARP, New York Times financial reporter Floyd Norris observed that the company was not forgoing governmental assistance altogether. Instead, Goldman elected to retain the benefit of $28 billion dollars in federally guaranteed loans -- not to mention nearly $12.9 billion in payments it received from AIG, which were undoubtedly funded by TARP assistance the embattled insurer received.

Companies Are Leaving TARP Because They Want "No Strings Attached" Federal Financial Aid
Today's Washington Post explains why companies are trying to repay TARP loans, while retaining the benefits of other government aid programs. The answer lies in the details of the various programs. TARP now has tougher conditions, including restraints on executive compensation. The FDIC loan guaranty program does not carry such restraints. Remarkably, banks want "free" money. [Note: "Remarkably" = sarcasm.]

The Washington Post reports that J.P. Morgan Chase has joined the list of banks that want to leave TARP. Jamie Dimon, the company's CEO, says that TARP is a "scarlet letter," and he renounces the idea of accepting additional funds from the government.

But while JPMC will rush to repay its $2.1 billion TARP loan, the company has no immediate plan to repay $40 billion in federally guaranteed loans it received from investors through the FDIC program. In fact, during the first week of April 2009, JPMC borrowed an additional $2.3 billion (which exceeds the amount of the company's TARP loan) through the FDIC program.

Irony: Is the Government Giving Banks the Money They Need to Get Out of TARP and Escape Restraints on Government Aid?
It appears that banks are taking advantage of governmental financial programs, such as the FDIC guaranty, in order to abandon TARP and its restrictions. Although the government has "toughened" requirements for TARP recipients, it provides less restrictive financial assistance to many of the same companies through other aid programs.

If the government provides banks with access to "unregulated" (or "less regulated") loans, the profits they make from lending this money could allow them to accelerate repayment of their TARP loans and evade the programs' tougher restrictions. At a minimum, government aid could free up other assets, which the banks could then apply to TARP payments. So, the government could actually fund banks' efforts to escape executive compensation limits that attach to TARP assistance. And if these firms subsequently participate in Tim Geithner's "toxic assets" purchase plan, they will receive additional governmental assistance that does not come with the conditions that TARP imposes, but which contains very generous risk formulas that allocate potential losses primarily to the government and potential gains primarily to private investors.

Unregulated Funds Can Generate Bank Profits
Furthermore, because banks that participate in the FDIC or Federal Reserve loan programs receive below market interest rates, they can make higher profits by using these cheaper money sources to finance their own loans to individuals and companies at higher interest rates. Accordingly, it is plausible that government aid has contributed to the sudden "profits" several banks have recently reported. As some commentators have argued, recent bank profits could in fact represent a government-sponsored windfall, rather than a real turnaround in financial markets.

Unequal "Welfare" Policies
Although the financial crisis warrants governmental intervention, it seems unconscionable to give many of the very companies that were largely responsible for causing the financial crisis easy access to governmental financial assistance. Furthermore, if the public supports extraordinary restraints on the receipt of governmental assistance for the poorest and most vulnerable persons in society, the public should demand similar concessions from bankers who want federal financial support. With some states callously considering whether to test recipients of unemployment assistance for drug use, it appears that the federal government is financing efforts by banks to escape politically popular restraints on the use of federal financial aid.

False Profits?

Suddenly, everything is coming up rosy for Goldman Sachs. After converting to a "bank holding company" last year and receiving $10 billion dollars in TARP assistance from the federal government, Goldman, formerly known as the nation's largest "investment bank," has shocked observers by posting a "profit." The company also sponsored a stock offering in order to raise funds to repay its debt to the government and to free itself from TARP.

Bye Bye December
Financial market analysts have approached Goldman's purported profits with skepticism. First, Goldman's earnings report excludes the entire month of December 2008. Floyd Norris, financial reporter for the New York Times, explains that Goldman converted to "calendar year," rather than quarterly reporting after it elected to become a bank holding company. Consequently:

Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s earnings statement, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ended in February.

The orphan month featured — surprise — lots of write-offs. The pretax loss was $1.3 billion, and the after-tax loss was $780 million.

In response to Norris' arguments, Goldman says that banking law requires the change in its reporting schedule. This change, however, does not undo the reality that under the old schedule, Goldman may not have earned a profit. According to Norris, Goldman has declined to disclose whether it would have earned a profit under its traditional reporting schedule.

The Goldman-AIG Connection
Another area of skepticism concerns the controversial $12.9 billion payment Goldman received from AIG -- the troubled insurance company that has received over $100 billion in TARP assistance. AIG "insured" Goldman's investments in risky mortgage-related assets. Even though the market has effectively deemed these assets "toxic" (i.e., worthless), Goldman recovered much more than the market value of its investment after AIG used TARP assistance to cover Goldman's risk.

Had AIG entered into bankruptcy like other banks and, presumably, as the automobile industry will soon do, it is unclear whether (and probably unlikely that) Goldman would have received far more than market value for the unsecured insurance policies. Accordingly, the bailout of AIG represented a major financial gain for Goldman.

After stating that the public's interest in Goldman's relationship with AIG has "mystified" him, Goldman CFO David Viniar dismissed speculation that Goldman's receipt of controversial payments from AIG allowed the company to realize a quarterly profit. Viniar said that most of the transfers from AIG occurred last year, and that the transfers from January to March 2009 "rounded to zero."

Viniar also stated that December 2008 transfers from AIG were "insignificant," but he does not provide any numbers. As Norris argues, however, Goldman has doctored its reporting by excluding December from its quarterly numbers altogether. Norris also questions whether Goldman's December losses would have been even larger absent the AIG transfers.

Goldman's "Fuzzy Math" Excludes $28 Billion In Government-Secured Loans
Goldman has only announced a plan to pay back $10 billion in federal loans that it received by participating in TARP. Goldman, however, borrowed an additional $28 billion on the open market, but the government acted as a guarantor on those loans. According to Norris, Goldman has no concrete plans to repay those loans, but the federal guarantee undoubtedly conferred value to Goldman.

Goldman's Competitors Are No Longer Around
The Bush administration decided to save AIG, which has undoubtedly benefited Goldman. Bush officials, however, refused to bail out Lehman Brothers -- which was Goldman's biggest competitor. Many of Goldman's other competitors (e.g., Morgan Stanley) were folded into other companies in distress sales.

Goldman's recent "profits" likely result in part from the elimination of other leading financial institutions as serious sources of competition. Because many former and current Goldman staff participated in the government's decision to bail out AIG and allow Lehman Bros. to collapse, AIG's survival and payment of billions of dollars to AIG has provoked a substantial amount of scrutiny and controversy.

Is the "Market" Skeptical Too?
How has the market reacted to Goldman's "good" news? Today, just one day after Goldman announced its profits and generated 1/2 of the money needed to repay its debt to the government, the company's stock fell 12 percent.

