I’m not a constitutional law expert. But I’m a fan (of the document, not the lawyers). And I’m extremely uneasy at the prospect of the United States government assuming control of Chrysler, GM and (maybe) Ford ahead of the company’s legal owners AND its creditors. Of course, I’m not the only one. And, once again, we turn to the just plain folks at The Heritage Foundation for a heads-up on a bailout-related issue. “A key provision of proposed legislation to bailout the General Motors and Chrysler, which say they are on the brink of insolvency, may be an unconstitutional taking of private property… General Motors and Chrysler already carry significant loads of ‘senior’ debt with priority over other claims, and it is a standard feature of such debt agreements that borrows cannot subordinate this senior debt—that is, as a condition of the loan, the borrower agrees not take on additional debt that has a higher priority and would therefore imperil the senior debt. But that’s precisely what the bailout bill purports to do.” In other words, “Without providing any compensation to senior creditors, the bailout legislation would convert their loans to junior debt, increasing the likelihood that they will not be paid, which amounts to a partial or total taking. There is also a real question as to whether this taking would be for a ‘public use,’ as also required by the Constitution.”
“The bailout legislation could be fixed by requiring the ‘car czar’ established by the legislation to provide adequate protection to lenders who debts are subordinated by government loans, but it is not apparent that, without drawing on the power of the Bankruptcy Clause–unavailable outside of bankruptcy–this would be sufficient to correct the constitutional infirmity.
“There are only two sure-fire fixes to the legislation. One is that the government could pay off the automakers’ senior debt-holders with ‘just compensation.’ The downside is that this could add billions to the bailout’s price-tag and be a windfall for lenders that might otherwise face a ‘haircut’ on their payouts in a bankruptcy proceeding.”
BUT–
“The best, safest, and most fiscally responsible solution is the simplest: Don’t use taxpayer funds to bail out the Detroit automakers. Instead, rely on the mechanism established in the Constitution to let the automakers confront their problems and reorganize: bankruptcy.”
Uhm, Robert, the auto bailout should be the least of your worries for unconstitutionality. How about we start with the Federal Reserve and work our way down from there?
Constitution? Yeah, we got one. Just a piece of paper though.
It and the Bill of Rights have been made irrelevant in the name of ‘public safety’ or just plain giving powerful people/companies what they want.
Between the ‘war on drugs’, random sobriety checkpoints, and Eminent Domain used strictly to raise tax revenue, the camel’s hump was already in.
The unPatriotic Act sealed the deal. Government can, and will do as it pleases.
Short story, current, STL, MO. St. Louis County decreed that it shall decide who picks up your trash. Up till a year ago, you got to pick your own hauler. Local haulers were required by law to be provided a 2 year notice if such a change were to ever take place. They were not. State Appeals Court ruled that STL County broke the law by not notifying in advance. Despite the ruling, the county will still fine an independent up to $50 per violation (each house) if caught operating where the county didn’t give them the contract. One contractor would be fined over $750K per month if they were to try to service the accounts they lost.
Everyone has to follow the law. Except the people who make the law.
Anybody see a problem?
“How about we start with the Federal Reserve and work our way down from there?”
I agree, however, it still begs the question about the legality of a taxpayer bailout. However, what a lot of people keep forgetting is that the Federal Reserve is tied to the US economy, and credit flow is essential to our health and is a “need.” A car is a “want,” and the people have spoken and the big 2.748 have failed to deliver anything not resembling carp on wheels.
They may have a point, but I’m not sure how it would stick.
Government almost always puts itself first for repayment. If you don’t pay your taxes and there are only so many assets to seize, Uncle will take his share before anyone else, even if the lenders have collateral and made their loan prior to Uncle getting stiffed.
Bankruptcy would certainly give priority to the DIP lender. The government would probably argue that the bailout was equivalent to a bankruptcy and that a greater public policy interest was served by not putting it into bankruptcy court.
An opponent might argue that the government violated the law by not using bankruptcy. But if the creditors would have done worse under bankruptcy than they would have under the bailout, then I would imagine that they would have a difficult time showing how they were harmed by it and therefore wouldn’t have much of a case. It’s not enough for there to be a breach, there are also needs to be a way to measure that more harm came from the alternative.
If I was the government, I wouldn’t worry about it. They have a lot of latitude these days, and will get away with just about anything for many months to come.
Leave it to a conservative think tank to worry about constitutional protection of property rights all the while other constitutional rights have been systematically under attack by Bush and the Neo Cons.
http://en.wikipedia.org/wiki/Heritage_Foundation
It seems to me that if there is a taking issue evolved in the Heritage Foundation argument, they must show that a loss in value occurred. What is the Senior debt worth without a government bailout? Probably not much.
An argument can be made that the bailout will increase the likely hood of payment on the senior debt since it increases the possibility of survival. I submit that the senior debt will go up in value if the bailout is passed.
That is not a taking, but a giving.
