lawless policy: tarp as congressional failure, cato policy analysis no. 660

8/14/2019 Lawless Policy: TARP as Congressional Failure, Cato Policy Analysis No. 660

1/28

The U.S. Constitution vests all the legislativepowers it grants in Congress. The SupremeCourt allows Congress to delegate some authorityto executive officials provided an intelligible prin-ciple guides such transfers. Congress quicklywrote and enacted the Emergency EconomicStabilization Act of 2008 in response to a financialcrisis. The law authorized the secretary of theTreasury to spend up to $700 billion purchasing

troubled mortgage assets or any financial instru-ment in order to attain 13 different goals. Most ofthese goals lacked any concrete meaning, andCongress did not establish any priorities among

them. As a result, Congress lost control of theimplementation of the law and unconstitutional-ly delegated its powers to the Treasury secretary.Congress also failed in the case of EESA to meet itsconstitutional obligations to deliberate, to checkthe other branches of government, or to beaccountable to the American people. The imple-mentation of EESA showed Congress to be large-ly irrelevant to policymaking by the Treasury sec-

retary. These failures of Congress indicate that thecurrent Supreme Court doctrine validating dele-gation of legislative powers should be revised toprotect the rule of law and separation of powers.

Lawless PolicyTARP as Congressional Failure

by John Samples

_____________________________________________________________________________________________________

John Samples is director of the Center for Representative Government at the Cato Institute and the author of TheStruggle to Limit Government: A Modern Political History(Cato Institute, 2010).

Executive Summary

No. 660 February 4, 2010


2/28

Introduction

The Emergency Economic StabilizationAct of 2008 created the Troubled Assets Re-

lief Program, which is authorized to spendup to $700 billion buying financial instru-ments from banks and other institutions.Congress considered, wrote, and enactedEESA in nine days in the early fall of 2008.Those days passed in an atmosphere of crisisif not panic. A few weeks earlier, the federalgovernment had seized Fannie Mae andFreddie Mac, two government-sponsoredenterprises tied to home mortgages, afterweeks of speculation that the two might fail.Two weeks prior to passing the law, Lehman

Brothers investment bank failed because oflosses on mortgage securities, and MerrillLynch, the nations largest brokerage, accept-ed a merger with Bank of America to avoidbankruptcy. A day later, federal officials tookcontrol of American International Group, aglobal insurance firm threatened by creditdefault swaps tied to mortgage investments.On September 25, as Congress consideredEESA, the nations largest savings and loanassociation, Washington Mutual Bank, col-lapsed and was sold by federal regulators to

JP Morgan Chase.1In confronting this crisis, the executive

branch and the Federal Reserve acted on itsown authority up to a point. Yet by mid-September, the Federal Reserve chairmanconcluded that Congress should be involvedto authorize additional spending to militateagainst the crisis.2 Bernanke believed the Fedwas already doing all that it can with thepowers we have and in any case, historyshowed that all parts of government need-ed to be at work to successfully resolve a

financial crisis.3 Later, addressing PresidentBush, Bernanke stated that Treasury, not theFed, should be dispensing funding and thatwould require congressional approval.4 Thatthey sought authorization for TARP showsthat Federal Reserve officials and members ofthe executive branch were operating at whatthey took to be the limits of their authority.

The evidence does not suggest either Fed orTreasury officials knowingly acted ultra viresin combating the crisis.5 They sought legiti-macy for their actions through law.

Unfortunately, the story of EESA is a story

of congressional failures.

6

The U.S. Constitu-tion establishes a government of delegatedand divided powers. Congress is a separatebranch that should check and balance the oth-er branches to limit government. The Framersalso hoped Congress would deliberate aboutlaws rather than simply follow the passions ofthe moment. Finally, the Constitution gavethe legislature the power to make laws. Thefirst section of the first Article of the U.S.Constitution vests all legislative powers inCongress. These powers cannot be transferred

to any other person or body. The Constitutionempowers Congress to make law but not tomake legislators.7 As the Supreme Court hasacknowledged, the system of governmentordained by the Constitution mandates thatCongress generally cannot delegate its legisla-tive power to another Branch.8

This stricture notwithstanding, Congresshas frequently granted power to the executivebranch or independent agencies. The SupremeCourt has validated such grants, providedCongress lays down by legislative act an intel-

ligible principle to which the person or body[exercising delegated authority] is directed toconform.9 This nondelegation doctrine led tothe Supreme Court overturning part of theNew Deal legislative program which, in turn,actuated a presidential threat to the judiciaryand subsequently a more compliant judicia-ry.10 Consequently, for much of the time sincethe New Deal, the courts have failed to over-turn even egregious instances of standardlessdelegation.11 It remains true, however, thatthe nondelegation doctrine and the intelligi-

ble principle test have not been overturnedand remain good law.

In the so-called Benzene Case,12 JusticeWilliam Rehnquist explicated the nondelega-tion doctrine. First, he argued the doctrineensures to the extent consistent with orderlygovernmental administration that importantchoices of social policy are made by Congress,

2

The story ofEESA is a story of

congressionalfailures.


3/28

the branch of our Government most respon-sive to the popular will. Second, Congressmust provide an intelligible principle toguide the exercise of the delegated discretion.Third, such a principle provides the judiciary

with ascertainable standards to assess thevalidity of a delegation.13

I focus here on the first part of Rehn-quists analysis. Congress can choose theends and the means of public policy. Of thetwo, the ends would be more important sincethe goals of a policy should determine itsmeans. The goals of a policy would also beessential to administrators as a guide to exer-cise delegated discretion and to judges as ameans of assessing the validity of the grant ofpower. Congressional control over the goals

of a policy thus advances the rule of law.Rehnquist notes the importance of Con-gress, the branch closest to the popular will,in making important policy choices. Con-gress, and the voters who elect its members,are interested in and as capable as anyone elseof choosing among such goals and the gener-al values they embody.14 In this way, congres-sional determination of the goals of policiesserves democratic values.

Rehnquists analysis implies that ifCongress is to make the important choices

for policy, it should determine tradeoffsamong goals and the values they embody.15 IfCongress stipulates a hierarchy of ends for apolicy, both those who implement the law(agency personnel) and those who enforce thelaw (judges) would have a foundation to assessthe constitutionality of a delegation. IfCongress simply sets out the ends of policyand assigns no priorities among them, neitherthe holder of discretion nor a court wouldhave a guide to implementing or assessing thelaw. Moreover, in this latter case, Congress

could not be said to have made the importantchoices affecting a policy. The choice might bemade by the recipient of a delegated power tothe detriment of both the rule of law and pop-ular control of government.

The first section of this analysis will showhow Congress failed to fulfill these constitu-tional obligations prior to passing EESA. The

second section will examine how its failure tolegislate deprived Congress of influence overthe implementation of EESA. The conclud-ing section explores the implications of thiscase study for Congress and for constitution-

al doctrine.

Enacting TARP

What should we have expected fromCongress regarding the financial crisis of2008? Article I of the Constitution vests alllegislative powers in Congress. We shouldexpect Congress to exercise those powersrather than delegate them to others. Congressis one branch of American government, a part

of a system of checks and balances designed tolimit political power and its abuses. We shouldexpect Congress to check and limit the otherbranches of government. Congress is alsomeant to be a deliberative institution thatcarefully considers its legislative duties.Finally, Congress is part of a republican gov-ernment and thus should be accountable tothe people of the United States. On each ofthese counts, Congress came up short withregard to EESA.

The Rule of Law

The EESA authorizes the secretary of theTreasury to establish the Troubled Asset Re-lief Program (or TARP) to purchase, and tomake and fund commitments to purchase,troubled assets from any financial institution,on such terms and conditions as are deter-mined by the secretary, and in accordance withthis Act and the policies and procedures devel-oped and published by the secretary.16 It

defines troubled assets as residential orcommercial mortgages and any securities,obligations, or other instruments that arebased on or related to such mortgages, that ineach case was originated or issued on or beforeMarch 14, 2008, the purchase of which theSecretary determines promotes financial-market stability and any other financial

3

We shouldexpect Congressto check andlimit the otherbranches ofgovernment.


4/28

instrument that the Secretary, after consulta-tion with the Chairman of the Board ofGovernors of the Federal Reserve System,determines the purchase of which is necessaryto promote financial-market stability, but

only upon transmittal of such determination,in writing, to the appropriate committees ofCongress.17

Congress stipulates that the secretary maypurchase any mortgage asset or any financialinstrument that promotes financial-marketstability.18 The section of the law definingtroubled assets places two insignificant con-straints on the secretarys discretion. The sec-retary is told to consult with the Fed chairmanbefore purchasing financial instruments notrelated to mortgages. This admonition cannot

be enforced; it is more advice than law. Thesecond constraint requires the secretary totransmit his reasons for buying nonmortgageinstruments to the appropriate congressionalcommittees. Here Congress is trying to con-trol their newly empowered agent. The secre-tary is required to inform the legislature of hisdecisions about troubled assets after the fact.19

EESA does not say what Congress might doafter receiving this information; it is assumedthat disclosure to the legislature in itself con-strains the power of the secretary.

