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.


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