The Big Three bailout failed in Congress yesterday evening. This morning, the White House announced its intention to consider using the $700 billion in Temporary Asset Relief Program (TARP) funds to extend financing to the big three auto makers. But, according to one Heritage scholar, using TARP funds to rescue a manufacturer breaks the law–and could precipitate an unhealthy run on Washington by other businesses asking for “emergency funding.”
The Hill reports,
The White House had resisted using funds from the Troubled Assets Relief Program (TARP) to help the Big Three, but following the impasse in Congress on the issue, it may have to reverse course.
“It is disappointing that while appropriate and effective legislation to assist and restructure troubled automakers received majority support in both houses, Congress nevertheless failed to pass final legislation,” White House spokeswoman Dana Perino said in response to a failed Senate vote.
“Under normal economic conditions we would prefer that markets determine the ultimate fate of private firms,” Perino added. “However, given the current weakened state of the U.S. economy, we will consider other options if necessary – including use of the TARP program — to prevent a collapse of troubled automakers. A precipitous collapse of this industry would have a severe impact on our economy, and it would be irresponsible to further weaken and destabilize our economy at this time.”
According to Andrew Grossman, a Senior Legal Policy Analyst at the Heritage Foundation, this move would be illegal:
“…More problematic, Treasury lacks the statutory authority to direct TARP dollars to the automakers. While the statute, passed by Congress in October, grants the secretary extremely broad discretion to decide how to employ the funds, it clearly limits the recipients to “financial institutions.” And the definition of that term is quite clear:
FINANCIAL INSTITUTION- The term ‘financial institution’ means any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States, the District of Columbia, Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands, Guam, American Samoa, or the United States Virgin Islands, and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government.
This doesn’t leave much room for interpretation.”
Grossman, who favors an auto bankruptcy, wrote on November 15 that
“Bankruptcy is not, as some would have it, the end of the road; it is, rather, a new beginning. Under Chapter 11, it affords companies that have hit hard times a fresh start and a chance to reorganize to take better advantage of their assets.
For this reason, dire claims that bankruptcy is somehow equivalent to the end of a business–for example, some have stated that bankruptcy would imperil the employment of all of an automaker’s workers–are simply incorrect. Instead, the reorganization process provides unique flexibility to unlock the fundamentally sound productive capabilities of a faltering business by freeing it of many obstacles to success, such as unviable contracts, crushing debt, and poor management.”
Update: According to MarketWatch, “the head of the Government Accountability Office testified last week that the wording of the legislation was flexible enough to authorize loans to the auto industry.”