This section also marks the first appear-ance of a goal for the policy and thus ofCongresss attempt to state an intelligibleprinciple to guide the secretary. The secre-tarys goals in purchasing assets will be:

promoting financial-market stability protecting home values, college funds,

retirement accounts, and life savings preserving home ownership promoting jobs and economic growth maximizing overall returns to the tax-

payers of the United States20

Some of these purposes show up again inSection 103, entitled Considerations. Incarrying out the law, this section admonishesthe secretary to take into consideration, inaddition to the purposes of the law alreadystated, the following goals:

minimizing the national debt keeping families in their homes stabilizing communities efficiency of spending avoiding several kinds of discrimination

in determining which firms are eligibleto participate in TARP subsidizing firms serving low- and

moderate-income populations and oth-er underserved communities that wereharmed by the collapse of Freddie Macor Fannie Mae21

stabilizing counties and cities22

Finally, at another place, Congress sets out afinal goal:

prevent unjust enrichment of financialinstitutions23

The law offers a bakers dozen of intelligibleprinciples to guide the spending of $700 bil-lion dollars by the secretary of the Treasury.Many of these intelligible principles are lit-tle more than sloganslacking any concreteindications of what they might mean or howthey might constrain the secretary. Two ofthe goals, however, have concrete directions.

The final goalpreventing unjust enrich-

ment of financial institutionscomes closestto serving as a useful guide to the secretary.The secretary is directed to take such steps asmay be necessary to prevent unjust enrich-ment of financial institutions participating ina program established under this section,including by preventing the sale of a troubledasset to the secretary at a higher price thanwhat the seller paid to purchase the asset.Congress then exempts purchases from someinstitutions from this rule.24 The secretarydecides what steps will be taken to enforce

this rule. But in buying troubled assets, thesecretary may not pay more for them than theseller did. That stipulation constrains the sec-retarys discretion, albeit in a minimal way.

The law also offers some specific guidanceabout the fifth goal, maximizing the returnfor taxpayers. The law specifies that the sec-retary should receive in exchange for buying

4

Many of theseintelligible

principles arelittle more than

slogans.


5/28

a troubled asset a warrant to buy common orpreferred nonvoting shares (if the firm inquestion has securities traded on a nationalexchange). Other firms would give the feder-al government stock or a senior debt instru-

ment. The secretary would receive such stockor debt to provide for reasonable participa-tion by the secretary, for the benefit of tax-payers, in equity appreciation in the case of awarrant or other equity security, or a reason-able interest rate premium, in the case of adebt instrument. Judging what is reasonableremains the job of the secretary, who bothsets the price to exercise a warrant and deter-mines exceptions to these rules.25

Had Congress set a single goal or intelligi-ble principle for EESA, the courts or a con-

gressional committee would have been betterplaced to oversee and control executive discre-tion in implementing the law. Yet in EESA, asin many laws, Congress set out multiple goals.Congress did not attempt to establish anyhierarchy among the 13 goals in EESA.Perhaps promoting financial-market stabilitymerits pride of place over the others, but thatis just a guess; the legislation does not estab-lish that priority. Perhaps considerations arenot purposes and thus should occupy lesserweight in the secretarys judgment, but that is

also a guess. Two of the purposes of the law arelisted among its considerations; perhaps aconsideration is a purpose by another name.(Promoting financial-market stability is men-tioned second among the considerations,which may suggest it ranks behind maximiz-ing returns for taxpayers.) The secretary has alist of goals, and the authority to purchaseassets. He has no guidance from Congress onhow to weigh goals when tradeoffs must bemade. From that list of goals and his ownjudgment about tradeoffs, the secretary must

concoct an intelligible principle for makingdecisions a principle he alone will formulate.In that regard, he is exercising the power tomake laws, a power the Constitution reservesto the Congress. In EESA, Congress enactedgoals aplenty, but they provide at best the rawmaterials of an intelligible principle. Thosegoals, however, could not guide implementa-

tion of the law nor serve as a proper standardfor evaluating the delegation of power andresources in the law. The raw materials of aintelligible principle were not enough to pre-serve the rule of law or separation of powers in

this case.

Neither Check nor Balance

The Framers of the U.S. Constitutionsought to both empower and to constrain thefederal government. Voters would enforce onekind of restraint on political power, but theballot alone was not adequate to the task.Hence, the power of the federal governmentwould be divided among its various branches

or departments. Those who administeredeach branch should have the necessary consti-tutional means, and personal motives, to resistencroachments of the others.26 Each branchshould be expected to resist the efforts of otherbranches to gradually concentrate power.Congress thus had an affirmative obligationunder the American system to resist any effortsby the executive branch to engross its ownpowers. This might be called Congresss struc-tural obligation in the American system.

Treasury Secretary Paulson initially pro-

posed allowing his office to purchase mort-gage-related assets in order to enhance mar-ket stability and protect the taxpayer. In theproposal, the secretary was also charged withregular reporting to Congress about his use ofthe authority. The secretarys actions would beexempt from judicial review.27 Congress didnot simply rubber-stamp Secretary Paulsonsoriginal TARP proposal; congressional leaderswere concerned about the proposals grant ofpower to the Department of the Treasury andthe Federal Reserve. Yet, despite these con-

cerns, Congress failed to check the executive inthe final law.

This failure to check the executive branchis most clear in the exercise of authority thatshould be dear to the legislative branch:spending public money. The law limits thesecretarys authority to purchase troubledassets to $250 billion. However, that ceiling

5

The secretary isexercising thepower to makelaws, a power the

Constitutionreserves to theCongress.


6/28

may be broached ifthe presidentcertifies thatit need be; the new limit will be $350 billion.Thereafter, if the president transmits to theCongress a written report detailing the planof the Secretary to buy more troubled assets

beyond the $350 billion, the secretary may doso unless Congress agrees to a joint resolu-tion disapproving of the plan.28

The law offers an illusion of congressionaloversight and control over the spending ofthe $700 billion. Where Secretary Paulsonhad originally wished to spend the entiresum, Congress broke up the $700 billion intothree tranches. The second and third trancheappear to require additional decisions to goforward with spending. In fact, the presidentneed only certify the need for the second

tranche and file a plan for spending the thirdtranche. It is up to Congress to stop thespending of the third tranche by passing a joint resolution of disapproval within 15days. Even if both houses of Congress passeda joint resolution of disapproval, the presi-dent would have to sign it; if he refused tosign, Congress would have to override hisveto.29 The executive who requested the mon-ey was unlikely to agree to a resolution pre-cluding his request. Congress could thus onlystop the release of the third tranche if two-

thirds of both houses agreed to override thepresident. Even a Republican president wouldlikely maintain enough support to sustain his veto of a resolution of disapproval. In sum,Congress was passive regarding the crucialquestion of spending public money on TARP.And EESA sets out nothing more than an illu-sion of legislative control of public spendingan illusion spun by Congress itself.

Congressional weakness here becomesclear if we consider the path not taken.Congress could have stipulated that the third

tranche could only be spent after a joint reso-lution of approval by both chambers. Theresult would be something more like the gov-ernment foreseen by James Madison. Theexecutive would get part of the powers itsought, but Congress would participate in ameaningful way in the ongoing project. Byrequiring a positive affirmation on the final

tranche, Congress would also have boughttime to investigate the need for the TARP pro-gram and the success or failure of the initialspending. Instead, Congress put on itself theburden of proof to stop the spending and the

program.Congress made a show of resisting the ini-tial proposal, but in fact, EESA actually grantsmore power to the secretary than Paulsonsoriginal bill. The first draft proposed givingthe secretary the power to purchase onlymortgage-related assets from any financialinstitution having its headquarters in theUnited States.30 EESA, as noted earlier, givesthe secretary the power to buy both mortgage-related assets and any other financial instru-ment that the Secretary, after consultation

with the Chairman of the Board of Governorsof the Federal Reserve System, determines thepurchase of which is necessary to promotefinancial-market stability. Paulson went toCongress asking for a broad power to buy onekind of asset and came back with the authori-ty to buy any financial instrument. Congressdid, as noted earlier, require the secretary toobtain warrants for future purchases of assetsand to not buy assets at a higher price than theseller paid for them initially. On the whole,however, Congress empowered rather than

constrained the secretary.

Deliberation

In a representative democracy, the legisla-ture should refine the voice of the people, lead-ing to legislation that serves the public good.31

Deliberation by the legislaturedevelopingalternatives, collecting and evaluating infor-mation, weighing consequences and refiningbillsoffers a means to that end. The Consti-

tution itself promotes deliberation. A lawmust pass both houses of Congress and besigned by the president. Members of Congressare accountable to different constituenciesand are elected to varied terms. The institu-tional design fosters a lawmaking process thatmoves slowly, especially in response to publicsentiment, and encompasses many interests

6

EESA sets outnothing more

than an illusionof legislative

control of publicspendingan

illusion spun byCongress itself.