Its a sad commentary about the state of the auto industry when a car blog has this many posts related to bankruptcy law, trademark law, constitutional law and congressional hearings.
thetruthaboutcspan.com
This is EXACTLY what Prof Edward Altman warned about in testimony. Barney Frank told him “we write the rules”. Barney! maybe you shouldn’t write THOSE rules.
An argument can be made that the bailout will increase the likely hood of payment on the senior debt since it increases the possibility of survival. I submit that the senior debt will go up in value if the bailout is passed.
Right. If that’s true, then the existing lenders have no case, because they lost nothing.
The alternative is a bankruptcy filing. If GM or Chrysler filed, they would probably go into Chapter 7, wiping out the value of many of these obligations. The creditors are helped, not harmed, by the bailout, because it delays or avoids the liquidation scenario.
Another alternative would be for the government to get these creditors to sign subordination documents, that clearly put the creditors in back of the government. If the creditors refuse to sign, no money from Uncle. Of course, that would involve playing chicken, and so far, the government has done a lot of crowing. Maybe too much crowing.
The government gets its way when it comes to money. Has been for a long time. Government (FDR) in the 30’s told everyone by executive order that owning gold outside of a piece of jewelry was illegal. Owning a kind of non-toxic metal was illegal? Since that one, its been a free-for-all with the government and money, and who gets to make the rules when about what regarding money.
The question you ask could be rightly posed to investors in Washington Mutual and Wachovia. Both those stocks went to zero because of the inability for those institutions to market-price MBS instruments they held and hence bankruptcy. Yet they held $billions$ in real estate and stocks.
Why do those outfits go bankrupt while investors in Citibank (hypothetical buyer of Wachovia, which itself tried to go tits-up last week) Merril Lynch, and JP Morgan get to benefit – at least in the long term – from these dirt-cheap midnight sweet-heart deals that let them buy hundreds of billions in assets and deposits for pennies on the dollar?
Welcome to extra-constitutional government, now it can reach out and touch everyone. Perhaps that will be a blessing in disguise.
wait, constitution, who do you think you are, Ron Paul? We make our own rules here.
The Heritage Foundation has been one of the main cheerleaders in the systematic decimation of our Constitution by the current administration. But they’re quick to bring up constitutionality when it serves their agenda.
It’s either “just a scrap of paper” or it isn’t.
One more example of right-wing hypocrisy.
“An argument can be made that the bailout will increase the likely hood of payment on the senior debt since it increases the possibility of survival.”
Really? Exactly how much do you think the giveaway, err, bailout, would have to be for GM and Chrysler to survive?
$15B is pissing in the wind. They’ll burn through this money servicing their debt and keeping the voice mail and elevators going during business hrs for 2 months.
@ bjcpdx
Don’t talk about something which you know nothing about. The Heritage Foundation has been very critical of George W. Bush and this administration on most major issues. Here’s a shocker: President Bush is not a conservative. He never was, and never will be.
The Heritage Foundation is a conservative institution that advocates conservative values. (most of which this administration does not represent)
Exactly how much do you think the giveaway, err, bailout, would have to be for GM and Chrysler to survive?
You misunderstand the point. The issue for this specific discussion topic is whether the other creditors could sue the US government on the basis of their being harmed because their senior position got pushed behind that of the government.
The answer to that may be “no”, because the bailout would have not harmed, and may have even helped the creditor’s position. Even if the only result was that they got another month’s worth of payments before the fit hit the shan, they would have a tough time proving their case.
A case would require them to show that they were hurt by the government’s actions in some measurable way (dollars and cents), and they would probably have a tough time doing that. If they would have been wiped out anyway, no harm done to them. The government would probably argue that the possibility of preventing a meltdown made it worthwhile policy that didn’t compromise the position of the creditors.
Welcome to extra-constitutional government, now it can reach out and touch everyone.
You may be going a bit far there. The country’s origins involved a fairly similar issue, which was so controversial that it is the subject of Article VI of the Constitution.
Back then, many of the various states and the national government created under the Articles of Confederation were up to their eyeballs in debt, the dollar was next to worthless and the US had zip for a credit rating. With the new Constitution, Hamilton dreamed up the idea of having the new federal government take over this debt by creating a Bank of the United States that could sell bonds to pay off the debt, instead of defaulting on it.
The states that had already paid off their debts weren’t happy with this, because they were going to have to pay taxes to cover the cost of Hamilton’s plan, but he managed to pull it off.
As a result, he established the US’ reputation for paying its bills, because taking the debts away from the states didn’t give them a chance to default, which would have made the US look like the 18th and 19th century equivalent of a third world country.
Repaying the bonds gave the US a worldwide reputation for having a credible treasury that would keep its promises, which in turn allowed the US to borrow money at low interest rates, making it a stronger country. Not bad for a bunch of rebellious rabblerousers who had tossed a pile of tea into Boston Harbor.
” .. the just plain folks at The Heritage Foundation”
Surely you must be kidding with that description of Heritage. The Heritage Foundation is conservative think tank headed Edwin Feulner, formerly staff head of the House Republican Study Committee. Hardly “just plain folks”.