Not Exactly "Socialism": While Government Pumps Trillions of Dollars Into Banks, States Forced to Slash Aid to Vulnerable Persons

These are the kind of stories that make people question the nation's priorities. An article in the New York Times reports that 34 states have been forced to slash spending for indigent and vulnerable individuals. Because the "stimulus" package only covers 40% of the state budget shortfalls, states must either make budget cuts or raise taxes -- or both.

But securing the nation's safety net and investing in human capital seem like a smart uses for federal assistance. Human capital investments could help retrain people and prepare them for a modified, post-recession economy. Instead, the approach of both the Bush and Obama administrations has centered around rescuing banks, rather than individuals. Once the banks start lending again, the country will "live happily every after." This narrative sounds like a repacked and updated version of the heavily maligned "trickle-down economics" theory advanced during the Reagan era.

Here is a clip from the New York Times article:

Battered by the recession and the deepest and most widespread budget deficits in several decades, a large majority of states are slicing into their social safety nets — often crippling preventive efforts that officials say would save money over time

Perhaps nowhere have the cuts been more disruptive than in Arizona, where more than 1,000 frail elderly people are struggling without home-care aides to help with bathing, housekeeping and trips to the doctor. Officials acknowledge that some are apt to become sicker or fall, ending up in nursing homes at a far higher cost.

Ohio and other states face large cutbacks in child welfare investigations, which may mean more injured children and more taken into foster care. Despite tax increases, California has ended dental coverage for adults on Medicaid, all but guaranteeing future medical problems.

“There’s no question that we’re getting short-term savings that will result in greater long-term human and financial costs,” said Linda J. Blessing, interim chief of the Arizona Department of Economic Security, expressing the concerns of officials and community agencies around the country. “There are no good options, just less bad options.”

Important stories like these barely receive coverage. Well, at least we know that the President has a new puppy!

Big One from the Washington Post: Obama Administration Plans to Devise Scheme to Avoid Company Restrictions on Bailout Funds

This one is intriguing:

The Obama administration is engineering its new bailout initiatives in a way that it believes will allow firms benefiting from the programs to avoid restrictions imposed by Congress, including limits on lavish executive pay, according to government officials.

Administration officials have concluded that this approach is vital for persuading firms to participate in programs funded by the $700 billion financial rescue package.

The administration believes it can sidestep the rules because, in many cases, it has decided not to provide federal aid directly to financial companies, the sources said. Instead, the government has set up special entities that act as middlemen, channeling the bailout funds to the firms and, via this two-step process, stripping away the requirement that the restrictions be imposed, according to officials.

Perhaps Obama believes that "if" doling out trillions to the banks gets the economy (artificially) working again that people will forget that he is doing something that goes against his promises concerning transparency, accountability, and, ahem, change.

Source: Washington Post

More on Bailouts, Autos and Banks

Yesterday, I analyzed the differential treatment of the banking and automobile industry. Liberal websites like Daily Kos, however, have pointed out that CEOs at AIG, Fannie Mae and Freddie Mac were forced to leave their jobs as a condition of the companies they managed receiving federal assistance. But the government essentially "took over" these companies and has been running them since that time. The situation with the automobile industry is vastly different.

Today, Eugene Robinson of the Washington Post has joined others who have criticized the disparate treatment. The fact that Robinson has criticized President Obama is far more important than the substance of his criticism, because Robinson has been one of the most loyal supporters of Obama among journalists at major media outlets. As Robinson observes, the automobile industry certainly requires a tough love approach, but so does the banking industry.

The Editors of the Detroit News have also come out swinging against the disparity. The newspaper argues that the ouster of General Motors CEO Rick Wagoner was a political ploy designed to make the President appear tough on bailouts, given the public's anger over Wall Street. According to the Detroit News, the automobile industry is simply the scapegoat in a political game:

Obama has been banged around the last couple of weeks because of the bonus scandal at AIG. His administration, with the help of Congress, botched the aid package to the failed insurance giant, allowing the indefensible bonuses to be paid and triggering public outrage that is increasingly focused on the White House.

Dumping Wagoner lets Obama deflect attention away from Wall Street, where his Treasury Department is still moving through quicksand, and turn it on Detroit.

He can portray himself as being tough on the corporate executives who are ruining America, without having to draw blood from the bankers.

The White House's approach to Detroit, as opposed to the financial industry, applies a clear double-standard. The existence of a double-standard, however, does not mean that automobile manufacturers deserve leniency. Instead, both industries should face restructuring and greater controls.

The banking industry in fact deserves more scrutiny because its reckless behavior was the leading cause of the global financial crisis, and it has received far more federal assistance than any other business sector. Other than the relative political and economic power of Wall Street, it is difficult to understand why the government continues to coddle the banks and pay off their investors, while providing very little direct assistance to consumers and other commercial sectors.

Discriminatory Bailouts? $2 Trillion for Wall Street, Tough Love for Detroit

According to the Associated Press, the White House has demanded that Chrysler and General Motors restructure before the companies can receive additional financial assistance from the government. General Motors CEO Rick Wagoner resigned Sunday at the request of the White House, and federal officials are reportedly pressuring Chrysler to accept a partnership agreement with Fiat SpA. Ford, the third United States car manufacturer, has not received federal assistance and is not subject to White House plans.

Here is a clip from the story:

The White House says neither General Motors nor Chrysler submitted acceptable plans to receive more bailout money, setting the stage for a crisis in Detroit that would dramatically reshape the nation's auto industry.

President Barack Obama and his top advisers have determined that neither company is viable and that taxpayers will not spend untold billions more to keep the pair of automakers open forever. In a last-ditch effort, the administration gave each company a brief deadline to try one last time to convince Washington it is worth saving, said senior administration officials who spoke on the condition of anonymity to more bluntly discuss the decision. . . .

Question: Why Does Detroit Receive Tough Love, While Banks Are Waiting for the Next Trillion-Dollar Installment?
The White House approach to domestic automobile manufacturers seems rooted in an understanding that market forces have seriously eroded demand for their products and that management has not adequately responded to this reality. With respect to banks, however, the government has proposed tossing another trillion dollars into the very industry that is largely responsible for the global financial and economic collapse.

Based on the banks' culpability in the economic crisis, the better argument would have the White House make stricter demands on banks than automobile manufacturers. The fact that the banking bailouts dwarf the magnitude of federal assistance for Detroit warrants even greater caution regarding the financial sector.

Experts ranging from Nobel Prize winning economist Paul Krugman to famed Merrill Lynch analyst Richard Bernstein have argued that the government should abandon its heavy subsidization of financial institutions and their investors. They believe that the government should instead offer financial institutions a healthy dose of tough love in the form of either nationalization and restructuring (Krugman) or promotion of greater consolidation within the sector, rather than artificially inflating the price of and purchasing toxic assets (Bernstein). Even former Federal Reserve Chairman Alan Greenspan recently promoted the idea that "It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.”