7/28

and viewpoints.32 Congress deliberated poorlybefore passing TARP.

It will be said that Congress had to actquickly on EESA. To have deliberated wouldhave been to risk the welfare of the nation.

Certainly the Bush administration pushedhard for Congress to act quickly on the EESA.On September 16, the Reserve Primary Fund,a $65 billion money market fund, reportedthat its customer accounts had fallen to 97cents on the dollar largely because of thedecline of its investments in Lehman securi-ties.33Administration officials feared a run onmoney market funds as part of a generalbanking panic.34 Chairman Bernanke andTreasury Secretary Paulson quickly went toCongress with a bailout plan for the financial

sector in hand. Bernanke told members onthe evening of Thursday, September 18: If wedont do this, we may not have an economyon Monday.35 His presentation to the Houseand Senate leaders on Thursday evening re-flected his fear and fostered theirs. A contem-porary news report conveys the tenor of themeeting:

We are facing a financial crisis on mul-tiple fronts, the Fed chairman said. De-spite our actions over the past several

months, investors are still losing confi-dence. Theres a run on the money-market funds. The last two big invest-ment banks are under siege. Thesituation is severe, he said, and the Fedis out of tools. If the problem isnt cor-rected, the United States could enter adeep multi-year recession akin toSweden or Japan in the early 1990s. Weare headed for the worst financial crisis in thenations history. Were talking about amatter of days.36 [emphasis added]

The next day the chairman of the FederalReserve told House Republicans on a confer-ence call: If we dont get this, it will be noth-ing short of a disaster for our markets.37

In the end, Congress accepted Bernankesdemand for rapid action and concocted andpassed EESA within two weeks. It did so

because members accepted the administra-tions view that a bill must be passed quicklyor the nation faced an economic calamity.Not everyone in Congress agreed. Some com-pared the administrations warnings that the

economy would collapse unless Congressmoved the bill to warnings they receivedregarding the invasion of Iraq. Rep. GeneTaylor (D-MS) asked, Where have I heardthis before? The Iraqis have weapons of massdestruction, and theyre ready to use them.Im in no rush to do this.38 ProminentRepublicans also questioned the rush to judgment. Mike Pence (R-IN) remarked:This is going way too fast. The Americanpeople dont want Congress to make hastewith the financial recovery legislation; they

want us to make sense. Sen. Richard Shelby(R-AL) argued for a different path: Congressmust immediately undertake a comprehen-sive, public examination of the problem andalternative solutions rather than swiftly passthe current plan with minimal changes ordiscussion. We owe the American taxpayer noless.39 Some experts doubted the need forquick action. Alan Blinder, an economist atPrinceton University, remarked, I totally dis-agree that this needs to be done this week. Itsmore important to get it right. A petition

organized by the economist John Cochraneof the University of Chicago also criticizedCongress for moving quickly without allow-ing more time for debate.40Allan Meltzer, aneconomist at Carnegie Mellon, was blunterabout the demand for speed: This is scaretactics to try to do something thats in theprivate but not the public interest. Its terri-ble.41 Those members of Congress andexperts did not prevail. But their views makeit clear that Congress had plausible reason todeliberate in late September on EESA and

chose instead to rush to judgment.Consider the four ways Congress failed to

deliberate regarding this matter:Alternatives. Congress identified and con-

sidered three alternatives (apart from the sta-tus quo) to deal with troubled assets. Secretaryof the Treasury Hank Paulson proposed thefirst alternative in a bill that ran 849 words

7

Congressaccepted

Bernankesdemand forrapid action andconcocted andpassed EESAwithin two week


8/28

approximately two book pages. It delegatedconsiderable discretion to the Secretary of theTreasury to deal with the problem.42 The sec-ond alternative appeared to be quite differentfrom Paulsons original proposal. It com-

prised over 18,000 words and contained lan-guage that appeared to constrain the secre-tarys judgment. That version was rejected bythe House of Representatives on September29, 2008. The third version of TARP was iden-tical to the second version, save for an addi-tional title increasing the sum covered byFederal Deposit Insurance and a small changerelated to the pay of the Special InspectorGeneral.43

Each of these measures proposed to givemembers of the executive branch broad pow-

ers to purchase troubled assets. These mea-sures agree about what should be done aboutthe bailout and did not represent alternativesfor policymakers. Beyond that agreement,the three proposals seemed to be of twokinds: one that granted broad authority tothe secretary of the Treasury and another(comprising the congressional bills) that con-strained that authority. In fact, as shown ear-lier, this appearance was deceiving. Paulsons version appears to have imposed more con-straint as to means on the secretary than the

other two versions of EESA. In any case, thelanguage in the second and third versionsthat appeared to limit the secretarys discre-tion actually put few constraints on him.44

Congress sought to add rules on executivecompensation and spending on foreclo-sures.45 The second and third versions addedseveral conditions to the law: an oversightboard appointed by Congress, limits on exec-utive compensation at firms receiving fund-ing, and warrants that give the governmentstock in banks.46 In sum, Congress consid-

ered only one alternative (buying troubledassets), which took two forms.47As we shallsee, Congress had little capacity to enact itslimited goals concerning executive compen-sation and foreclosures.

Experts of different political outlooks pro-posed alternatives that fundamentally differedfrom the Treasury plan. Some argued that the

federal government should offer loans tobanks with their troubled mortgage debt serv-ing as collateral. Others argued the govern-ment should act as a well-endowed hedgefund that purchased higher quality mortgage

securities and other bank assets.

48

Liberalsargued that the federal government shouldrestructure mortgages to preclude foreclo-sures and support the housing market.Conservatives called for a temporary cut in thecapital gains tax and suspending accountingrules in order to direct funds to capital mar-kets.49 Each of these alternatives was proposedby individuals or organizations from thebroad mainstream of American politicsCongress did not consider any of these pro-posals in any depth prior to enacting TARP.

Information. Members of Congress collectinformation in several ways. They hear fromconstituents and from groups whose interestsbear on their reelection. Staff members andcongressional agencies provide research andfindings. Congress also holds hearings by spe-cialized committees and subcommittees tolearn more about issues or bills. Debates incommittees or on the floor of the House orSenate may also provide some members withnew information about an issue. During theprocess of enacting EESA, members of

Congress received a great deal of informationfrom their constituents, information thatindicated widespread opposition to the billprior to September 29 and more supportthereafter.50 More reliable measures, like sur- veys, suggested that the public was ambivalent about the bailout.51 Congress largelyignored the formal process of eliciting infor-mation about troubled assets and policy alter-natives. Congress held two days of committeehearings, one on each side of Capitol HillEven these limited hearings provided limited

information. Fed Chairman Ben Bernankestestimony to the Senate Banking Committeewas nine paragraphs long.52 Paulson andBernanke were the main sources of informa-tion to congressional leaders. Congress alsodebated the versions of TARP on seven differ-ent days, one day for each $100 billion autho-rized for spending by the law.53 The policy

8

Congress largelyignored the

formal processof eliciting

informationabout troubled

assets and policyalternatives.


9/28

committees of both parties did issue reportson the bill to inform members; these reports,however, appear to be largely summaries ofthe provisions of the bill.54

Consequences. Congress did not try very

hard to estimate the policy consequences ofTARP. Members assumed that affirming thestatus quo would lead to an economic cata-strophe, an outcome they had learned aboutfrom the secretary of the Treasury and thechairman of the Federal Reserve System.Congress delegated the task of estimating theconsequences of the actual bill to the secretaryof the Treasury, who was expected, in part, todeliberate with the chairman of the FederalReserve to determine how buying particulartroubled assets might affect a multitude of

goals or some tradeoff among them. Congresspresumably struggled hard to estimate thepolitical consequences of voting for or againstthe bill. The politics of the situation appearedto pose a choice between an oncoming eco-nomic catastrophe and an electorate enragedby bailing out banks. This stark choice hardlycontributed to sensible deliberation aboutpublic spending.

Refinement. Deliberation includes refin-ing provisions of a law by carefully drafting abill.55 Congress did add a few conditions to

Secretary Paulsons initial proposal as notedearlier. The final law shows little effort atdraftsmanship. The Secretary is given thepower to buy two kinds of financial instru-ments, the first being a proper subset of thesecond. Much of the second version of thebill adds considerations and other verbiagethat have little practical import. Congressand the Bush administration drafted TARPin no more than nine days: two weekends anda single workweek. The lack of refinementseems a consequence of the failure of deliber-

ation.Congress did a poor job of deliberating

regarding EESA. Its leadership deferred toleaders of the executive branch and failed toshow a seemly skepticism about the bailout. Inthe end, Congress resorted to less seemlymethods to pass the law. After the initial rejec-tion of EESA, congressional leaders purchased

the necessary votes for passage by offeringfunding for projects favored by members whohad voted no earlier. In other words, theleaders bought the passage of EESA by wast-ing perhaps $150 billion on what were essen-

tially bribes.

