The Guarantee

Yesterday, Megan McCardle asked, with regards to the bailout plan, “[A] lot of Democrats seem to want the Wall Street executives to disgorge things like their retirement packages and bonuses before cutting any deal. Can Congress do this, legally? I mean, yes, they make the law. But my understanding is that while you can grandfather in benefits, you can't retroactively punish people for behavior that was legal when committed. Can Congress reach in and retroactively void a private contract?” and Kevin Drum replied, “Not a chance. The Fifth Amendment prohibits the direct impairment of contracts, and Article 1 prohibits both bills of attainder and ex post facto laws.” The answer to both of Megan's questions are yes, and Drum's answer goes badly wrong.

The Fifth Amendment doesn't mention impairment of contracts, but Article 1, Section 10 does. However, post-New Deal jurisprudence interprets the contracts clause to primarily attack the evil of states unilaterally changing the terms of contracts they enter into, not changing the terms of contracts between two other parties, like an employee and employer. Such changes, if challenged under the contracts clause, will be reviewed with a very lenient standard.

The ex post facto clause prohibits criminal punishment of conduct which wasn't criminal at the time the conduct took place and is obviously inapplicable here.

The bill of attainder clause prohibits the legislature from punishing, and not just criminally, specific individuals or easily ascertainable members of a group without a trial. I don't know of any precedent which addresses the issue of just how easily ascertainable the members have to be, but the cases I know of deal with groups both smaller and more particular than that composed of people above a certain level in the hierarchy of whichever companies choose to take advantage of the bailout fund is not sufficiently easily ascertainable, and I think that's the relevant group. Even if the members were too ascertainable, as long as any bill conditions disgorgement of benefits upon choosing to make use of the fund it wouldn't be a punishment for the purposes of the bill of attainder clause.

In unrelated legal pedantry, it's not the case that, as Michael Lewis wrote in a somewhat funny satirical1 article today, “Not only was [Paulson] required to sell his half-billion dollars in Goldman stock near the high, but also, as Treasury Secretary, he was exempt from capital-gains taxes.” He was required to sell by conflict of interest laws, but his gains are not tax-exempt. Rather, assuming he got a certificate of divestiture which states that he was required to sell those shares because of conflicts of interest laws, he could, according to Internal Revenue Code §1043 reinvest the funds in either treasuries or certain “diversified investment funds,” which are mostly blind trusts and not recognize the gain on the original sale until he realized a gain or loss on the sale of the property purchased with the proceeds from it. And I read elsewhere that Paulson, unlike other Federal appointees covered under 1043 couldn't buy treasuries, which makes sense, since he's the Secretary of the Treasury. While there's obviously value in deferring taxation, it's not the same the thing as being exempt from capital gains, and the difference shouldn't be elided.

1. The claim I'm refuting doesn't just appear in satire, there's a good deal of confusion about the matter. For instance, “One fringe benefit was the capital gains tax exemption given to federal appointees who have to sell holdings before they take office.”