THE LEGALITY OF THE BAILOUT

The historic financial bailouts of 2008 and 2009 may have been necessary, but experts are now rethinking whether they were legal, according to a commentary in today's Wall Street Journal. None of those extraordinary turning points—from the frantic American International Group rescue to the government's takeover of General Motors—has since faced constitutional review in the way, say, Guantanamo Bay detention cases have. Two years on, however, constitutional scholars are re-examining those fretful days, taking on the questions that went ignored in the frenzy to avert financial calamity. Their consensus: the Troubled Asset Relief Program, which sprayed some $475 billion into banks and finance companies, could stand up to the ghosts of Jefferson, Madison and Hamilton. The bailouts of GM and Chrysler, however, largely failed the constitutional test, said a number of scholars from across the political spectrum. They simply "were not plausible" under the law, according to one constitutional scholar, University of Virginia's Saikrishna Prakash.


The historic financial bailouts of 2008 and 2009 may have been necessary. But were they legal?

Deputy Money & Investing editor Dennis Berman discusses with WSJ's Evan Newmark the finding of a constitutional scholars who concluded that TARP was indeed legal, whether you agree or not that it was the right response.

We'll never really know; none of those extraordinary turning points—from the franticAmerican International Group rescue to the government's takeover of General Motors—has since faced constitutional review in the way, say, Guantanamo Bay terrorist cases have.

Two years on, however, constitutional scholars are re-examining those fretful days, taking on the questions that went unasked or ignored in the frenzy to avert financial calamity.

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

This is no academic matter. The limits of government intervention were supposed to be set by the passage of the Dodd-Frank Act, which provides a step-by-step guide for euthanizing sick financial institutions. Yet the next crisis will likely be something the 2010 Congress couldn't foresee. Just how tight is it willing to tie a president's hands? Thomas Jefferson himself noted that "to lose our country by a scrupulous adherence to the written law would be to lose the law itself..."

Associated Press

Speaking at a Senate hearing on the auto industry in December 2008, from left, General Motors' Richard Wagoner, auto workers' leader Ron Gettelfinger, Ford's Alan Mulally and Chrysler's Robert Nardelli.

In that spirit, the often ham-fisted responses of Presidents Bush and Obama largely fell within a president's emergency powers, said constitutional experts who convened at a Stanford Law School conference about the constitution and bailouts, the first of its kind. Intriguingly, former Treasury Secretary Hank Paulson's first draft of the $700 billion TARP bailout fund may have violated the constitution. Written in just a few pages, it appeared to give away too much spending power from Congress to the White House, said Mariano-Florentino Cuéllar, a Stanford Law professor. Congress voted down Mr. Paulson's original version and eventually crafted the slim TARP proposal into a 157-page law instead.

The TARP law still gave the Treasury sweeping powers to dole out bailout funds. Those powers would be difficult to grant in today's political climate, especially when the likes of Sarah Palin deride it for "morphing into crony capitalism at its worst."

Rash presidential responses are "somewhat inevitable, and part of the structure of the executive branch to respond more quickly" than Congress, said Gillian Metzger, a Columbia University law professor at the Stanford conference.

Even Prof. Metzger seemed skeptical of the U.S. involvement in another controversial constitutional issue: the GM and Chrysler rescues. Begun with short-term loans by President Bush, they were formed into full-fledged TARP bailouts in early 2009, eventually totaling nearly $80 billion in assistance for the car companies and related finance arms.

That assistance was originally designated by Congress to go to "financial institutions" as "established and regulated" under U.S. law. The law makes express mention of banks, credit unions, insurers and broker-dealers.

It doesn't, however, come close to naming industrial companies as beneficiaries. And that appeared to make it a different matter for Prof. Metzger, who wondered aloud about the legality of instances when "the executive branch engages in aggressive interpretation of statutory authority in ways that Congress prohibited."

Prof. Prakash said the auto bailouts were illegal, arguing that the Bush and Obama administrations said TARP didn't cover autos "until they decided they did." It is one thing to broadly interpret an emergency, another to violate specific language. "There is no suggestion that you can bail out any institution in the nation just because you've got the word 'institution' in the language," Prof. Prakash said. Some Chrysler creditors tried to bring a case to the Supreme Court, arguing that the car maker's government-controlled bankruptcy subverted the usual bankruptcy rules. The court declined to hear the case.

That was the best chance we had for judging tough legal issues around the government's financial-crisis response. Until an issue gets to the courts, we may find that what is legal may simply be what government can get away with.