56

Vote-buying, not deliberation,brought victory on October 3.

Failure of Accountability

One purpose of EESA was providing publicaccountability for the purchase of troubledassets.57 Congress seemed responsive to theelectorate in both votes on EESA. The first vote taken on September 29 failed in theHouse of Representatives. Afterwards, mem-

bers of both parties said prior to the first votethose who voted no had encountered toomuch hostility for the bill among their con-stituents, and were worried that a vote in favorwould be political suicide.58 The same day ofthe negative vote, the Dow Jones IndustrialAverage dropped 778 points. Public opinionseemed to shift thereafter: Congressionaloffices reported a shift in angry calls from con-stituents, with some now demanding that law-makers take some corrective actiona distinctchange from the outpouring of public opposi-

tion that contributed to the defeat of theplan.59 Four days after the rejection, Congresspassed EESA.

Yet there is more to accountability in arepublic than simply enacting what the peo-ple want, especially in a moment of crisis andnear panic. Voters should be able to holdCongress responsible for legislating andapportion credit or blame in a later election.

It would be difficult to hold Congressaccountable for the bailout under TARP. Byidentifying many goals for the law, members

of Congress could always blame a shortcom-ing on the incompetence of the secretary ofthe Treasury.60 If financial markets did notstabilize, the secretary could be blamed fornot achieving a goal of the law. If financialmarkets stabilized but taxpayers resented thecosts, members could note that the law haddemanded protection for taxpayers. And so

9

Congress did notry very hard toestimate thepolicconsequences ofTARP.


10/28

on. In a sense, the responsibility for the suc-cess or failure of the law had gone to thesecretaryalong with the vast power delegat-ed by Congress. The secretary (and the execu-tive branch) more generally appeared willing

to accept this responsibility. In contrast,Congress wished to avoid being blamed forwhat might go wrong in a difficult projectundertaken a month before a national elec-tion.

Voters might enforce some accountabilityon the executive branch which is, after all,headed by an elected official. But the incum-bent in 2008 was not running for reelection.His successor might well run in 2012. By then,the TARP program would likely be a minorfactor in a presidential race. In 2009 and 2010,

the public would find it hard to follow thework of the technocrats at Treasury on a com-plicated matter like the bank bailout.Congressional delegation of power attenuatedaccountability over TARP.

For its part, Congress defined accountabil-ity as oversight of delegated authority. One ofthe main instigators of TARP, Sen. Chris-topher Dodd said, as the bill was being writ-ten: We need to offer some assurance to theAmerican taxpayer that Congress is watching.One of the things that got us into this mess

was the lack of accountability and the lack ofoversight that was occurring, and I dont thinkwe want to repeat those mistakes with a pro-gram of this magnitude.61 EESA created aFinancial Stability Oversight Board chargedwith reviewing the policies of the secretary.62

Members demanded and obtained an over-sight board for the program.63

The Financial Stability Oversight Boardcomprised the secretary of the Treasury, thechairman of the Fed, the director of the FederalHousing Finance Agency, the chairman of the

Securities Exchange Commission, and the sec-retary of Housing and Urban Development.64

This group is a curious choice to oversee theimplementation of EESA on behalf of Con-gress acting as representatives of the Americanpeople. Two of the members, the secretary andthe Fed chairman, were formulating andimplementing the policies that would be

reviewed. The chairman of the Securities andExchange Commission was involved at timeswith policymaking, though not at crucialpoints. The director of the Federal HousingFinance Agency regulated Fannie Mae and

Freddie Mac. The HUD secretary oversees pub-lic housing and related policies. This groupmight have served as a broadly informed dis-cussion and policymaking group. (In fact, itdid not, since actual policymaking fell to agroup of four senior officials, includingBernanke.)65 But it could hardly provide inde-pendent oversight to policymaking and imple-mentation undertaken by its members.

The Congressional Oversight Panel createdby EESA consisted of five members appointedby the leaders of both parties in Congress.

They were charged with issuing reports evalu-ating the secretarys use of authority grantedunder the law; the impact of troubled assetpurchases on the financial markets and finan-cial institutions; whether the informationgleaned by transactions had contributed tomarket transparency; andas a catchalltheeffectiveness of foreclosure mitigation efforts,and the effectiveness of the program from thestandpoint of minimizing long-term costs tothe taxpayers and maximizing the benefits fortaxpayers.66 The other agent of oversightthe

Special Inspector Generalwas empoweredto conduct, supervise, and coordinate auditsand investigations of the purchase, manage-ment, and sale of assets by the Secretary of theTreasury under any program established bythe Secretary under the authority delegatedby the law.67

In the EESA, Congress authorized a largesum to be spent by the secretary of theTreasury, at his discretion, to achieve a multi-tude of ill-defined and conflicting goalsCongress hoped to compensate for its failure

as a legislature by appointing three panels tooversee the secretary and to guard againstpossible criminal conduct. Such oversightmay be better than none at all, but Congressmight have written a law with clear goals andpriorities, a law that would guide and con-strain the executive branchthereby laying afoundation of political accountability. In-

10

Congressionaldelegation of

power attenuatedaccountability

over TARP.


11/28

stead, Congress largely said to the executivebranch: Here is a problem, deal with it.68

Having done that, how well did Congress fol-low up in overseeing the exercise of authoritythat had been delegated to the secretary of

the Treasury?

Implementation

The enactment of EESA did little to fosterconfidence in capital markets. Both the DowJones Industrial Average and the broader S&P500 Index dropped 22 percent in the first eightdays of October 2008. Overseas markets expe-rienced similar drops.69 Shortly after the bail-out bill passed in the United States, British

officials announced plans to directly buy equi-ty stakes in some of their troubled banks.70 ByOctober 11, eight days after EESA passed, theNew York Times reported that the Bush admin-istration had dropped the plan to buy trou-bled assets in favor of buying equity in banks.We can use the taxpayers money more effec-tively and efficiently, get more for the taxpay-ers dollar, if we develop a standardized pro-gram to buy equity in financial institutions,Treasury Secretary Paulson said.71 Later,Treasury would emphasize that credit market

conditions had become much worse whileCongress passed EESA and in the week there-after. Secretary Paulson and Chairman Ber-nanke decided the fastest, most direct waywas to increase capital in the system by buyingequity in healthy banks of all sizes. Illiquidasset purchases, in contrast, require muchlonger to execute.72

As we saw, the discussions prior to passingEESA assumed that the secretary of theTreasury would use his new authority to pur-chase troubled assets. Paulsons change of

policy did not violate EESA, an indication ofthe breath of the delegated authority given byCongress to Treasury. Indeed, EESA allowedthe secretary to purchase any financialinstrument that might, in his view, con-tribute to market stability. Paulsons quickswitch to re-capitalizing banks confirms theunchecked discretion given to the executive

branch. As Sen. Jack Reed later said, We[Congress] authorized the program but thespecific beneficiaries, the specific details wereworked out by Treasury.73

The switch to recapitalization opened up

new possibilities for spending the $700 billionauthorized by EESA. Congress had imposedfew restraints on spending the money. If theTreasury secretary had discretion to buy bankshares, why not funds for other troubled busi-nesses? After all, the secretary was authorizedto buy any other financial instrument . . . topromote market stability provided he con-sulted with the Fed chief and informed Con-gress. Advocates were soon pressuring Treasuryto stretch TARP over insurance companies,transit agencies, and auto companies.74 In late

October, two troubled auto companiesGeneral Motors and Chryslerbegan pressingtheir case for subsidies from the U.S. govern-ment, initially to attract private investors to amerger of the two. EESA would be a source forthe subsidies. Treasury initially resisted. ATreasury spokeswoman said such fundsshould be focused on financial institutions.75

But Congress had not debated recapitalizationeither, and shares in the car companies (or theirfinancial services subsidiaries) were certainlyfinancial instruments. The language of EESA

did not preclude bailing out auto companies.For a time, the Treasury secretary preventedthe government from taking this path.

The floundering automakers persisted.They and members from Michigan arguedthat TARP money should go to the financialarms of the automakers who would, in turn,provide credit for purchasing cars, therebyreviving the industry. The New York Timesreported that the Bush White House indicat-ed some agreement with this argument.76

Soon related businesses joined the argument.

The chairwoman of the National AutomobileDealers Association proclaimed, A well-capitalized, financially sound dealer networkis essential to the success of every automobilemanufacturer. Any government interventionshould include provisions to preserve the via-bility of dealers.77 EESA had been in force fora month.

11

The enactmentof EESA didlittle to fosterconfidence in

capital markets.