Final Thoughts
The reality that the United Autoworkers union is a leading supporter of President Obama could potentially make the White House approach politically difficult. With that in mind, perhaps this is Obama's way of indirectly pressuring UAW to accept concessions. A tough public stance towards management could likely conceal the government's desire that UAW relent on issues such as compensation and benefits. On the other hand, a public standoff between the White House and labor would be politically damaging.

The cost-cutting and restructuring that the White House has demanded of the automobile manufacturers, however, would likely necessitate sacrifices by labor. Offering tough love to management could send a message to union leaders that they should approach negotiations with greater flexibility. Banks deserve the same type of treatment.

PS: I wrote a related article on this subject after Senator Dodd called for the resignation of automobile industry management earlier this year. Also, it seems others are making similar observations: CEO Change Begs Question About Banks.

Update: Some auto workers believe they are being punished because the public is upset with the banking bailout.

George Will Favors A More Activist Court: Argues That Bailout Law Violates Constitution

George Will has published an essay which argues that the Emergency Economic Stabilization Act of 2008 (or "EESA"), known affectionately as the "bailout" legislation, is unconstitutional. Will contends that the EESA violates the "nondelegation doctrine." This doctrine, rooted in the separation of powers, prohibits Congress from delegating its legislative authority. The Supreme Court, however, has applied this doctrine with a tremendous degree of flexibility.

Supreme Court precedent allows Congress to legislate in broad terms and delegate to the Executive Branch the authority to promulgate specific rules and policies that effectuate or give substance to the legislation. The Court only requires that Congress provide meaningful guidelines for the exercise of executive discretion. Chief Justice Taft's opinion in the 1928 case J.W. Hampton v. United States contains the most definitive language on this subject:

If Congress shall lay down by legislative act an intelligible principle to which the person or body [authorized to exercise discretion] is directed to conform, such legislative action is not a forbidden delegation of legislative power.

Will argues that the EESA "flunks" the intelligible principle test:

By enacting [the EESA], Congress did not in any meaningful sense make a law. Rather, it made executive branch officials into legislators. Congress said to the executive branch, in effect: "Here is $700 billion. You say you will use some of it to buy up banks' 'troubled assets.' But if you prefer to do anything else with the money -- even, say, subsidize automobile companies -- well, whatever."

Will analogizes the EESA to the hypothetical and dramatically vague "Goodness and Niceness Act," which Professor Gary Lawson describes in an essay that criticizes the granting of broad discretion to the Executive Branch by Congress. Lawson's hypothetical statute bans "all transactions involving interstate or foreign commerce that do not promote goodness and niceness," and it authorizes the President to "define [its] content . . . by promulgating regulations to promote goodness and niceness in all matters involving commerce and . . . specify[ing] penalties for violations of those regulations."

Will Overstates the Ambiguity of the EESA
The EESA undoubtedly gives the President and the Secretary of Treasury wide discretion (I have previously written an essay on the subject). Will, however, overstates the statute's ambiguity. The statute places parameters around the use of bailout funds by defining "troubled assets":

TROUBLED ASSETS.—The term ‘‘troubled assets’’ means—
(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary [of Treasury] determines promotes financial market stability; and

(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

Although the statute permits the purchase of "other financial instruments" that promote "financial market stability" but never defines the phrase "financial market stability," this does not mean that the law lacks an intelligible principle. The phrase is sufficiently specific and commonly used to qualify as an intelligible principle under Supreme Court's precedent.

Will Advocates A More Activist Judicial Role In This Area
If the Supreme Court applied the nondelegation doctrine in a more activist fashion, then Will's essay would present a more plausible constitutional argument. The Supreme Court, however, has applied the nondelegation doctrine with a high degree of flexibility.

Will correctly observes that "[s]ince the New Deal era, few laws have been invalidated on the ground that they improperly delegated legislative powers." Will fails to mention, however, that prior to 1935, the Court had never invalidated a law on the ground that it impermissibly delegated legislative authority. For almost the entirety of its existence, the Supreme Court has declined to use the nondelegation doctrine to constrain Congress.

In the 1989 case Mistretta v. United States, the Court upheld over a nondelegation challenge the creation of the Federal Sentencing Commission, which Congress authorized to promulgate sentencing guidelines for federal crimes. The 8-1 ruling, which united Justices as diverse as Rehnquist and Brennan, documents the Court's historically flexible approach to nondelegation questions:

[O]ur jurisprudence has been driven by a practical understanding that, in our increasingly complex society, replete with ever-changing and more technical problems, Congress simply cannot do its job absent an ability to delegate power under broad general directives.

"The Constitution has never been regarded as denying to the Congress the necessary resources of flexibility and practicality, which will enable it to perform its function." Accordingly, this Court has deemed it "constitutionally sufficient if Congress clearly delineates the general policy, the public agency which is to apply it, and the boundaries of this delegated authority."

Despite the Supreme Court's longstanding flexibility on this issue, Will believes that courts should declare the EESA unconstitutional. This act alone would compel a more activist stance by the judiciary.

Invalidating the legislation, however, would also require courts to defy the will of two presidents, two sessions of Congress, and the Secretaries of Treasury of two administrations -- who have supported the legislation. Democracy does not preclude judicial invalidation of laws that elected officials favor. Will's argument, however, is inconsistent with traditional conservative appeals to judicial deference.

Tangled Webs: Goldman Sachs, AIG and the Feds

Goldman Sachs Chief Financial Officer David Viniar held a conference call with journalists yesterday in an effort to calm a growing storm over the company's relationship with AIG. Goldman, like other investment banks, invested in and marketed "mortgage-backed securities," which AIG "insured" with "credit-default swaps."

The implosion in mortgage-related financial instruments, however, caused AIG to suffer enormous losses. The company ultimately required a massive governmental bailout because it lacked the resources to cover other companies' investment risk.

Goldman, AIG and TARP
After refusing to do so for many months, AIG recently released the names of companies it paid using TARP assistance. According to the disclosure, AIG has paid Goldman $12.9 billion.

Seeking to mute speculation that the federal government bailed out AIG in order to funnel billions of dollars in TARP assistance to Goldman, Viniar insists that even if AIG had entered into bankruptcy, Goldman would not have suffered financially. Viniar says that Goldman hedged its market exposure through agreements with third parties and had already received $7.5 billion in collateral from AIG prior to the company's insolvency.

But Viniar's comments raise other concerns. First, even though Goldman hedged its risks using third parties and had received collateral from AIG, it is possible that it would have received less money in a bankruptcy proceeding. Second, the close relationship between financial regulators and Goldman will undoubtedly create a wall of suspicion around the company, regardless of whether it benefited from the bailout. This suspicion will only grow deeper if it turns out that the government's decision to keep AIG alive helped Goldman, just as its decision to let Lehman Bros. implode necessarily helped Goldman because it removed one of the company's chief competitors from the market.

