With the Senate's rejection of a bailout for Detroit's ailing
automakers, there comes word that President Bush is actively
considering using funds allocated by Congress for the Troubled
Asset Relief Program (TARP) to prop up the automakers for the time
being. Such action would be legally wrong,
economically wrong, and counterproductive to turning around these
troubled businesses. By opening the door to virtually unlimited
uses of this money, a unilateral decision to employ TARP funds
would be an outrage to taxpayers.
Until now, the Bush Administration has resisted repurposing TARP
funds for industrial policy, though this morning comes word that
the Treasury may have reversed course. TARP, Administration
officials have said, was intended to shore up the stability of the
financial markets and stave off economic collapse, not to inject
capital into failing non-financial businesses. Moreover, only $15
billion remains of the initial $350 billion in TARP funds disbursed
More problematic, however, is Treasury's lack of statutory
authority to direct TARP dollars to the automakers. While the
statute, passed by Congress in October, grants the
Secretary extremely broad discretion to decide how to employ the
funds, it clearly limits the recipients to "financial
institutions." The definition of that term is quite clear:
FINANCIAL INSTITUTION- The term `financial institution' means
any institution, including, but not limited to, any bank, savings
association, credit union, security broker or dealer, or insurance
company, established and regulated under the laws of the United
States or any State, territory, or possession of the United States,
the District of Columbia, Commonwealth of Puerto Rico, Commonwealth
of Northern Mariana Islands, Guam, American Samoa, or the United
States Virgin Islands, and having significant operations in the
United States, but excluding any central bank of, or institution
owned by, a foreign government.
This definition does not leave much room for interpretation.
In this case, due to the enumeration of included
institutions in the statute, the term "any institution" is defined,
in part, by the list that follows it: "bank, savings association,
credit union, security broker or dealer, or insurance company." An
automaker is unlike any of these things, being a manufacturer of
goods, not a financial intermediary.
It is a closer, but still not close enough, question as to
whether the automakers' financing arms, such as GMAC, qualify. GMAC
is not a bank, having failed so far to qualify for such status. It
and other such financing arms are, to be sure, more like banks than
the divisions responsible for stamping sheets of steel into auto
bodies. But providing customer financing is a function that many
non-financial institutions, from department stores to bars and
taverns, engage in regularly. If merely offering loans or other
financing to customers would transform a manufacturer, wholesaler,
or retailer into a "financial institution," then any business in
the nation would qualify for TARP funding. This is an absurd
result, one that would render Congress's attempt to limit the pool
of "financial institutions" a nullity, mere surplusage without
meaning. This interpretation, then, must be rejected.
Even if the Administration were inclined to do so, it simply
lacks the power under the statute passed by Congress to tap TARP
funds to prop up auto manufacturers. This limitation makes sense:
Why else would have Congress spent the past month taking testimony
from auto executives and then crafting politically contentious
bailout legislation if the whole thing was unnecessary due to the
bailout back in October?
The Administration must reject calls for it to trample the law,
and accomplish an end-run around our representative democracy, by
moving forward with an automaker bailout. Giving in would be both
unprincipled and, ultimately, illegal.
Worst of all, such a bailout would be counterproductive.
Reorganization in bankruptcy continues to represent the best chance
for General Motors and Chrysler to survive and prosper.
Andrew M. Grossman is
Senior Legal Policy Analyst in the Center for Legal and Judicial
Studies, and James L.
Gattuso is Senior Research Fellow in Regulatory Policy in the
Thomas A. Roe Institute for Economic Policy Studies, at The
Emergency Economic Stabilization Act of 2008, Public Law