12/28

The separation of powers and a Senaterule acted as a brake on the bailout of theauto companies for a time. The House waswilling to enact the bailout. To allocate themoney to the automakers, however, Congress

would have to overcome a filibuster in theSenate. The votes were not there in the mid-dle of November, largely because many GOPsenators opposed the bailout.78

In early December, the auto industry as awhole announced its worst month in sales in26 years. General Motors reported it wouldbecome insolvent soon without federal subsi-dies; its November sales had fallen over 40 per-cent from a year earlier. The Speaker of theHouse, Nancy Pelosi, said that bankruptcy wasout of the question for the automakers and

that a deal for support would be forthcom-ing.79 In mid-December, Pelosi proved to becorrect. The Bush administration announcedthat part of the EESA money would subsidizetwo failing auto manufacturers, GeneralMotors and Chrysler. Both would sign emer-gency loan agreements with Treasury andthen immediately have access to $4 billion.General Motors could then lay claim to over$9 billion more in January and February of2009, if Congress released the final tranche ofEESA funding.80At this point, the term any

financial instrument included both shares inan auto financing company and loans toGeneral Motors and Chrysler.81 Congress hadnot considered bailing out the auto compa-nies while passing EESA. The authority it didgrant, however, proved to be broad enough tofund this bailout.

Meanwhile, as the auto companies slowlywon their battle, Treasury announced anothereffort to stabilize the financial markets. In lateNovember, this time the government provideda backstop for assets owned by Citigroup to

prevent its failure. The plan opened the possi-bility of $290 billion in losses for taxpayers.82

The new plan involved a portfolio of troubledassets at Citigroup. The bank would take first$29 billion of losses in the portfolio on itsown. After that, various agencies of the UnitedStates government will absorb 90 percent ofany additional losses.83

By the end of November 2008, the Treasurydepartment had embraced three differentbailouts under EESA: the original troubledassets model, the recapitalization of banks,and the asset guarantee for Citibank. The

Bush administration itself was well on the wayto a fourth model in the bailout plan forGeneral Motors and Chrysler. The executivemade use of the wide discretion offered byEESA.

Unlike the Treasury, Congress did littleabout its goals of limiting executive compen-sation and reducing foreclosures. By mid-October, Treasury had come up with guide-lines on executive compensation. Banks thatreceived public money will have to followsome general rules on paying their top five

executives. They will be restricted from offer-ing golden parachutes, as rich severancepackages are called, and they will have to paymore taxes if an individuals compensationexceeds $500,000. Barney Frank was quotedas saying the plan did not go far enough.84

Congress did nothing to act on his dissatis-faction.

Similarly, in late November, it was report-ed that Treasury and Fed officials are underintense pressure from Congress to spendmoney on reducing foreclosures, the other

goal set by Congress for the law.85 InsideTreasury, however, it appeared that whateverwas being said, Congress did not really wishto spend money on preventing foreclosuresbecause members understood the pooroptics of having the government write checkswhen some would find their way into thehands of irresponsible homeowners.86

Both of these congressional concerns con-tinued to fester even if Congress cared moreabout executive compensation. Both concernscould have been addressed initially if Congress

had written a law that actually guided theimplementation of EESA. Congress couldhave specifically required both compensationguidelines and spending to assist the indebt-ed. Of course, had Congress actually written aclear law, they would have had to establishcompensation guidelines (and run the risk ofmaking the crisis worse) or spend directly on

12

Congress hadnot consideredbailing out the

auto companieswhile passing

EESA. Theauthority it didgrant, however,

proved to be

broad enough tofund this bailout.


13/28

preventing foreclosure (and run the risk ofbeing blamed for wasting tax dollars on spec-ulators). The EESA delegation allowed Con-gress to have its cake and eat it too. They couldcomplain about Treasurys obstinacy (thereby

claiming credit for wanting to help) whileavoiding any concrete actions and attendantrisks.

A pre-existing congressional oversight unit,the General Accountability Office, movedquickly. A few days after the law passed, GAOhad put together a 20-member team to overseethe actions of Treasury under EESA.87 ButGAO was the exception. Most oversight bodiesmoved slowly. By late November, a federalprosecutor from New York, Neil M. Barofsky,had been nominated to be special inspector

general for TARP, but he had not been con-firmed.88 The oversight panel began weakly.Congress did not appoint all its membersuntil November 14. The panel first met onNovember 26, more than seven weeks afterEESA passed in Congress. In early December,the panel had only had a few briefings withTreasury officials; the panels head noted thatshe and its other members were still in theearly stages of their research. ElizabethWarren, the head of the panel and a Harvardprofessor of law, testified about the difficulties

faced by Congress and the panel. She notedthat lawmakers have just been stunned bythese economic and financial developments.There wasnt time even to develop a coherentlist of questions to ask Treasury about whatits doing and what it plans to doandwhether either of those are likely to addresswhats going wrong. Our role is to make surethat the right questions are asked as early aspossible. The first report of the oversight pan-el thus laid out the central questions thatTreasury should be addressing as it spends the

taxpayers money. Warren also said the panelwould be advising Congress on policy over-sight, not procedural oversight.89 But it wasnot until early December that the panel wasplanning to set standards for evaluatingTreasurys work. Meanwhile, for two monthsTreasury Department officials had been mak-ing policy and spending hundreds of millions

of dollars without an intelligible principle orcoherent set of goals from Congress. In fact, byearly December most of the money Treasurywould spend on banks on TARP had alreadybeen committed.90

On December 2, 2008, GAO reported onthe program of capital injections into banks.Their first recommendation was work withthe bank regulators to establish a systematicmeans of determining and reporting in a time-ly manner whether financial institutionsactivities are generally consistent with the pur-poses of [recapitalizing the banks] and helpensure an appropriate level of accountabilityand transparency. The second recommenda-tion was to develop a means to ensure thatinstitutions participating in CPP [the capital

injection program] comply with key programrequirements (e.g., executive compensation,dividend payments, and the repurchase ofstock).91

Just over a week later, the CongressionalOversight Panel issued its first report. Itbegan by noting the dire economic circum-stances and reporting that the federal gov-ernment had spent $1,900 for each Americanfamily under EESA. But the report offerednothing about how Treasury had spent over$200 billion. Instead, as Elizabeth Warren

had promised, the panel laid out three majorquestions for its work: who got the [TARP]money, what have they done with it, how hasit helped the country, and how has it helpedordinary people?92 These questions were fol-lowed by 10 questions, which yielded, in turn,more questions. In all, the panel posed over40 questions for the TARP program.93 Thepanel did not stop there: the pages posingthese questions were followed by 21 pages ofnarrative and analysis explicating issues relat-ed to TARP. These pages mark the first time

any part of the legislative branch had publiclyposed difficult questions about the programand the future plans of Treasury officials.

The panels analysis is revealing. Amongthe questions posed was: What is the scope ofTreasurys statutory authority?94 If Congresshad actually provided Treasury with an intelli-gible principle to carry out EESA, why would

13

The EESAdelegationallowed Congresto have its cakeand eat it too.


14/28

Congresss own panel be querying Treasuryabout the limits of its authority under the law?If the guidance had been set out in the law, thepanel (and the public) could have answeredthe question by consulting the law. Instead,

the oversight panels question suggests thespecification of the executives authority is notat all apparent from the law. A second reportasked Treasury whether its authority coveredother businesses, such as commercial realestate, manufacturers of consumer products,and other businesses not directly involved infinancial services.95 The panels questionsindicate both the extent of EESAs delegationto the executive and the lack of control exer-cised by Congress from the start.

On December 10, the House Financial

Services committee held hearings on howTreasury was implementing the bailout.Echoing the GAO report, members insistedthat Treasury monitor what banks did withthe federal money that they received. Membersalso demand that Treasury tie more strings tothat capital to make sure it would be used toprovide credit to homeowners, small business-es, and consumers. And they demanded thatTreasury develop a plan to prevent foreclo-sures.

Congress also tried to get some leverage

over the bailout. Representative Frank warnedTreasury officials that Congress was unlikelyto approve the next $350 billion installment inthe overall $700 billion bailout programunless it was convinced the Treasury was effec-tively measuring the lending by participatingbanks. Neil Kashkari, the interim secretary ofthe Treasury for financial stability at Treasury,agreed to a request from lawmakers that hesummon bank executives to explain how theyare using federal money. He also argued thatTreasurys action had produced market stabil-

ity. However, Kashkari maintained thatimposing foreclosure conditions on banksreceiving capital might keep them out of thebailout and be counterproductive.96

In winter, as in fall, Treasury focused onmarket stability. The primacy Treasury ac-corded market stability may be seen in theirresponse to the first report of the oversight

panel. The panel had asked for Treasurysstrategy in implementing EESA. The depart-ment responded by mentioning three purpos-es: market stability, preventing foreclosures,and protecting taxpayers. The next sentence

however, mentions only one purpose: Themeasures taken by Treasury under theEmergency Economic Stabilization Act arepart of a comprehensive strategy by Treasuryand the federal regulators since the onset ofthe crisis to stabilize the financial system andhousing markets, and strengthen our finan-cial institutions.97 Market stability was anessential means, in Treasurys view, to all othergoals, not least helping American families.98

In a sense, little had changed from October toDecember. Congress had many goals in mind

for the bailout and little willingness or abilityto make Treasury pursue its purposes. Con-gress had added a great deal of language inEESA about its goals and concerns. But thelaw itself had done little to change Treasurysundertaking.