Bankruptcy versus Bailout
AIG avoided bankruptcy because of the federal bailout. If AIG had entered into bankruptcy, it is unclear whether Goldman would have recovered the same amount of money. For example, the government financed AIG's purchase of $5.6 billion in securities related to its agreements with Goldman. At the time of the purchase, however, the market value of the securities was 1/2 less than the contract price. Had AIG been in bankruptcy, it is highly unlikely that a judge would have allowed AIG to pay Goldman a price that greatly exceeded market value.

Also, a bankruptcy judge could invalidate (as a "voidable preference") the transfer of collateral or money from AIG to Goldman if the transfer took place within 90 days of the filing of the bankruptcy petition. Bankruptcy law disfavors payments to creditors on the eve of bankruptcy because they tend to benefit more powerful creditors and frustrate the underlying policies of bankruptcy law, which include the distribution of the debtor's assets to all creditors in proportion to the debt owed them. Early payments to an individual creditor could drain the debtor's resources and make them unavailable for a proportional distribution. It is unclear whether Goldman could have recovered from third-parties the same amount of money it obtained from AIG, but it is definitely debatable whether it could have extracted the same amount from AIG had the company entered into bankruptcy.

Tangled Web
Viniar's conference call will likely lead to greater scrutiny of Goldman's relationship to AIG because many influential politicians and banking industry executives have connections to Goldman and to the Treasury Department -- the federal agency that administers TARP.

Henry Paulson, Secretary of Treasury during the Bush administration, is a former Chairman of Goldman Sachs. Paulson was responsible for administering TARP, and he had a large role in structuring the legislation.

Robert Rubin, Secretary of Treasury during the Clinton administration, was a Co-Chairman of Goldman (along with Stephen Friedman -- see below) before he earned a Cabinet post. Although Rubin does not have a formal position in the Obama administration, he has served as an informal economic advisor to the President. Also, current Secretary of Treasury Tim Geithner worked as an assistant to Rubin (and later to Lawrence Summers -- former Secretary of Treasury and current head of Obama's National Economic Council) when he headed the agency. Paulson was also a partner at Goldman when Rubin was Co-Chairman.

Mark Patterson, Geithner's Chief of Staff, is a former lobbyist for Goldman. Obama waived his anti-lobbying rules in order to secure the job for Patterson.

Tim Geithner, current Secretary of Treasury, served as the President of the Federal Reserve Bank of New York until his current position. In that capacity, he helped to structure the federal bailout of AIG. Geithner, unlike many of the other individuals listed in this article, never worked at Goldman, but he worked for Rubin during the Clinton administration and for Summers, who replaced Rubin. Summers heads Obama's National Economic Council.

Stephen Friedman, the current Chairman of the Federal Reserve Bank of New York, was the Co-Chairman of Goldman with Rubin, and he has held several other executive positions at the company. In his current position, Friedman presumably will have a significant role in the ongoing federal bailout of AIG. Friedman also sits on the board of directors of Goldman.

Update: After discussing this issue with a friend of mine, I have an additional comment. Assume that the AIG bailout was a wise policy decision that coincidentally benefited Goldman. This still does not explain the differential treatment of Lehman Bros.

Although I mention the disparate treatment of Lehman Bros. in the original essay, I primarily discuss why bailing out AIG helps Goldman. But allowing Lehman Bros. to collapse helped Goldman tremendously, because it eliminated one of its main competitors. The deeper story may lurk behind this issue.

Misdirected Outrage: Public Should Bash the Feds for Giving AIG a "Blank Check"

The moralistic grandstanding from all sides of the political spectrum over AIG is nauseating to say the least. After hearing members of Congress propose some very questionable "legal" measures to recoup the $160 million in bonuses AIG paid some of its executives, I am convinced that AIG is the new Saddam Hussein. It is the leader of a financial "axis of evil." As with Iraq, the U.S. needs a smokescreen to mask its own bad decisions and complicity surrounding AIG and other financial institutions and to justify improper remedies for those mistakes. Get ready for a new round of "shock and awe."

Saddam Hussein, Iraq and the U.S.
Long before Bush I's Iraq War, the U.S. covertly (and perhaps illegally) supplied Hussein with weapons and intelligence data -- not because he was such a good guy, but because the government wanted to sponsor his eight-year bloody war against U.S. nemesis (and former regional buddy) Iran. Later, Hussein's own corruption and destabilizing behavior created an excuse for the U.S. to turn against its friend and to engage in imperialistic military action.

The "weapons of mass destruction" mantra became the rallying cry of the war machine. Absent from the political discourse, however, was any sustained conversation about the shady role the U.S. played in empowering Hussein, including tacitly supporting his prior use of banned chemical weapons. The construction of Hussein as an evil dictator with horrible weapons (presumably directed at the U.S.) allowed the government to conceal its own role in making him a supposedly dangerous individual.

Outrage Over Bonuses Masks Government's Role As AIG's Enabler
The Government Failed to Enact Reasonable Regulations to Protect the Investing Public. The U.S. propped up AIG long before the bailout. During the housing boom, AIG made billions of dollars insuring companies' investment risks with instruments known as "credit default swaps." The government, however, failed to regulate these instruments as "insurance," but instead treated them as securities.

Federal law requires insurance companies (and commercial banks) to maintain a certain level of "reserves" proportional to their outstanding risk portfolio. These reserve requirements protect the companies and the public by making sure that the companies can actually cover the risks they insure. These requirements, however, do not apply to investment instruments -- even if the investment instruments effectively operate as insurance and are issued by insurance companies.

AIG made enormous profits during the housing boom because mortgage-related financial instruments proved valuable as housing prices soared, home lending was robust and easy, and home values were skyrocketing. But AIG insured many extremely risky mortgage-backed securities that were formed by bundling subprime and other risky mortgage instruments. When the housing/lending party ended and homeowners started defaulting on their loans, AIG had to cover the losses of those companies with investments it insured.

AIG began losing billions of dollars, but it did not have the reserves to cover its outstanding risk portfolio. To save AIG -- and companies with investments it insured -- the government stepped in to salvage it. To date, AIG has received $170 billion in bailout assistance.

The Government Failed to Place Necessary Constraints on the Use of TARP Funds. During debates over the appropriateness of the bailout, many members of Congress stressed the need for accountability, transparency, and assistance to homeowners. But Congress passed legislation that gave the Treasury Department wide discretion to determine how companies used the money.

In January, some Democrats and Republicans in Congress threatened to block the release of the second $350 billion installment of TARP funds because they wanted more specifics concerning and restraints on the use of the funds. In response, President-Elect Obama marched to Capitol Hill and promised to veto such action. Congress released the funds after the President's veto threat -- an action that would have politically damaged the Democrats.

