What is a "financial institution"?

If the Senate has nixed the auto bailout bill, how can Treasury announce that it will nonetheless go ahead and bail out the automakers? The answer turns on an interpretation of TARP, which authorizes the government to purchase securities in "financial institution," defined as follows:

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.

David Zaring says that "financial institution" is essentially defined as any "institution," given that the statute does not limit it to banks and other firms that we ordinarily think of as "financial institution." Others, such as Mike Rappaport, argue that the "not limited to" language encompasses institutions like hedge funds or other institutions "that deal[] with financial matters."

But doesn't an automaker deal with financial matters? They certainly lend money; and they borrow money as well. Of course, the same can be said about all business institutions. What matters currently is not whether a firm borrows and lends, but whether it borrows or lends a lot. The collapse of the automakers, which owe tens of billions of dollars, matters more for the financial system than the collapse of any number of tiny banks though the latter are indisputably financial institutions.

In resolving statutory interpretation questions like this one, courts don't just read the dictionary; they also look at other statutes. Consider 31 U.S.C. 5312, which also defines "financial institutions":

(2) "financial institution" means-- (A) an insured bank (as defined in section 3(h) of the Federal Deposit Insurance Act (12 U.S.C. 1813(h))); (B) a commercial bank or trust company; (C) a private banker; (D) an agency or branch of a foreign bank in the United States; (E) Any credit union; (F) a thrift institution…

[So far, so good. Rappaport-like in the narrowness of the definition.]

(G) a broker or dealer registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.); (H) a broker or dealer in securities or commodities; (I) an investment banker or investment company; (J) a currency exchange; (K) an issuer, redeemer, or cashier of travelers' checks, checks, money orders, or similar instruments; (L) an operator of a credit card system; (M) an insurance company; (N) a dealer in precious metals, stones, or jewels;

[?? What's this doing here?]

(O) a pawnbroker; (P) a loan or finance company; (Q) a travel agency;

[Travel agency?!]

(R) a licensed sender of money or any other person who engages as a business in the transmission of funds, including any person who engages as a business in an informal money transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institutions system; (S) a telegraph company;

[Telegraph company?]

(T) a business engaged in vehicle sales, including automobile, airplane, and boat sales;


Of course, elsewhere in the U.S. Code the term is defined more narrowly and intuitively; the point for present purposes is that how Congress understands "financial institution" or any other term depends on what it is trying to accomplish. This statute addresses financial reporting, and Congress had in mind something about who should report and who shouldn't, rather than who is really a "financial institution" and who is not. A court interpreting TARP will think in the same way. A financial institution for TARP purposes is an institution that holds financial assets (virtually all businesses) that have importance for the credit crisis, with "importance" a matter of case-by-case determination left to Treasury. Automakers collectively owe more money than most individual banks do; their financial health clearly matters to the resolution of the financial crisis, which is what TARP is for. With Chevron deference to the Treasury's reasonable interpretation, this would not be a hard case.


There have been a number of recent posts on comments, and comments on comments, almost all negative. For my part, comments have corrected errors and directed me to valuable scholarship and commentary of importance for my work. Thanks!


More from Randy Picker here and here.

Welcome to the Emotional Age, where what you feel about the symbol "financial institution" trivializes any prior common-sensical definition.
12.16.2008 9:45am
Dan R. (mail):
Who would have standing to challenge this anyway?
12.16.2008 9:57am
KenB (mail):
In the 1980s I represented savings and loans, which no longer exist here in Texas. In reading commentary on financial institutions, I had to struggle to understand why an insurance company was considered a financial institution. What I finally concluded was that the common element among commercial banks, investment banks, and insurance companies was that they aggregate capital. They take in small amounts and put them together to make larger investments. Perhaps that's a definition Congress ought to have used. It appears it did not.
12.16.2008 10:00am
Cornellian (mail):
Doesn't the list of examples restrict the scope of "any institution?"

Help me out here guys, I've forgotten the Latin phrase for that rule.
12.16.2008 10:18am
Expressio unius est exclusio alterius?
12.16.2008 10:30am
Not a lawyer here, but according to the urban legend that is constitutional law, is there any chance the the expenditure be found illegal simply because the Congress already said "No?"
12.16.2008 10:34am
The Divagator (www):
I get your broad point, I think, but this seems overdone. The fate of the car-makers has little bearing on the financial crisis (despite the banks' exposure to Big 3 loans) unless we start playing little language games with "financial crisis" as we are doing with "financial institutions."

So, Mr. Posner, just what is a "financial crisis"? :)
12.16.2008 10:44am
Could the fact that Congress specifically rejected the auto bail out bill be used to support a narrow definition of "financial institutions" for TARP purposes (excluding auto companies)?
12.16.2008 10:48am
MarkP (mail):
Please be sure to read the REST of the statute. The statute has a HUGE catchall, which authorizes the Secretary of the Treasury to purchase "any other financial instrument [that the Secretary, along with the Chairman of the Fed, determines the purchase of which is necessary] to promote financial market stability . . . ". So, as long as Bernanke agrees, the Secretary clearly has the ability to invest in Detroit's stocks or bonds (etc.). I wish this weren't true, but it is -- regardless of the definition of "financial institution" and regardless of Congress' refusal to specifically bail out Detroit.
12.16.2008 10:57am
PeterWimsey (mail):
The "including, but not limited to" language defeats the exclusio unius canon of construction wrt the list.