The second report of the oversight panelnoted that Treasury did not respond to mostof the questions posed by its first report. Thepanel could see no evidence that Treasuryhas used TARP funds to support the housingmarket by avoiding preventable foreclo-

sures. It also cast doubt on the propriety ofthe policies pursued by Treasury, especiallythe shift from buying troubled assets forrecapitalization. The panel argued thatTreasury should set up metrics to measurethe effects of their policy. Indeed, its reportmade it clear that Congress would be depen-dent on Treasury for the data and analysisassessing the effects of the agencys activity, ifTreasury undertook such an evaluation. Thepanel also found many of Treasurys respons-es irrelevant to TARP: the favorable policy

consequences cited by Treasury did not comefrom spending EESA money. Throughoutthe second report the panel indicated astrong preference for foreclosure relief andconcluded that this policy goal had receivedlittle attention from Treasury.99

The panel asserted that Congress had clear-ly intended for Treasury to focus on foreclo-

14

The oversightpanels question

suggests thespecification of

the executivesauthority is not atall apparent from

the law.


15/28

sure relief. Indeed, it was one of the 13 goalsmentioned in the law. As we have seen, howev-er, whether foreclosure relief actually mat-tered is open to question. Moreover, ifTreasury was correct that imposing foreclo-

sure conditions on share purchases wouldundermine the goal of fostering market stabil-ity, then there was an unavoidable tradeoffamong the goals in the legislation, andCongress had provided no guidance in mak-ing that tradeoff. Within its broad delegationof authority, Treasury could legitimately makea choice between stability and foreclosurerelief without violating EESA. The panel wasreading its own (and perhaps Congresss) pre-ferred tradeoff back into the law, but EESA is just a list of goals, not a guide for choice in

implementation, and certainly not a standardthe oversight panel could enforce.By early 2009, Congress seemed willing to

become more active. Treasury had used up thefirst half of the bailout authority. It thendelayed asking for more. Meanwhile, Repre-sentative Frank was at work drafting a bill torequire the Treasury to spend money onreducing foreclosures and mortgage rates. Itwould have required the new administrationto develop a plan by March 15 to use at least$40 billion of the $350 billion to prevent

home foreclosures.100 Franks fellow Demo-crats wanted tougher caps on executive com-pensation and more pressure on the bailed-out banks to lend.101 Both moves seemed toreflect a more assertive Congress, but bothalso bespoke prior failures. Congress had donelittle to constrain the executive in the first twomonths of the bailout. The COPs work inDecember had not elicited a serious responsefrom Treasury, much less a change in policy.Treasury had selected a goal and a means tothat end; Congress and its panel complained

to little effect.Obamas economic team set about per-

suading lawmakers that the new administra-tion would make better use of the bailoutmoney than the Bush administration had.102

The outgoing president, on behalf of theincoming one, asked Congress to release theremainder of the TARP funds. Treasury

argued that the banks needed more money.Obamas advisers believed that denying thenext tranche of funding might jeopardize thestability of the banking system. LawrenceSummers, Obamas leading economic advis-

er, promised to devote $50 billion to $100 bil-lion to a sweeping effort to address the fore-closure crisis. He also promised to havegreater transparency about capital injections;to measure the effects of federal spending onoverall lending; to set conditions, includinglimits on executive compensation; and tofocus on increasing the flow of credit. AsSummers worked with Congress, the FederalReserve chairman made it clear that most ofthe remaining $350 billion would have to goto the continued task of stabilizing the banks

if they were to renew lending at normal levels.On January 15, 2009, the Senate narrowlydefeated a resolution disapproving the releaseof the remaining funds. The victory cameafter a week of intense advocacy by the Senateleadership.103 The House later passed a reso-lution of disapproval, an impotent move giv-en the earlier Senate vote.104

Had Congress received much in exchangefor releasing the third tranche of money?Congressional Quarterly provided a concise sum-mary of Congresss weak bargaining position

over the remaining funds:

Even if the Senate had passed the mea-sure and the House had followed suit,there was little chance that it actuallywould have halted the release of thesecond half of the funds. Joint resolu-tions must be signed by the presidentto take effect, and Obama had vowedto veto it.

No one believed a Democratic Senate would

greet an incoming Democratic president witha legislative defeat.105 Thus, the Obama ad-ministration had little reason to make morethan cosmetic compromises with the legisla-ture. Summerss letter set out conditions thatwere general enough to be compatible withcontinuing discretion by Treasury in the useof TARP funds.

15

EESA is justa list of goals,not a guidefor choice inimplementation.


16/28

Barney Frank succeeded in getting theHouse to pass HR 384, which set conditionsfor the second half of the bailout money,including foreclosure mitigation and condi-tions related to housing, minorities, and small

business. The bill, passed as an amendment,also allowed retroactive application of restric-tions on executive compensation to firms thathad already received bailout money.106 Franksnew bill suffered from some of the same prob-lems plaguing EESA. Even if Franks bill hadpassed the Senate, Treasury would still havehad significant discretion. Yet the bill did setout two specific conditions: it prohibits firmsreceiving TARP money from giving bonuses toits 25 most highly compensated employees,107

and it also directs Treasury to quickly commit

between $40 billion and $100 billion for thepurposes of foreclosure mitigation.108 Frankwas attempting to write Summerss promisesinto law. The Senate referred the bill to theFinance Committee, where it languished with-out action.

In late January, reports of large bonuses atsome firms excited political passions. TheObama administration vowed to curb thebonuses and to reduce compensation at thebanks.109 The new president announced in ear-ly February that firms receiving assistance

could pay no more than $500,000 annually toexecutives; no bonuses would be permitted.110

The House Financial Services Committee heldhearings focused on questioning the heads ofseveral banks that had received public support.Some accounts suggested the hearings wereless populist in tone than might have beenexpected, given all that had happened. Rep.Barney Frank recognized that the bankers werecrucial to overcoming the economic problemsof the nation, and most members focused onrenewing lending.111

A policy on foreclosure, however, remainedoff the administrations agenda. Frank com-plained, The secretary said the administrationwould present details of their foreclosurereduction plan in a few weeks, which is toomuch time.112 Congress had complained forsome time about putting foreclosure into thebill. Now with a new administration, nothing

seemed to be happening. It is difficult to inter-pret the non-action on foreclosure. Congressmay have been happy to be deprived of thechance to vote on foreclosure relief for the rea-son indicated earliertaxpayers might not

appreciate rewarding speculation. On the oth-er hand, many Democrats in Congress wantedto take up the cause of the victims of thebanks. Treasurys inaction on foreclosureallowed members of Congress to complainabout foreclosures while doing nothing in real-ity about them.

Congress apparently did care more aboutexecutive compensation than foreclosure reliefThe difference in concern may be rooted invotes. Foreclosure relief would run the risk ofalienating taxpayersa large group of voters

Limiting bankers pay might alienate bankerswho received public money, and perhaps, theirshareholders; in total, these two groups com-prised few voters. Congress soon acted on itsfrustration about pay. The stimulus bill ofmid-February proscribed cash bonuses andalmost all other incentive compensation forthe five most senior officers and the 20 high-est-paid executives at firms that were receivingfunds from TARP. The restrictions were similarto those announced by the Obama administra-tion, but they were expected to apply to more

people and to reduce bonuses more than theadministrations plan. Leaders of these firmscould not receive bonuses larger than one-thirdof their annual salary. Any bonus would haveto come as restricted stock which could not beliquefied until the TARP payments had beenrepaid. Senate Democrats took this stepdespite opposition from the Obama adminis-tration. Obamas economic advisers arguedthat the restrictions would drive needed talentout of the firms in question just as they wererequired to deal with the continuing financial

crisis. The advisers also predicted that therestrictions might encourage the affected firmsto pay back government money to avoid suchregulations.113

In fact, by early March, some banksalready wished to repay the TARP moneyBank officials were concerned that Congressor the administration could, at any time, set

16

Treasurysinaction onforeclosure

allowed membersof Congress to

complain aboutforeclosures while

doing nothing inreality about

them.


17/28

new conditions for having received TARPmoney. Some of the conditionslike modify-ing mortgage contracts or delaying evic-tionsmight be popular but could force thebanks to take steps that could lead to

greater losses.