After his inauguration, President Obama came up with his own plan to create transparency in the use of TARP funds and to prevent wasteful practices among participants in the program. Most industry experts and news media, however, described Obama's regulations as being absolutely toothless. For example, it did not apply retroactively to companies that had already received TARP assistance.

Senator Dodd -- himself a recipient of millions of dollars in campaign donations from the financial sector -- proposed an amendment to the stimulus package that would have done much more than Obama's regulations to constrain the use of TARP funds. Specifically, Dodd's amendment would have severely restrained the ability of TARP recipients to pay executive bonuses, and it would have applied retroactively to companies like AIG that had already received TARP funds.

After the measure passed in the Senate, President Obama, Treasury Secretary Geithner and Economic Policy Advisor Larry Summers expressed disagreement with the provision, which exceeded the constraints in the regulation that Obama and Geithner had already created. At the time, The Hill published an in-depth report on the Obama administration's disagreement with Dodd's effort to constrain use of TARP funds.

Obama's Senior Advior David Axelrod stated that the administration would have a "dialogue" with Dodd in order to "come up with a good approach," an odd position to take given that the measure had already passed in the Senate. Perhaps Axelrod's statement was an indication of things to occur because the bill that emerged from the conference committee did not contain the retroactivity portion of Dodd's amendment and specifically stated that the bonus and salary restrictions did not apply to any employee contract that predated the passage of the statute.

Dodd denies agreeing to the change regarding retroactivity -- even though he voted for the stimulus package. Whether he did or not, it is clear that the Obama administration negotiated limitations on regulations that would have prevented payment of the very bonuses that Obama now finds so outrageous.

Public Will Be Duped Yet Again
The government, including some of its most outraged leaders, failed to regulate credit default swaps, and it resisted efforts to place stronger conditions upon the receipt and use of TARP funds. Now that AIG has become a political embarrassment for its enabler, the enabler is outraged. Regime change -- or at least "sanctions" -- will definitely follow.

Despite the trail of events that show governmental complicity in AIG's profitable-then-costly behavior, the government is skillfully exploiting populist opposition to corporate excess in order to mask its own actions that enabled AIG to transfer money from taxpayers to its executives and to avoid the consequences of its own financial recklessness.

Similarly, the Bush Administration manipulated the country's fear of terrorism and anger over the 9/11 attacks in order to justify waging a war against Hussein whom the U.S. had previously fed arms and other assistance so that Iraq could battle Iran, which had fallen into disfavor with the U.S.

Rather than scrutinizing the government's wrongful conduct, the public is once again falling for the rhetoric and smokescreen. Instead of focusing on AIG, voters should direct their attention to AIG's enabler: the U.S. government. The government essentially gave AIG a blank check. That action should anger the public more than AIG's subsequent use of the money.

Update: Glenn Greenwald is covering the Treasury Department's attempt to blame Dodd when actually the Obama administration demanded that Congress drop the retroactivity clause. Apparently, the New York Times is digging into the matter as well. The administration's "outrage" could potentially become an embarrassment itself.

Corporate Salary Caps: Reading the Fine Print

The Obama admnistration yesterday announced that it would impose a $500,000 cap on executive salaries at institutions that participate in TARP -- known affectionately as the "bailout." The policy comes after the public became outraged over reports of corporate jets, high salaries and other "shocking" details (yes - sarcasm) and lavish spending among TARP participants.

The Department of Treasury released an official statement of the policy. Here are some highlights.

The salary cap is mandatory only for executives at institutions that receive "extraordinary" assistance, or bank-specific agreements with the government, rather than the generalized assistance available to all banks. This is a smaller subset of TARP participants.

General TARP participants can waive the $500,000 salary restriction -- if they make the salaries public and explain why they are not excessive.

The salary cap does not include restricted stock awards.

Stock awards cannot vest until after the company has paid the government in full, plus interest -- or (a major exception) "after a specified period according to conditions that consider among other factors the degree a company has satisfied repayment obligations, protected taxpayer interests or met lending and stability standards." Translation: If the company becomes healthy again, the executives can get their stock awards.

My favorite is the anti-plane rule (my language). This do-nothing provision purports to establish policy related to "aviation services, office and facility renovations, entertainment and holiday parties, and conferences and events." The companies' boards of directors must adopt policies on these matters and place them on their webpages.

Oh, and these requirements do not apply retroactively to current TARP participants.

Update: LA Times article reports that corporate watchdogs say policy is pretty weak.

Republic Windows and Doors Received a Bailout from Chicago Before It Bailed Out of Chicago

This story gets deeper by the day, but only a few outlets are trying to paint a comprehensive picture. Thankfully, history will contain these alternative readings. The leading narrative describes the worker' sit-as a great historical moment in labor activism. I agree with that account. The rest of the dominant story, however, requires greater scrutiny and revision. While most accounts portray the workers' activism and political protests as a defeat of "greedy" banks, a closer look shows that this angle reflects fantasy more than reality.

Yesterday, I posted an essay that examines Republic Windows and Doors. To date, the company has been curiously missing from most accounts of the sit-in, even though it, not Bank of America, violated the workers' rights secured by state and federal law. While the company has basically escaped critical analysis, it is probably the most culpable player involved.

Although progressives have used this moment to vent anger over the bailout and banks, Republic Windows recently completed a series of transactions in which it shut down its Chicago factory, discarded its Chicago labor without providing the statutorily required notice, and purchased and combined its operations with a company located in Iowa where it can now process the same orders but pay workers less money. But due to misdirected progressive anger and a completely uncritical news media, Bank of America and JP Morgan Chase have provided financing to the company so it can complete these transactions and escape liability under labor law.

The Bailout No One Wants to Discuss
If that weren't already enough irony, it also turns out that Republic Windows and Doors, like Bank of America, received an enormous governmental subsidy, sometimes described as a "bailout." In 2002 and 2003, the company received $9.3 million from the Chicago to construct a new factory. Prior to the building project, the company threatened to leave the city, arguing that it had outgrown its space. Chicago provided the money using a development tool known as "Tax Increment Financing" (or TIF). Under a TIF setup, cities invest in development projects under the theory that the investments will generate higher tax revenue, as improvements to blighted areas increase property values. Chicago (and other cities) has created several TIF districts that fund various projects, hoping to profit from the development activity through future taxation. Now that Republic Windows and Doors has fled the scene, the whole theory behind the subsidy has evaporated. Some local politicians are trying to figure out how to recoup the city's subsidy. Good luck.

