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.

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

Citigroup has received a massive federal bailout -- the largest to date, in fact. Today's Washington Post examines how a powerful trio of men -- Paulson, Rubin and Geithner -- worked to secure the deal. Turns out that Robert Rubin -- former Secretary of Treasury under Clinton and a Director of Citigroup -- is an old colleague of Paulson back from their days together at Goldman Sachs. Geithner, Obama's pick as Secretary of Treasury, worked for Rubin in the Clinton administration. Rubin made several calls to Paulson pressuring -- I mean persuading -- him to make a really big move with respect to Citigroup. Although it does not appear that Paulson will have a role in the Obama administration, Geithner will, and Rubin has acted in an advisory role for the president-elect on economic issues. Furthermore, Summers, Obama's Chief Economic Advisor, is a protege of Rubin. Could turning to these guys to fix the economy amount to "disease as cure"?

Read more here: Washington Post on Citigroup.

Obama Might Abandon Campaign Promise on Taxes, Names Economic Team; Plus: Rubinomics and Citigroup

Obama Names Economic Team
Although the rumor mill had already leaked the information, Obama named his economic policy team today. Tim Geithner will head the Department of Treasury, while his mentor Larry Summers will serve as the Director of the National Economic Council. Christina Romer will head the Council of Economic Advisors.

Source: CBS News

Rubinomics?
Members of the Democratic Wing of the Democratic Party are already up in arms over some of Obama's staffing decisions. Today's New York Times adds more coals to the fire in an article that links Obama's economic team with Robert Rubin, who served as Secretary of Treasury to Bill Clinton. Liberals and progressives blame "Rubinomics" for free trade and deregulation, which they argue caused job losses and the current credit crisis. The article states that:

The president-elect’s choices for his top economic advisers — Timothy F.
Geithner as Treasury secretary, Lawrence H. Summers as senior White House
economics adviser and Peter R. Orszag as budget director — are past protégés of
Mr. Rubin, who held two of those jobs under President Bill Clinton. Even
the headhunters for Mr. Obama have Rubin ties: Michael Froman, Mr. Rubin’s chief
of staff in the Treasury Department who followed him to Citigroup, and James
Rubin, Mr. Rubin’s son.

All three advisers — whom Mr. Obama will officially name on Monday and
Tuesday — have been followers of the economic formula that came to be called
Rubinomics: balanced budgets, free trade and financial deregulation, a
combination that was credited with fueling the prosperity of the 1990s [Editor:
And the recession of the 2000s].

Source: New York Times

Speaking of Rubin: Citigroup Gets Largest Bailout Package to Date
Citigroup, the troubled financial conglomerate where Rubin serves as a Director, will receive the largest federal bailout of any financial institution to date during the present credit crisis. Under the plan, the government will give Citigroup at $20 billion cash infusion and insure losses on the bank's $300 billion portfolio of bad debt -- largely from risky mortgage instruments. Geithner helped negotiate the bailout pursuant to his role as Chair of the Federal Reserve Bank of New York.

Source: Los Angeles Times

Obama: "No New Taxes"
Taxation became a major debate issue during the general-election campaign. McCain promised to cut taxes for the "middle class," but he also said he would maintain Bush's controversial tax cuts for high-income earners. Obama, by contrast, promised to cut taxes for the middle class, but raise taxes on upper-income earners in order to fund his social programs and to prevent an explosion in the deficit. Many economic experts argued that both candidates' plans (which involved higher spending and fewer taxes) would increase the deficit. McCain's plan, however, would cause greater injury to the deficit because it would not involve any tax increases (as would Obama's).

Now, less than one month after the election, it seems that Obama's tax plan suddenly looks like McCain's. According to Reuters, Obama's team is now considering abandoning its plan to impose new tax increases due to the poor state of the economy. Wasn't the economy bad a month ago?

Source: Reuters