The requirement that the institution be regulated will have some limiting effect on construction of the term, however. Although it is probably the case that at least the finance arms of some automakers should receive money even under a narrow interpretation of financial institution - GMAC holds millions of mortgages (including mine) - and should be treated like any other similar mortgage company or bank. Although I have no idea how much they overlap with the regular auto business...I suspect not much, but have no real knowledge.
12.16.2008 10:59am
qwerty (mail):
so a used car dealership can apply for a bailout?
12.16.2008 11:00am
Jim at FSU (mail):
But the carmakers have separated out their manufacturing and credit wings for a long time. They are separate companies. And the credit wings are very healthy and in no need of a bailout.

No matter how low a price a cavalier sells at, GMAC makes a profit so long as they collect that delicious 12 percent interest for the next 7 years.
12.16.2008 11:02am
The TARP statute also has a section 103 that requires that the government not discriminate based on size of institution, geography, or form of organization for eligibility. Not for doling out funds, but for eligibility. I'm not sure if form of organization means bank, etc. or corporation, etc. I'd suspect the former.

In many ways, TARP is a lot like NIRA - basically unlimited authority to reshape the economy.
12.16.2008 11:15am
Sean O'Hara (mail) (www):
I'd guess telegraph companies is there for Western Union, though I don't see why they wouldn't be covered by (R) as well.
12.16.2008 11:23am
Preferred Customer:
Jim at FSU:

But the carmakers have separated out their manufacturing and credit wings for a long time. They are separate companies. And the credit wings are very healthy and in no need of a bailout.

No matter how low a price a cavalier sells at, GMAC makes a profit so long as they collect that delicious 12 percent interest for the next 7 years.

Actually, GMAC is in deep trouble and my implode regardless of whether GM gets the bailout money being discussed here. GMAC's foray into home mortgages did not exactly work out any better than any other recent such foray. In addition, companies like GMAC make bets on residual values of cars that they lease—when those cars come back off lease, GMAC has to turn around and resell them. The gas price spike and the corresponding collapse of the used market for cars like trucks (many of which are coming off lease) means that GMAC is stuck with assets worth much less than GMAC thought they'd be.

In fact, GMAC's recent restrictions on consumer credit (including basically abandoning leasing and restricting new car loans to customers with credit scores of 700 and above) are one of the proximate causes of GM's current liquidity crisis—even if people want to buy a GM car (and millions of Americans do), financing is very difficult these days.

See article here on GMAC's attempt to become a "bank holding company," and why that may fail:

GMAC Rushes to Conclude Bond Buyback And Avoid Bankruptcy

Also, GM hasn't made Cavaliers in years.
12.16.2008 11:28am
Duncan Frissell (mail):
The travel agencies and car dealerships were swept into the cash transaction reporting provisions of the Bank Secrecy Act (which outlawed bank secrecy) because those who couldn't deposit cash in banks would spend it on cars or prepaid travel. Also, travel agencies often indulge in various financial transactions like traveller's checks.
12.16.2008 11:31am
Wayne Conrad (mail):
The bigger question is whether the bailout, or most anything else congress does these days, is a constitutional use of the federal government's power. Of course, congress writes itself a blank constitutional check using the the "general welfare" clause. We prefer not to look to closely at what the founders meant by that clause, knowing it would bring too much skulduggery to light.
12.16.2008 11:37am
Cornellian (mail):
The "including, but not limited to" language defeats the exclusio unius canon of construction wrt the list.

I thought the "not limited to" language just meant the list wasn't exclusive. I didn't think it defeated the rule that other, non-listed "institutions" had to be in some way analogous to the institutions that were listed. Otherwise why not just say "any institution" with no examples?
12.16.2008 12:05pm
Zubon (www):
Otherwise why not just say "any institution" with no examples?

Because that would be obvious to even a casual reader?

(N) a dealer in precious metals, stones, or jewels; [?? What's this doing here?]

They believe in hard money like bars of gold?
12.16.2008 12:35pm
Dan Weber (www):
[Travel agency?!]

Back before there were credit cards or a series of tubes, you would take a pile of money to a travel broker, who would get you your tickets. I can see reasons for them to be considered a financial institution, wrt having fiduciary responsibilities and the like.
12.16.2008 1:38pm
Michael Hertzberg (mail):
I don't think the "including, but not limited to" language abrogates the principle of ejusdem generis, in which an unspecified institution would have to share the same characteristics as the ones listed in order to be included. While the auto companies have lending arms (e.g., GMAC?)that are akin to banks, credit unions, brokers, etc. in the same way that they're all akin to each other, it seems clear that the manufacturing arms of the auto companies are not includable on their own. So isn't the question whether the GMAC tail can wag the GM dog?
12.16.2008 1:47pm
With the feds fund rate now at almost zero, perhaps there are no financial institutions left.
12.16.2008 3:20pm
Brett McDonnell (mail):
Michael Hertzberg gets it extremely close to right in the Latin phrase that Cornellian is looking for, but I think the best answer technically is actually noscitur a sociis. Just for the statutory interpretation nerds in the audience.
12.16.2008 5:46pm
If TARP covers loans and guarantees to the car manufacturers then it's a blank check for the Treasury Secretary.

