Sunday, December 14, 2008

Did Congress Save the Day?
Mike Rappaport

According to Randy Picker, the provision here is the operative one in TARP as to whether the automobile companies can be bailed out.  The question is whether they are financial institution as defined as:

(5) 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.

Randy seems to be unsure about how to interpret this, but I am quite confident as to the correct interpretation.  This provision does not cover companies that manufacture automobiles.  First, automobile manufacturing companies are not financial institutions in the ordinary meaning of the term.  Second, the list of financial institutions all are what are traditionally regarded as financial companies, involving the provisions of finance or other monetary assets.  Third, while it is true that financial institution is defined simply as an "institution," the list of financial institutions would ordinarily limit the general term "institution" to institutions similar to those on the list -- that is, to financial institutions. 

Randy notes that Chevron deference may be applicable here.  But even if it is, I would say that treating automobile companies as financial institutions would still be incorrect (that is, it would violate Chevron Step One).

I say that I am confident as to the correct interpretation.  By that I mean, how the statute ought to be interpreted.  Whether the courts will follow the correct interpretation is, of course, another matter.  But here I am pretty confident that the courts will get this right, as it seems very clear to me.


Randy Picker, in the comments, asks a couple of good questions.  First, if the statute simply referred to institutions, rather than financial institutions, it would be likely to cover the auto companies.  But, of course, the statute makes clear in a couple of ways that it is much narrower than that.  The primary term is financial institution, not institution, and there is a long list of financial institutions. 

Second, “the including but not limited to” language is clearly intended to go beyond the list of listed institutions.  So if there is a different financial institution – say a hedge fund – it will be included as well.  

Let me make my point more broadly.  I think the language in the statute that seems broad – its reference to “institution” and to “including but not limited to” – is to be understood as indicating a broad meaning of financial institution.  So if an institution deals with financial matters, but it is not on the list or not within the core (but only the periphery) of traditional financial institutions, it might still be covered. 

But this language cannot be understood to cover institutions that are not even in the periphery of financial institutions – that is, institutions like automobile manufacturing companies, that are in the core of nonfinancial institutions.  Allowing those institutions to be covered would make nonsense of the term financial institution and the long list of financial institutions.

Finally, Steven in the comments mentions that GM holds 49 percent of GMAC, which owns through subsidiaries other financial institutions.  My comments above were focused on automobile manufacturers.  These subsidiaries are probably financial institutions, but that does not make GM – which is a separate institution – a financial institution.  The subsidiaries companies can receive assistance under TARP, but not GM.      

Update 2:

I should note that the most likely way that the statute gets interpreted to allow an auto bailout is if the courts feel pressured into believing that their action will have general negative economic consequences.  Courts don't want to be held responsible for general harm to the economy and that might lead them to approve the bailout.  My confident prediction above about what the courts would do is based on their applying the ordinary rules to this statute.  The bailout might not be ordinary for political and economic reasons.  Mind you, I am not taking back my previous views, except to say that political and economic pressure might cause them to behave differently.  I still think they will reject the bailout; I just think it might be closer -- in the real world -- than I said above.

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Mike Rappaport


GM holds 49 percent ownership in GMAC, whose wholly owned subsidiary "ResCap Holding" is the parent company of GMAC mortgage, GMAC bank GMAC real-estate which is the 4th largest real-estate brokerage in the US. SO i can see how it is not that far of a stretch to lump GM into the financial service category

Posted by: steven | Dec 14, 2008 5:19:12 AM

(1) If the term was just "institution"--and nothing else--who would qualify?

(2) What work is "including but not limited to" doing in your analysis?

Posted by: Randy Picker | Dec 14, 2008 10:43:01 AM