Republic Windows and Doors took $9.6 million from the City of Chicago, and now two banks have provided nearly $2 million to pay the company's debt to its employees. But the only villain in this story remains Bank of America. What interests are served by not telling a fuller story that includes scrutiny of this company? Given Chicago's deep history of political corruption, news media should at least try to determine whether any powerful individuals helped the owners of the company vanish from Chicago overnight, set up shop in another state, discard its workers, escape negative media attention, and avoid liability under state and federal law.

Possible Leads?
Some websites report that Chicago Monarch (sorry - I mean "Mayor") Richard Daley secured TIF funding for the company. According to a report by a Chicago NBC affiliate, Daley backed financing after previously expressing deep disagreement with the concept of TIF investments altogether. Also, his brother William Daley chairs the JP Morgan Midwest regional offices. Yesterday, JP Morgan extended $400,000 to the company for the purpose of paying the workers. And Governor Blagojevich abruptly banned Bank of America from transacting business with the State of Illinois one day prior to his arrest for trying to sell Obama's vacated Senate seat. Apparently, the bank gave in to the governor's pressure. All of these moves benefit the company primarily and the workers incidentally. Fox Mulder keeps coming to mind with this story: "Trust No One."

Related Readings on Dissenting Justice:

* MADE IN IOWA: Did Company in Chicago Sit-In Illegally Discard Its Workers and Quietly Relocate While Liberals Forced BOA to Pay for the Shady Scheme?

* Laid-Off Republic Windows and Doors Workers: Pawns in Political Football

Laid-Off Republic Windows and Doors Workers: Pawns in Political Football

The sad story concerning laid-off workers for Republic Windows and Doors has generated a lot of political attention and commentary. Last week, the employees began a "sit-in" at the company to protest its failure to provide them with adequate notice of a shutdown as required by federal and state law. Alternatively, the employer could avoid a violation by paying them wages and benefits for the statutory notice period. Since the sit-in began, politicos ranging from Jesse Jackson to Governor Rod Blagojevich have flocked to the scene to make statements in front of an unsurprisingly flocking news media.

Even President-Elect Obama (who is from Chicago) offered a statement today. He made the unassailable claim that "if they have earned these benefits and their pay, then these companies need to follow through on those commitments." Interestingly, most of the liberal websites have construed Obama's message as bold support for workers. But it is actually just an unimpeachable statement of the law. People should get money to which they are entitled from the source that owes them the money. Notice, he did not say that the company's creditors -- in this instance, Bank of America -- should pay its wages. Other politicians, however, have made this very claim.

Bank of America: Poster Child for Evil
Although federal and state laws require employers (not their creditors) to provide advanced notice to employees of an impending shutdown or mass layoff, Republic Windows and Doors failed to do so. Despite the fact that the employer potentially engaged in illegal conduct, most of the media coverage has focused on Bank of America, which apparently is the largest creditor of the company.

Bank of America has canceled the company's line of credit due to its lagging sales. Union leaders, workers and local politicians, however, blame Bank of America for the plight of the workers. Today, the Governor of Illinois threatened to ban state agencies from conducting business with Bank of America if it does not restore the company's line of credit. The City of Chicago is considering a similar provision. It is unclear whether the governor has the authority to impose this sweeping sanction upon Bank of America, but media commentary has not examined that issue.

Because the country is in the middle of a steep recession, it is probably true that Republic Windows and Doors cannot service its debt with Bank of America. Furthermore, because the company sells products for home construction and renovation, its business outlook is probably even worse than most others. The fact that the company cannot pay its workers without a line of credit demonstrates that it lacks sufficient cash reserves. And its decision to close the plant suggests a state of economic distress; the company is basically insolvent. On purely economic and business grounds, Bank of America probably made a sound decision. Given these factors, Bank of America's decision to deny additional credit probably would not have generated any attention in an average year. Because the country is in a recession and unemployment is soaring, the situation in Chicago has captured public attention.

Republic Windows and Doors: Guilty But Innocently Portrayed
Republic Windows and Doors likely made a good deal of profits over the last four or five years while the "housing boom" was in full effect. Now that the situation has turned around dramatically, the company has decided to let go of its workers (at least at this one facility). The company knows that it has potentially violated the law (unless it can avail itself of an exception to the notice requirements). But the company can minimize bad press if it allows the workers -- who blame Bank of America -- to occupy its premises unimpeded. This does not alter the reality that the company is probably the only culpable party from a legal perspective. Despite this fact, the governor has threatened to penalize Bank of America, not Republic Windows and Doors.

As much as I want a remedy for the workers, this one makes me feel uneasy. In the 1990s, conservative states threatened to sever ties with liberal corporations because they adopted policies prohibiting anti-gay discrimination. Also, if Bank of America loses all business with the state, it could cost local workers their jobs as well. My greatest discomfort stems from the fact that one person believes he can stop Bank of America from doing business with the state. A decision of this magnitude should probably receive public deliberation, rather than an edict from one person. Other liberals have admitted feeling uncomfortable, but praise the decision anyway.

Essentially, the politicians and other supporters of the employees are attempting to shift liability for unpaid salary and benefits to the insolvent company's creditors. This far ranging legal question deserves more sensitive analysis than the current situation has generated. Because many companies shut down or lay off a large number of workers due to insolvency, workers will often remain unpaid or only partially paid, despite the existence of federal and state law that establish their right to notice. Typically, bankruptcy courts deal with these issues. But now, the issue provides photo opportunities for politicians. CBS News, for example, reports that Jesse Jackson delivered 300 turkeys to the employees. With additional political appearances, the situation could turn into a Terry Schiavo/Elian Gonzalez moment.

Bailouts
The sit-in brings to light deficiencies and misunderstanding surrounding the bailout. In a previous blog entry, I lauded the protesters for bringing some of these problems to light in their protests, but that was in advance of Monday's political circus. Most of the politicians involved in the situation, as well as the liberal commentary concerning it, have all argued that Bank of America refuses to follow the will of Congress by withholding money from a distressed debtor. Bank of America received or is slated to receive $25 billion as part of the "Capital Purchase Program." Under this plan, the government infuses funds into banks in exchange for shares of senior preferred stock. Technically Bank of America has received only a portion of the funds. It reportedly received $15 billion in November, and will get an additional $10 billion to complete its acqusition of Merrill Lynch.

Once the economy improves, the government itself could profit from investing in the banks. This plan is not a mere "handout" as many people have portrayed it. Although it provides a remedy for horrific banking and consumer decisions over the last five years, it is probably a necessary measure to keep money flowing in the sluggish economy.

The bailout legislation, however, does not alter lending parameters. Most of the details of the legislation focuses on executive salaries and government ownership of stakes participating companies -- not on subsequent lending decisions by the banks. It is unclear whether extending additional credit to Republic Windows and Doors even makes sense, given the sharp decline in home building and renovation. Ultimately, this is a problem for bankruptcy law, but it is now clouded by political rhetoric that exploits public frustration with the economy and the bailouts. But if Bank of America is correct from a legal and economic perspective, the political discourse coming out of Chicago stands on a complicated ground.