114

The struggle over bonuses reached itszenith in mid-March. The federal governmenthad supported AIG, which had lost enormoussums of money because of credit defaultswaps. The firm had contracts with executivesthat called for large bonuses in late 2008 andin March of 2009. When the latter round ofpayments became known, a public outcry fol-lowed to the point that the new president wascalled upon to instruct the Treasury secretaryto cut off future bonuses.115As the furor built

over the bonuses, Congress acted. DemocraticHouse leaders in Congress proposed a bill toimpose a 90 percent tax on bonuses paid outsince January 1 by any company that hadaccepted more than $5 billion in governmentbailout funds. Senate leaders had proposed a35 percent tax on recipients of the AIG bonus-es, and a 35 percent tax on the company.116

The House would eventually pass a tax billintended to confiscate the bonuses.117 The billthen moved the Senates Finance Committeewhere its progress stopped.

Later developments contravened the re-surgent Congress theme. The House FinanceCommittee approved a bill prohibiting anyfirm receiving TARP funding from payingunreasonable or excessive compensation.The concrete meaning of unreasonable orexcessive was left to federal banking regula-tors.118 The House, in the end, delegated awayits populist fury. About the same time, thesame committee rejected an amendment byRepublican Jeb Hensarling of Texas to changelanguage in a bill to require, rather than per-

mit, the EESA inspector general to review theTreasury secretarys use of authority underTARP to minimize negative effects on taxpay-ers.119

As Congress acted out an illusion of highpolitical drama, the Congressional OversightPanel continued its ineffectual struggle withthe executive branch. The panels February

report argued that Treasury had paid toomuch for the assets purchased under TARP;its valuation of various capital injections andthe support given to AIG and Citigroup indi-cated that Treasury paid about 44 percent

more for the relevant warrants than they wereworth.120 Until this point, the panel had askedquestions about Treasurys actions. Now theywere becoming more assertive in questioningthe wisdom of Treasurys decisions. TheFebruary report also indicated that Treasuryhad not provided additional informationsought in both earlier reports by the panel.Secretary Geithner was queried again and areport on his answers was promised forMarch.121 Treasury replied in late February.The panel found little satisfaction: Treasury

left many questions unanswered. The panelmust insist that Treasury address outstand-ing questions from previous oversight re-ports. Another letter had been posted to theTreasury secretary; the next report wouldupdate the panels one-way correspondencewith the executive branch.122 The questionsfor which the March letter sought answers hadbeen posed over three months earlier.

The next report of the panel would againnote that Treasury had never really respond-ed to the panels initial question about its

strategy. Finally giving up getting directanswers from Treasury, the panel relied inlarge part on Treasury officials public state-ments to discern the answer to its questionabout strategy.123 It is difficult to avoid theconclusion that Treasury was ignoring thepanel and that panel members could do littleto increase their influence over the program.Instead, their April report offers a generalpolicy analysis of the options and possibleconsequences of Treasurys work. The reportis interesting, but it is a profession of impo-

tence about changing the policy in questionthrough oversight.124 The May effort by thepanel reported more promises of a completeresponse from Treasury, along with 10,000pages of undigested documents that werekeeping staff busy.125

In late March, Treasury offered anotheriteration of TARP called the Public-Private

17

As Congressacted out anillusion of highpolitical drama,

the CongressionOversight Panelcontinued itsineffectualstruggle with theexecutive branch


18/28

Investment Program. It sought to lend mon-ey to private investors to buy up toxic assets.(It had proven to be too expensive, Geithnersaid, for the government to buy the assetsoutright per the original EESA plan.) Most of

this debt (85 percent) would be insured bythe FDIC. However, the FDIC has, in its char-ter, a provision clearly limits its ability toborrow, guarantee, or take on obligations ofmore than $30 billion.126 The PPIP mightinvolve obligations of $1 trillion. The FDICgot around the charter by counting only loss-es as liabilities for purposes of the provision.The agency and its accountants then project-ed no losses from the loans. Hence, the termsof the charter could be met and the loansguaranteed. All of this happened without any

oversight or influence from Congress, eventhough taxpayers will be stuck with the lia-bilities if the program does not work aspromised.127 The program eventually beganin early July and was expected to be muchsmaller than originally announced, involving$50 billion rather than $1 trillion.128

On the surface, Congress appeared to beout of the action in 2009 apart from amend-ing the stimulus bill to enact pay caps.Treasury made policy, and some members ofCongress complained but did little apart from

the executive compensation caps. Yet Con-gress was active. As TARP went forward, mem-bers of Congress did what they do well: pro-vide constituent service. In late January 2009,the Wall Street Journal reported that severalmembers, including lawmakers from Ohioand Alabama, had sought to steer bailoutfunds to banks in their states. Five banks in Alabama received funding, an outcome re-flecting the status of their representatives,both of whom were ranking members on therelevant committees in both chambers. State

officials in Arizona, dismayed by their lack ofTARP money, vowed to take up the advocacygame. In Ohio, an initial refusal to bail out aCleveland bank led to a political brouhahathat apparently influenced funding decisionsat Treasury; Ohio banks later received over $7billion. Barney Frank admitted that he hadwritten a provision into EESA to help a bank

from Massachusetts. He also said that he hadlater spoke to regulators to urge that the bankbe considered for a capital injection. Frankargued he had been very public about hissupport for the bank. He saw no problem with

Treasury posting a log of communicationswith members of Congress. Lawmakers want-ed voters, he continued, to know about suchefforts.129 This conclusion need not be limitedto particular cases reported in the media. Amore systematic study of the effects of politi-cal influences on capital injections discoveredthat congressional representation, as well as abanks presence on the board of the FederalReserve, was strongly correlated with receivingTARP money.130

Conclusion

By mid-April, Goldman Sachs had returnedto profitability and planned to raise privatecapital to pay back the $10 billion receivedfrom the government and exit the TARP pro-gram. Leaving the program would free the firmfrom government controls that came with themoney, not least the limits on executive com-pensation.131 Goldman Sachs was not the onlybank hoping to get out of TARP. By June 17,

2009, recipients had repaid $70 billion of capi-tal purchases by the government.132 During thespring and summer of 2009, several banksrepaid sums to the Treasury and bought backthe relevant warrants. As a result, the Treasuryrealized a reasonable return on investmentfrom these banks. This did not mean the entireprogram would turn a profit. It did suggest thepossibility that the bank portion of EESAcould show a positive return.133A part of thisoutcome may be credited to Congress. Thecongressional version of EESA differed from

the initial Paulson proposal by requiringTreasury to receive a warrant in exchange forpublic investment in a bank.134 The auto com-panies, in contrast, had received over $70 bil-lion from the government. CBO estimated that$40 billion of the first $55 billion representedlost value.135 As of June 2009, the bankappeared to be a better outlay than the car

18

A study of theeffects of political

influences oncapital injections

discovered thatcongressional

representation, aswell as a bankspresence on the

board of theFederal Reserve,

was stronglycorrelated withreceiving TARP

money.


19/28

companies. Both cost less than the $150 to$175 billion spent to procure congressionalvotes in favor of EESA on October 3, 2008.136

In hindsight, the original bill proposed byTreasury Secretary Paulson would have been

superior in some ways to the EESA. Paulsonsproposal suffered from at least one severedefect: it attempted to preclude judicial reviewof the Treasury secretarys action. However, hisinitial proposal had two advantages. Paulsonproposed delegating less authority than theEESA had proposed: he sought only the pow-er to buy mortgage-related assets. It is possi-ble, although by no means certain, that hadPaulsons proposal become law, Congresswould have had to amend it to empower theSecretary to capitalize the banks or to subsi-

dize the auto companies, which would haverequired more deliberation about those poli-cies from Congress. Finally, the money wastedbuying votes to enact EESA would presum-ably have been saved had Paulsons bill rapidlybecome law.

This alternative scenario posits a hypo-thetical Congress willing to take jointresponsibility with the executive for dealingwith the financial crisis. EESA, however, hasmultiple goals and weak congressional con-trol over the authorized sums. As noted sev-

eral times in this account, Congress triedrather hard to avoid responsibility for theconsequences of EESA. Responsibility fell, aswe saw, to Treasury and the Federal Reserve.Both had an attenuated relation to the votersthrough the president that appointed them.

The enactment and implementation ofEESA showed how far Congress has comefrom the centrality accorded the legislature inthe Constitution and in republican theory. Itis not just, as one commentator put it, thatCongress with its howls of rage, its chaotic,

episodic reaction to the crisis, and its shame-less playing to the crowds was out of con-trol.137 Congress showed itself to be a bit play-er in a multi-hundred billion dollar dramathat appeared to implicate the economicfuture of the nation. Throughout the TARPsaga, Congress had two priorities: limits onexecutive compensation and funding to pre-

clude foreclosures.138 Treasury resisted thelimits on executive compensation until Con-gress passed limits on bonuses as part of thestimulus bill in February. Congress also even-tually goaded the administration into setting

aside $50 billion for foreclosure mitigation. Bymid-June 2009, CBO reported that none ofthis money had been disbursed.139 The con-gressional panel set up to oversee the TARPprogram started late and was ignored byTreasury. It is hard to argue that the oversightpanel had any influence at all on the imple-mentation of the policy for a year after its pas-sage.

