7.17.2008

Napolitano Complex

Fmr. Judge Napolitano of the Jersey Superior Court (state court) is now a fox news legal analyst and, apparently, sometime contributor to the NY Sun. He argues that the Fed's bailout (if it is that yet) of Mr. and Ms. May is unconstitutional. His reasons:

1. General Welfare clause: the government can only spend money for the general welfare, not for private companies. Fannie and Freddie used to be government-owned, but because they have shareholders now, they are no longer eligible for public funds.

2. Equal Protection clause: The goodly judge reminds us that all American laws must be equally applied, so the Fed can't chew gum, I mean provide funds to these companies, unless it brought some for the whole class - including, he points out, Indymac.


First, you'd think a judge would rely on some precedent or case law or something, but the Judge's argument stand instead on bald, sweeping statements about the broadest meaning of Constitution. As a former judge, Mr. Napolito well knows that the Constitution does not operate this way. There are several hundred years of case law setting out the nuances. You have the right counsel, but not for every trial, appeal, or motion. You have the right to assemble, but a permit can be required. And you have the right to equal protection - but that requires a protected class and permits some discretion. You'd expect a judge to at least acknowledge that he's glossing over this - the actual manifestation of the Constitution in modern American law. He doesn't.


Second, the arguments fail on their merits.

General Welfare: Fannie and Freddie own the vast majority of American mortgages, representing both the stability of home ownership and a HUGE chunk of the marketplace. If they fail, it hurts every single American.

Further, the Fed is running to protect these companies in large part because they are tightly regulated so that the market has always had a tacit understanding that they were guaranteed by the Federal government. That government guarantee, long implied and never disavowed, was put in place to empower all Americans to buy homes. If the government now has to make good on it, that is the execution of its powers for the general welfare.



The judge claims the companies are now private. The government caps the size of the loans each can buy and determines what is and is not "conforming." The Macs then don't get to selectively accept or deny loans. How, then, Mr. Napolitano, are these private entities?

Equal Protection: Last I checked financial institutions were not a protected class.

Second, there is the point that Fannie and Freddie aren't truly private entities, and so are part of the government, not citizens of the U.S. like private companies.

Third, what law is being applied unequally here? This is the Federal Reserve, a federal agency, acting within its discretion to carry out its mission - to preserve the integrity of American markets. Every time the Fed acts, it is targeting a subset of the market - why aren't all of those inequitable? Further, there is no charge that Mr. Bernanke is doing this for corrupt purposes. He is acting for the market, not for his personal or political interests.

Finally, the good judge may be looking at this at too high a level. He says the laws should apply equally between the companies. What if the laws should apply equally to the American people? At that level, Bernanke's actions do the most to help Americans equally. Indymac accounts were insured by the FDIC, so investor losses are covered. Fannie and Freddie mortgages are not insured, so damage to buyers is not. As for investors of both Companies - both took known risk and both will now lose all or close to all of their investments. The "bailout" is going to just keep these companies afloat; it won't buy back shares at their prices from 2 years ago. Seems like the Fed's actions treat both investors and depositors/buyers equally, so what's the problem?

1 comment:

thegameiam said...

I think you're correct - if FNMA itself is constitutional, then government assistance to it also is. Now whether or not that's a good idea is a separate question...

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