David Zaring and I attempt to provide an explanation for the government’s seemingly haphazard actions in our latest paper Big Deal: the Government’s Response to the Financial Crisis. Professor Zaring and I posit that the government’s team, staffed and led by a team of investment bankers, has been taking a “deal-approach” to the bail-out. The government has pushed the limits of its statutory authority to authorize an ad hoc series of deals designed to mitigate that crisis. The result has not been particularly coherent, but it has married transactional practice to administrative law. We call the result regulation by deal, and think it provides a loose process consistency upon the government’s actions.
A week before we posted our paper to the SSRN, Professors Eric Posner and Adrian Vermeule also posted Crisis Governance in the Administrative State: 9/11 and the Financial Meltdown of 2008. The good professors offer an alternative explanation. As Posner wrote on the Volokh Conspiracy where Prof. Zaring and I “see legal constraints . . . . Adrian Vermeule and I see black and gray holes exploited by the executive branch and the Fed.” For administrative law geeks, Professor Vermeule talks about this topic in more detail in his forthcoming Harvard Law Review article: Our Schmittian Administrative Law.
For those who study corporate governance, our article also details and explores the mind-boggling stretching of Delaware law that the government has either fostered or facilitated in these bail-outs. From Bear to AIG to Wachovia, dealmakers have been pushing and testing the limits of deal protection devices to lock-up these government sponsored deals safe in the assumption that Delaware is unlikely to intervene. Much of these new-found devices are likely justifiable on insolvency grounds – a still being explored area of Delaware law. But, it remains to be seen how this stretching will affect how deals are done outside the government sphere, and how Delaware’s jurisprudence will respond to the use of more circumscribing lock-ups in ordinary course deals. For those who subscribe to the theory that Delaware’s jurisprudence is a thaumatrope – oscillating between strictness and laxity depending upon the times – Delaware is likely to tolerate these lock-ups for the time being as necessary to the preservation of our capital markets system. The truth remains to be seen.