Immediate Assistance for Families: Lost in the Shuffle
As I read the proliferating and increasingly politicized coverage, I wonder primarily about the welfare of the families. While the governor has threatened to ban Bank of America from conducting business with the state (despite the bank not violating any laws), has he mobilized state and local authorities to expedite unemployment, health care, and other social services for workers who need immediate assistance? Have local officials done the same? Does Illinois have business assistance programs which could help this company and others avoid insolvency? At a minimum, the laid-off workers need assistance finding and adjusting to new employment (if such exists). Perhaps Illinois should implement and mobilize its own assistance programs rather than pretending that the bailout legislation was designed to settle every liquidity issue in the entire nation. This situation seems to scream for some type of social safety net. But apparently, local politicians do not wish to commit the state to providing relief.

Will this situation lead Obama to lobby for more direct assistance to consumers? He has signed on to the banking bailout and will probably support the automaker assistance package. His economic advisors include Secretary of Treasure designate Tim Geithner and Robert Rubin who held that position during the Clinton-era. Together with Paulson, they worked tenaciously to construct the largest bailout package to date for Citigroup, where Rubin currently serves as a Director. Senator Dodd, who chairs the Senate Banking Committee, argued that executives in the auto industry could lose their jobs in exchange for their companies receiving assistance, but he did not make the same demand of banks. Nevertheless, automakers will soon receive their assistance package. Where exactly is the plan for working people? Although the bailouts seek to keep money flowing through the economy in order to fuel economic activity that, in the long run, will help consumers, direct assistance can help them as well -- and perhaps more immediately.

Engaging in Political Discourse Without Miseducating the Public
Liberals are understandably moved by the workers' protest. I am as well. But unless they hold conservative and liberal politicians accountable for remedying or at least providing some relief for this situation, then neither group will have the incentive to deliver true reform. I admire the workers' protest and empathize with their plight. Beyond that, I am purely disturbed by the political theatrics this situation has invited.

Attacking Bank of America for a solitary business decision will not solve the broader problems faced by the workers, who will lose their jobs anyway and collect their unpaid wages either because Bank of America bows to political pressure or because the company goes into bankruptcy and the workers receive some portion of the money owed to them. Leading the public to believe that banks must lend to any person or business seeking money simply because they receive federal assistance does not advance public discourse. Sloppy lending practices created the current economic situation; continuing this practice will not cure it.

Related Readings on Dissenting Justice:

* What Did Obama Really Say About the Chicago Sit-In? Depends on What the Meaning of "If" Is

* Dodd's Discriminatory Bailout: "Regime Change" for Main Street, But Not for Wall Street?

* Factory Closes in Chicago; Workers Invoke Bailout During Protest

* Paulson, Geithner and Rubin: How the Big Three "Hooked Up" Citigroup

* Was GOP's Opposition to Bailout a Clever Ploy? Concessions for House Republicans Could Increase Budget Deficit, Make Plan More Expensive

* READING THE FINE PRINT: BAILOUT IS STILL A DEAL PRIMARILY FOR BANKERS

* Bringing Back Welfare As We Knew It: My Indignant Take on the Wall Street Bail-Out

Dodd's Discriminatory Bailout: "Regime Change" for Main Street, But Not for Wall Street?

_________________________________________________________________
What the media are not saying about the Chicago workers' sit-in:

* MADE IN IOWA: Did Company in Chicago Sit-In Illegally Discard Its Workers and Quietly Relocate While Liberals Forced BOA to Pay for the Shady Scheme?

* Republic Windows and Doors Received a Bailout from Chicago Before It Bailed Out of Chicago

* Laid-Off Republic Windows and Doors Workers: Pawns in Political Football]
_________________________________________________________________


Regime Change in Detroit?

Senator Christopher Dodd, who chairs the Senate Banking Committee, has argued that Richard Wagoner, the CEO of General Motors, should resign before the troubled automobile manufacturer receives federal financial assistance. And this morning, he has broadened those comments to implicate all automakers: "'[I]t's not my job to hire and fire, but what I suggest is, you need to have new teams in place here . . . if you're going to convince the American public' that the financial relief plan is necessary and justified" (italics added). Dodd also believes that Chrysler and GM will probably have to merge so that both companies can survive. My question for Dodd: Why did you fail to demand "regime change" among Wall Street recipients of federal aid?

President-Elect Barack Obama was less direct when he addressed the issue. During an appearance on Meet the Press, Obama said that the issue of mandatory changes in leadership "may not be the same for all companies." At press conference following the show, however, Obama offered an additional perspective on the issue:

If the management team "that’s currently in place doesn’t understand the urgency
of the situation and is not willing to make the tough choices and adapt to these
new circumstances, then they should go. . .If, on the other hand, they are
willing, able and show themselves committed to making those important changes,
then that raises a different situation . . . .”

Although Obama refused to define what "changes" he envisions or to take a position regarding a specific company or executive, his statements together with Dodd's comments show a new toughness among Democrats towards potential recipients of federal "bailout" assistance. During the general election campaign, members of Congress engaged in bipartisan rhetorical grandstanding and promised to place numerous conditions in the bailout package. The final statute, however, gives very broad discretion to the Secretary of the Treasury (see my analysis here). Now, Democrats have indicated that they might require company executives to step aside as a condition of receiving federal money. That's very tough talk.

Why No Regime Change on Wall Street?

But I am trying to understand why replacing corporate management has only recently become a possible prerequisite to the receipt of federal assistance. The various financial institutions that have received federal assistance face poor economic conditions because they recklessly decided to engage in risky -- but lucrative -- mortgage lending, bundle those mortgages and sell them as securities, or invest in securitized mortgage assets. Citigroup, the recent recipient of the largest financial bailout to date, engaged in all of these practices through its various divisions. Flawed managerial decisions led to these bad investments and to the present erosion of available credit. If Congress wants "heads to roll" before assisting companies, this same logic should apply evenly to all economic sectors.

In many ways, however, the auto industry could be less culpable for its financial woes than the banks were for their own problems. Auto companies lend money to purchasers and probably made poor choices during the recent "easy credit" run. They can also invest in risky mortgage-backed securities. But most of their trouble today results from not having sufficient money to conduct prospective business, rather than from the unraveling of prior investments. They do not have access to credit precisely because the bank crisis has caused credit to tighten. Prospective car purchasers also face difficulty securing loans, which exacerbates the situation (see this article in Forbes on the subject and on a potential remedy). Irrational exuberance in the housing market caused most of this problem. The greatest blame lies with financial institutions, mortgage brokers, realtors, home builders, state and federal regulators, and home buyers. The auto industry does not deserve tougher restrictions than Wall Street.

Then Why Treat Wall Street and Main Street Differently?