Of course, Pelosi, Reid and others said when the administration first raised the issue that they would not give the Treasury Secretary "a blank check."
12.16.2008 5:54pm
fortyninerdweet (mail):
What is your point, Nunzio? They say things like that all the time. Didn't you notice they're fingers crossed behind their backs?
12.16.2008 8:44pm
devil's advocate (mail):
I actually have a novel statutory take which is that "troubled" is the past participle and as such it presumes the previous existence of the financial instrument to be purchased. Thus the new preferred shares and new commercial paper in the auto industry would be off limits, while buying existing shares or paper wouldn't be.

But what is or is not included under this statutory language is completely irrelevant as the judicial review provision exempts actions under 101, 102, 106 and 109 of the statute (purchase, insurance, divestiture and management of trouble assets) from review as contrary to law!!!!!!!!!!! sorry about all those marks :). So what the heck are these legal posts about anyway and why isn't anyone talking non-delegation. I know it ain't the most popular doctrine, and has been toothless, but it is the central question here. And with Amity Shlaes and others recently retelling the tale of Schechter I would think a few of these legal blogs might actually what to debate the merits of challenges in this area.

It blows my 'effin' mind, to quote Rod Blagovetch, that the constitutional challenges are preserved and that no additional impediments to standing to bring them were placed as referenced under 5 USC at 702, so I cannot understand for the life of me why the non-delegation lawsuit that Bob Levy and George Will have alluded to is not springing to life. And will some conspirator please start this conspiracy rolling. There hasn't been a post on the non-delegation aspects of the bailout that I can find -- but the search function is kind of weak , got to to talk to Eugene about that.


If TARP covers loans and guarantees to the car manufacturers then it's a blank check for the Treasury Secretary.

That is the whole constitutional point.

Dan R.

Who would have standing to challenge this anyway?

Anyone who is harmed subject to precendential rulings on standing under this preexisting standard. So tough to claim standing as a taxpayer who is being taxed to pay for this, but if ever there was a time to run that one up the flagpole again. But my obvious candidate would be say a stockholder in Toyota. Also difficult but not always ineffective, legislators who voted against the bailout -- often tends towards categorizing beef as political question,but not always.

Standing is an issue, but one that I think could/should be solved.

Strategic questions abound, and that might affect who sides up for the challenge but there has to be one, e.g., you're going to loose anyway and the largely moribund doctrince will be killed altogether (so what if its moribund); You're going to be seen as siding with the four horsemen against the future, slightly more substantive, slightly more possible, but not a convincing argument in my mind.

tons of other strategic discussion but the post is too long already.

topic: Barbara Streisand's hands are like butter.

Talk amongst yourselves.

12.17.2008 9:26am
devil's advocate (mail):
Just to be clear on the language of HR 1424 (Emergency Economic Stabilization Act of 2008 that includes the Troubled Assets Relief Program -- was originally the Paul WellStone Mental Health bill)

At Sec. 119, it says that the secretarys actions are subject to challenge for the normal retinue of adminstrative bollocks and then it forbids equitable relief of any sort with regard to the operative bailout sections I mentioned above (101,102, 106 and 109):


(a) Judicial Review-

(1) STANDARD- Actions by the Secretary pursuant to the authority of this Act shall be subject to chapter 7 of title 5, United States Code, including that such final actions shall be held unlawful and set aside if found to be arbitrary, capricious, an abuse of discretion, or not in accordance with law.


(A) INJUNCTION- No injunction or other form of equitable relief shall be issued against the Secretary for actions pursuant to section 101, 102, 106, and 109, other than to remedy a violation of the Constitution.

Given 5 USC 702 reads:

A person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action within the meaning of a relevant statute, is entitled to judicial review thereof. An action in a court of the United States seeking relief other than money damages and stating a claim that an agency or an officer or employee thereof acted or failed to act in an official capacity or under color of legal authority shall not be dismissed nor relief therein be denied on the ground that it is against the United States or that the United States is an indispensable party.

It seems to me that the Judicial Relief provision provides and then takes away an equitable remedy. Maybe I'm missing something you can drive a truck through insofar as statutory review. I'm hoping to be set right, but I recall much public discourse about the lack of reviewability as the legislation was passed and this seemed to bear it out.

12.17.2008 10:17am
einhverfr (mail) (www):
A note on telegraph companies....

One of the major businesses that telegraph companies have been involved in have been the transfer of funds from one person to another (wire transfer). Western Union is a good example of this.

Travel agencies seem to my mind to be a little bit of a stretch though.
12.17.2008 6:13pm

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