Lenders of last resort lending to companies in perilous condition routinely do so under first-in-line terms and conditions. This constitutional argument is little more that speculative saber rattling.
The United States government, particularly the White House, has taken dozens of Constitutionally dubious actions in the past eight years. And yes, plenty the eight years before that, too.
There really is only one question for me:
Is there any possibility of the Constitutionality argument having any impact here?
No. So it doesn’t matter.
Please, don’t even begin to lecture me on the Constitutional rights of citizens EVEN BEING REMOTELY CONSIDERED in this day and age.
Last month I got fined for parking my 2002 Mercedes Benz on my driveway. Why? Apparently you’re no longer allowed to park your own business vehicle on your driveway according to my County’s Zoning Board. You can park it in a garage, on a side yard, or behind your house… but not your own driveway. Oh, and if your wife works with you in the same business get ready to carpool. I got fined $300 plus $105 in ‘trial fee’ for parking my own car on my own driveway.
I’m going to wait six months on this one. If I still feel as angry about it then as I do now, I’m going to declare total outright war. By the way folks, this anti-Constitutional policy is being enacted in both Republican states and Democratic states.
It’s all a matter of making citizens pay for the government’s debts in whatever means and ways possible.
The Heritage Foundation seems to be very confused internally. They seem to invoke Constitutionality when it pleases them, and ignore it the rest of the time.
For example, the are for warrantless, baseless border searches of electronic devices which is plainly a violation of the 4th amendment to the Constitution in the name of combating “terrorism”. They are willing to throw out probable cause because it is too much of a burden for border agents or Homeland (In)Security. See http://www.techdirt.com/articles/20080710/1531421643.shtml
@ RF
Maybe you could link to the Wall Street Journal and the constitutional commentary their story contains rather than attracting critics of Heritage Foundation per se.
@ Steven Lang
That goes in my file on why I believe zoning boards and housing associations are Nazis too lazy to march.
(No, I’m not invoking Godwin’s Law, just using an accurate metaphor.)
Pert’ near every day while reading/hearing/watching the news/editorials/essays/message board comments/etc. I become ever-more convinced that the USA is and has been in the midst of class warfare and that the battles are growing in size and number.
The Heritage Foundation is lock, stock and barrel of the Republican party. They are quite willing to have the NSA listen to your phone calls, but heaven forbid they keep union workers on the job.
Clearly someone has been smoking Repbubican Study Group talking points recently. I suggest you lay it off — science has proven it destroys your brain cells.
I am not a Constitutional law expert, however, I suspect it can easily be justified in the name of national defenese. I wonder if somewhere in the bill there is mention of such purposes.
Also, I would tend to agree with other posters who have argued that there is no taking where you have the CEOs of each company confirming that holders of existing debt will be wiped out in a matter of weeks without aid.
It’s not unconstitutional if, as a precondition to receiving the money, the government requires the senior debt holders to agree to a subordination. The senior lenders would be inclined to do so because this is “new money”. If they really wanted GM (etc.) in bankruptcy, they would have filed an involuntary petition a long time ago.
No seriously, as couple of commentators have already said, you were just joking in your description of the Heritage Foundation as “just plain folks” right? I really really need to know.
Sorry, I tried to link to WSJ but failed.
It’s a similar article, but the commentary is useful and no-one has to worry about the Heritage Foundation, just Rupert;
http://online.wsj.com/article/SB122895623197196549.html
Qusus :
Yes, it was a joke.
Interesting question – the Supreme Court has in the past been particularly lenient when an overriding national interest was at stake (and even sometimes when it wasn’t – i.e. someone needed to build a stadium or commercial development).
Also, it’s only an unconstitutional taking if there wasn’t just compensation in return – how much is an otherwise totally abandoned debt worth? Can we chuck a few GM shares in their general direction?
Oh yeah, and as a practical matter, even if this is blatantly unconstitutional, the lawsuits will take a while to get anything struck down. So long in fact that the game could well be over before the refs have a chance to review the call. FDR did this with some of the New Deal programs – they were struck down after they had started as blatant overreaching, but at that point much of the purpose of the plan in question had already been achieved.
I always love the broad, sweeping statements about how Bush and the neo-cons are trashing the constitution…..care to back that up with facts?
BTW…were you able to accuse the president of such action without being jailed? Go visit a great country like China….where one of the first things you are whispered by your aquaintences is to not say anything bad about the leadership.
It seems for some people the phrase “It’s not constitutional!” means “I don’t like it!.” Well, I suppose if everyone had the exact same understanding of the law and its application to every situation, there’d be no need for lawyers or judges.
The Fed is constitutional. Proponents of a central bank have been winning that argument since the time of the Founders. The Supreme Court dealt with the question as far back as 1819 in Marbury v. Madison.
I used to challenge my students with the question, “How can we have paper money if the constitution speaks only about coining money?” Because Congress has extensive powers regarding money. A concise and readable article on these topics, written by a professor with no ax to grind, is at:
http://www.geocities.com/CapitolHill/Senate/3616/flaherty3.html