The Election is Over
Perhaps the Democrats feel safe taking a tougher position with companies seeking federal assistance now that the election has taken place. Even though most voters disagreed with the banking bailout, they also felt that not supporting the legislation could harm the economy. The House Republicans received a fair amount of criticism for blocking the initial plan. Democrats probably wanted to avoid similar complaints.

Financial Institutions Give Much More Money to Political Candidates Than Automakers
Another, more ominous explanation for the disparate treatment of automakers relative to banks could involve campaign financing. According to research completed by the Center for Responsive Politics, Dodd, who chairs the Senate Banking Committee, tops the donor recipient list of several banking institutions. Furthermore, members of Congress who supported the bailout received far more money in campaign donations from financial institutions than legislators who voted against the bill. In the House, legislators who supported the bailout received 51% more in campaign contributions from banks, and in the Senate they received twice as much (see here and here).

Automakers also contribute to candidates, but they do not donate nearly the same amount as banks. According to data compiled by the Center for Responsive Politics, automakers split their donations among the two major parties during the recent election cycle, but they contributed only a fraction of the money that financial institutions gave (The Center for Responsive Politics website has a tool that permits readers to research campaign donations by industry.). Keep in mind that donations come from individual employees and their political action committees. Auto workers will have less money to donate on average than Wall Street bankers. Car dealers donated more money than automakers, but most of it to Republicans. Furthermore, their donations do not compete with those of financial institutions. Given the role of money in politics, it is difficult to deny some degree of industry capture with respect to regulated entities and regulators.

Update: I have not found any major media coverage of this particular dimension of Dodd's comments, but I did find this entry by Deb Cupples on the Buck Naked Politics blog. Blogs can provide a wonderful alternative to popular news sources.

Factory Closes in Chicago; Workers Invoke Bailout During Protest

Republic Windows and Doors closed its Chicago-based factory without giving workers the 60-days notice that federal law requires, according to a spokesperson for United Electrical Workers, which represents employees. A similar state law provision requires that workers receive 75-days notice.

The plant closing is both a sign of the vanishing United States manufacturing sector and the recent economic downturn. The company, which sells windows for use in home construction, has suffered tremendously due to the sluggish economic conditions, which are even bleaker in the housing market.

Employees, however, have decided to engage in creative protest. Since last Friday, they have occupied the factory and say they will remain inside unless the company promises severance and vacation pay. Employees also invoked the Wall Street bailout in their protests. Bank of America, a creditor of Republic Windows and Doors, canceled the company's line of credit, which apparently prevents it from paying workers. Employees used the situation to politicize the disparate levels of federal relief that financial institutions have received relative to manufacturing and other commercial sectors:

"Across cultures, religions, union and nonunion, we all say this bailout was a
shame," said Richard Berg, president of Teamsters Local 743. "If this bailout
should go to anything, it should go to the workers of this country."

Outside the plant, protesters wore stickers and carried signs that said,
"You got bailed out, we got sold out."

I think the workers made a great decision to bring the disparate treatment of "Main Street" and "Wall Street" to the table. Both parties and presidential candidates made decisions that favored monied interests. None can claim innocence.

Legal Issues: It is difficult to analyze legal issues from media accounts of this situation, particularly because the reports only present the opinion of the union. Furthermore, I have not located any analysis from labor law experts on this subject.

While the federal Worker Adjustment and Retraining Notification Act requires companies with over 100 full-time employees to provide notice to workers 60 prior to a shutdown or mass layoffs, it contains a couple of exceptions that could operate in this situation. The law does not require notification when a shutdown or mass layoff results from "unforeseeable business circumstances" that preclude timely notice. It also does not require notice from a "faltering company," when announcing a shutdown could hinder the company from seeking financing which would keep the business running.

The Illinois law on this issue contains similar exceptions. The media reports, however, do not permit a determination regarding the potential applicability of these exceptions.

Related reading: Dodd's Discriminatory Bailout: "Regime Change" for Main Street, But Not for Wall Street?

Enough Criticism, Senator Obama. Where Is Your Plan to Help Homeowners?

Today, just about every major media outlet and blog deeply scrutinized Senator John McCain's stunning proposal to commit federal funding to purchase mortgages of distressed homeowners and reissue them with more favorable terms. McCain, who admitted borrowing the idea from Senator Hillary Clinton, has altered the plan somewhat during the day, but it remains the only standing plan among the two candidates that details a strategy for providing direct assistance to homeowners.

McCain's plan certainly deserves scrutiny. First, it seems like a calculated political ploy designed to grab voters who are not sold on his ability to manage the economy. Second, there are legitimate valuation and feasibility issues that cloud the plan. Accordingly, I am happy to see specialists examine the fine print.

I am shocked, however, that the media have not asked the following question of Obama: Senator Obama, where is your plan? Today, Obama, armed with press accounts, came out swinging hard against McCain's plan. He did not, however, offer an alternative approach. This is surprising because one of Obama's most salient messages during the recent economic upheaval is that he, not McCain, understands the economy, will bring change from the last eight years, and would protect the middle-class. He even lambasted McCain for not specifically saying "middle-class" during the first presidential debate. Yet, his campaign has not designed a mortgage plan for distressed homeowners. Liberals and progressives should demand more. Saying middle-class does not pay the mortgage.

We should definitely want more details from Obama in light of the fact that:

1. He voted for the bailout legislation which actually authorizes the federal government to purchase individual mortgages and minimize foreclosures. The statute, however, is extremely light and vague when it comes to homeowner relief. It is almost exclusively aimed at providing relief to companies. Essentially, Congress has delegated authority to the executive branch to promulgate rules for helping homeowners. Accordingly, I would like to see how both candidates would "fill in the blanks."

2. Obama is rightfully concerned with the cost of McCain's plan. But Obama voted for the bailout legislation, which leaves it to the Secretary of Treasury to determine how to value assets the government purchases under the plan. Accordingly, I would like to see how an Obama administration would value these assets and how the terms of a reissued mortgage would look. Right now, I assume that Obama would not pay full value for the mortgages and then reissue them at the current, depreciated market value. Beyond that, he has not specified what he would do. Regardless of the merits of his plan, McCain has put the cards on the table. I commend McCain for doing this, even though I do not share his political ideology and even though I'm convinced that this is a political tactic.

I am not a Republican, and my political leanings are much more in sync with the Democrats, than the Republicans. Nevertheless, I want my party's candidate to create a specific plan for homeowners, rather than simply criticize McCain on this important issue. More importantly, I want the media to ask tough questions of both candidates. Candidates have no incentive to answer questions not asked of them. So unless the big networks take on this issue we will only hear from McCain, who had to do something to get voters' attention. My cynical side tells me that McCain is just playing politics, and my understanding of economics leads me to question its feasibility, but at least it's a plan. That must count for something, right?