FEIN: Bailout’s legal flaws

OPINION:

COMMENTARY:

Expounding all the outrages and inanities in the Troubled Asset Relief Act of 2008 (TARA) should not be attempted as a concession to the shortness of life.

Accordingly, this column is confined to TARA’s legal infirmities, although the concern may smack of quaintness among voters and the political elite who yawn at ever-escalating constitutional transgressions. (While the House was passing TARA, House Speaker Nancy Pelosi, California Democrat, scuttled a vote to hold former White House guru Karl Rove in contempt for thumbing his nose at a congressional subpoena. Mr. Rove’s nonappearance ordered by President George W. Bush was a high-water mark in executive privilege that bettered the instruction of President Richard M. Nixon during the Watergate hearings featuring former White House counsel John Dean).

TARA authorizes the Treasury secretary to purchase mortgage-backed securities or other assets if the purchase transactions are thought to promote economic stabilization or growth. No banking institution sought an equity investment by the secretary under TARA, which would inescapably make the government the bank’s manager through jawboning or otherwise informed by political calculations in lieu of economics. Last week, in altering the administration’s economic recovery strategy, Treasury Secretary Henry Paulson summoned nine mega-banks to his office. He demanded that each institution create and sell nonvoting preferred stock to the government at a collective cost approximating $125 billion. The mega-banks were confronted with a “take it, or take it” non-choice choice; and, an insinuation that a refusal to sell would be unpatriotic and might provoke punitive regulatory harassment, for example, delays on applications for mergers or branches, or hyper-strict money laundering, safety and soundness, or Community Reinvestment Act compliance reviews.

In sum, the nine mega-banks created and sold nonvoting preferred stock to the secretary with the same voluntariness with which a citizen yields his wallet to a highwayman. The secretary’s coercion amounted to the exercise of eminent domain over bank stock. It was a taking of private property for the “public purpose” of economic stabilization by encouraging greater bank lending. Under the Fifth Amendment, takings require the government to pay “just compensation.” Neither TARA nor any other act of Congress, however, authorizes the Treasury secretary to “take” bank preferred stock. The Treasury Department lamely maintains that none of the mega-bank CEOs today would claim coercion in their stock sales. But of course they will deny the truth. To do otherwise would be to confess capitulation to blackmail, to invite stockholder suits, and, to trigger regulatory retaliation by the Treasury Department.

The mega-bank stockholders and competitors of the mega-banks both enjoy standing to challenge the legality of the preferred stock takings in federal court. Lawsuits can be expected within months.

The TARA precedent should be alarming to opponents of socialism, i.e., government control of the commanding heights of the economy. It means any statute authorizing the executive branch to “purchase” an asset carries with it a subtextual or countertextual authorization for the government to “take” that asset by eminent domain! As with Humpty Dumpty, the statutory words will mean whatever the president wants them to mean, not more or less.

The Bush administration’s taking of the mega-banks’ preferred stock to stabilize the economy with vocal support from Republican presidential nominee John McCain wars with the views of both voiced in 2005 in the celebrated Kelo case. There the United States Supreme Court, by a 5-4 majority speaking though liberal Justice John Paul Stevens, held that private property could be taken by eminent domain to promote economic growth in the private sector.

President Bush, John McCain and a bevy of other professed Republican Party conservatives then raced to denounce Kelo as a menace to private property and as constitutionally outlandish as the Roe v. Wade abortion decree. But the preferred stock transactions championed by Mr. Bush, Mr. McCain and their respective political flocks are simply a variation of Kelo. The government has taken private property for the purpose of encouraging private lending to the private sector.

If economic benefit, simpliciter, justifies eminent domain, then no private property is sacred. The government can always claim it knows of a superior economic use of an asset - ranging from a woman’s gold jewelry or Google’s search engine.

TARA was also unconstitutional at birth. Article I, section 7 requires all appropriations bills to originate in the House. To evade that injunction, the Senate struck everything in the defeated House bill but the number, and wrote its own bill anew. Constitutional law, however, subordinates form to substance. And the substance of TARA originated in the Senate.

But what’s the Constitution among friends of socialism? As President Nixon confessed in 1971 that “we are all Keynesian’s now,” President Bush may announce before he leaves office that “we are all New Dealers now.”

Bruce Fein is a constitutional lawyer at Bruce Fein & Associates and author of “Constitutional Peril: The Life and Death Struggle for our Constitution and Democracy.”