We might summarize the TARP story asfollows. Fed and Treasury officials diagnoseda financial panic and responded within the

limits of their powers as they saw them.Secretary Paulson then proposed thatCongress allocate $700 billion to be used topromote market stability while protectingthe taxpayer. Congress appeared to resist andenacted a law that set out many more goalsfor EESA. Afterwards, Treasury and the Fedspent much of the allocation promotingmarket stability. In that sense, Treasury andthe Fed simply acted on Paulsons originalproposal. Congress did not affect the tellingof this tale; the story we have was written by

the Federal Reserve and the Department ofthe Treasury. Justice Rehnquist stated in theBenzene case that Congress should make theimportant choices about policy. In the caseof EESA, Congress made no importantchoices about the policy. That failure byCongress arose from its defective grant ofpower to the executive in this case.

The Supreme Court demands that delega-tions of congressional authority be accompa-nied by an intelligible principle to constrainexecutive discretion. Such a principle suppos-

edly preserves congressional control over law-making, the separation of powers, and therule of law. In this case, Congress specified 13goals or intelligible principles for EESA.What Congress did not do was assign priori-ties to its many goals for EESA. The tradeoffsamong goals and values were delegated to theexecutive along with money and power.

19

In hindsight,the original bill

proposed byTreasurysecretary Paulsowould have beensuperior in someways to the EESA


20/28

Congress did become involved in policy-making beyond granting plenary power to theexecutive to buy assets. Members fought hardto ensure that banks in their districts receivedtheir due share of the bailout money.

Congresss policymaking, in sum, involved thenormal distributive politics of the pork barrelrather than policies seeking a more generalgood. Congress also sought to impose limitson executive compensation in firms funded bythe bailout. As we saw, Congress did amendlegislation to enact such limits. A year after thebailouts, however, the relevant federal officialwas still seeking to apply such limits. In gener-al, the policy seems more a response to publicanger about bailouts than a serious effort tomake public policy.

The TARP case casts a harsh light onCongress. The institution intended shape andcontrol federal policymaking was weak andhelpless in the face of a crisis. It transferred itspowers to the executive with little constrainton their exercise. Members sought, above all,to avoid responsibility for economic problemsa month before an election. The executive, incontrast, was willing to assume power in thecrisis along with the concomitant and attenu-ated responsibility of acting. Not surprisingly,Congresss goals for TARP were ignored with

impunity by the executive. The Framerssought to both separate and balance powers.In the TARP case, power was neither separatednor balanced. The executive held a unifiedauthority that was unchecked.

How might we restore the constitutionalbalance? Not much may be expected ofCongress based on what happened withEESA. Congressional leaders and membersshowed no desire to meet their institutionalobligations to deliberate, to check the execu-tive, or to properly legislate. Congress avoided

its obligations because members wished toavoid hard choices that might alienate somevoters.140 In contrast, the executive and thehead of the Federal Reserve initially showedmore respect for the Constitution and forCongress than members of Congress did fortheir own institution. In any case, it is not thejob of the executive to help Congress meet its

institutional obligations. The courts have thattask.

Chief Justice Rehnquists opinion in theBenzene case provides a legal foundation forrenewed scrutiny of congressional delegations

of power. The Supreme Court has longdemanded that Congress set out an intelligi-ble principle to guide grants of power to theexecutive. That demand, however, has oftenrequired little more than setting out a goal orgoals for the policy. Congress should berequired to do better as suggested by Rehn-quists opinion. Each grant of power to carryout a law should contain an intelligible princi-ple that indicates the hierarchy of goals andvalues served by the law. By establishing thathierarchy, Congress would make the most

important choices regarding the law. An intel-ligible principle of this kind would also beworkable. It would inform the discretion ofthose who carry out the law and the judgeswho pass on its validity in implementationCongress would also, of course, have the pow-er to specify the means to reach its goals andvalues. This concept of an intelligible principlewould ensure that Congress fulfilled its con-stitutional obligation to legislate (and not del-egate power), thereby affirming the rule of law

In EESA, Congress did not set out an intel-

ligible principle. Instead, Congress set out anunordered plethora of goals and gave the exec-utive plenary power to buy any asset to achievethese unspecified ends. Inevitably, theTreasury secretary made the important choic-es regarding the federal governments re-sponse to the financial crisis. The courts couldhardly fault Treasury for doing so; judges hadlittle guidance to assess Treasurys perfor-mance. Indeed, Congress itself had no clearbasis to oversee the implementation of EESAHaving failed to meet its constitutional oblig-

ations to legislate, Congress could hardly com-plain of having no leverage over the policy out-comes. The Supreme Court should haveprecluded all this by requiring Congress tofashion an intelligible principle that resolvedthe conflict of values at stake in this situation

Had Congress or the Court taken theConstitution seriously, the government re-

20

The TARP casecasts a harsh light

on Congress.


21/28

sponse to the financial crisis would have beendifferent. Congress could have begun and end-ed its work with the original Paulson proposal. As noted earlier, that proposal set out twogoals (market stability and taxpayer protec-

tion), rather than 13 goals. It would have beeneasier for Congress to fashion an intelligibleprinciple for a law with two goals. Congresscould have stipulated that the primary goal ofthe bill was restoring market stability. It couldalso have constrained pursuit of that goal byestablishing a Special Prosecutor for fraud andby setting out an overall spending limit. Con-gress could also have required that Treasuryonly buy troubled assets to the point that theprobable losses to taxpayers from economiccontraction equaled the probable losses from

purchasing assets. With that principle in law,Treasury could then make judgments at themargin about purchases. Congress, in turn,would have had a standard by which to exerciseoversight of Treasurys work. Congress wouldhave retained, as Rehnquist demanded, themost important choices regarding the policy.

Congress could have added additionalgoals like foreclosure relief or justice (i.e.,limiting executive compensation). Had theytried to do so, members would have had toconsider how Treasury should make tradeoffs

between these goals and market stability ortaxpayer protection. As we saw, Treasury offi-cials apparently subordinated limiting com-pensation to the goal of market stability.Congress might have made the same decisionor not. Under the U.S. Constitution, however,that decision belonged to Congress, not theexecutive. This path not taken under the guid-ance of a real intelligible principle wouldhave had another advantage. Given greaterclarity about ends and means, Congress andthe informed public might have been better

placed to assess the consequences of the bill.141

Even those who support the politics pur-sued by the executive under EESA should bealarmed by Congresss institutional decline asrevealed in this episode. The facts of this casesuggest that, in a crisis, our republican consti-tution has given way to unified technocraticpower obscured by empty rituals of legislation

and oversight.142Absent a reform and revivalof the Courts intelligible principle test, we willhave more TARP laws that diminish congres-sional authority, blur the separation of pow-ers, and undermine the rule of law.143

Notes1. Thomas J. Billitteri, Financial Bailout. CQ Re-

searcher18, no. 37 (October 24, 2008): 86588, http://library.cqpress.com/cqpac/cqresrre2008102400,p. 878. Phillip Swagel provides a view of the devel-oping crisis from inside the Treasury Department.See Swagel, The Financial Crisis: An Inside View,

Brookings Papers on Economic Activity, Spring 2009,Conference Draft.

2. James B. Stewart, Eight Days: The Battle toSave the American Financial System,New Yorker,

September 21, 2009, p. 73.

3. Ibid., p. 75.

4. Ibid., p. 76.

5. It is a separate question whether the officialsactually had such authority. Subsequent to thecrisis, no court has ruled that they did not.

6. Congress failed in other ways. The United StatesConstitution sets up a government of defined, enu-merated, and limited powers. If the people do notgrant a power in the Constitution, the federal gov-ernment may not legitimately exercise it. The

Constitution does not grant federal officials thepower to buy troubled assets or to become a gar-gantuan mortgage broker. EESA is not a law nec-essary and proper for carrying out any enumerat-ed powers. Judging by the meaning of theConstitution, Congress did not have the power toenact EESA, and the law is unconstitutional. SeeGary Lawson, Burying the Constitution under aTARP, Boston University School of Law WorkingPaper no. 09-3.

7. John Locke, Two Treatises of Government, ed. PeterLaslett (New York: Mentor Books, New AmericanLibrary, 1965), section 141. Fourthly, The Legis-

lative cannot transfer the Power of Making Laws toany other hands. For it being but a delegated Powerfrom the People, they, who have it, cannot pass itover to others.

8. Mistretta v. United States 488 U.S. 361 (1989) 730.

9. J. W. Hampton Jr. and Co. v. United States, 276 U.S.394, 409 (1928). See also Mistretta v. United States,73031.

21


22/28

10. The cases werePanama Refining Co. v. Ryan, 293U.S. 388 (1935), A.L.A. Schechter Poultry Corp. v.United States, 295 U.S. 495 (1935), and Carter v.Carter Coal Company, 298 U.S. 238 (1936).

11. David H. Rosenbloom

lawless policy: tarp as congressional failure, cato policy analysis no. 660

Documents