Allison Kilkenny: Unreported

Bush Administration Memos Claimed Vast War Powers

Posted in Barack Obama, law, police state, politics by allisonkilkenny on March 3, 2009

International Herald Tribune

confidential-photo4The secret legal opinions issued by Bush administration lawyers after the Sept. 11, 2001, attacks included assertions that the president could use the nation’s military within the United States to combat people deemed as terrorists and to conduct raids without obtaining a search warrant.

That opinion was among nine that were disclosed publicly for the first time Monday by the Justice Department, in what the Obama administration portrayed as a step toward greater transparency. The opinions showed a broad interpretation of presidential authority, asserting as well that the president could unilaterally abrogate foreign treaties, deal with detainees suspected of terrorism while rejecting input from Congress and conduct a warrantless eavesdropping program.

Some of the legal positions had previously become known from statements made by Bush administration officials in response to court challenges and congressional inquiries. But the opinions provided the clearest illustration to date of the broad definition of presidential power that was approved by government lawyers, including John Yoo and Jay Bybee, in the months following the Sept. 11 attacks.

In a memorandum dated Jan. 15, 2009, just before President George W. Bush left office, a top Justice Department official wrote that the earlier memorandums had not been relied on since 2003. But the official, Stephen Bradbury, who headed the Office of Legal Counsel, said it was important to acknowledge in writing “the doubtful nature of these propositions,” and he used the memo to formally repudiate the opinions.

Bradbury said that the earlier memorandums were the product of lawyers confronting “novel and complex questions in a time of great danger and under extraordinary time pressure.”

The opinion authorizing the military to operate on domestic territory was dated Oct. 23, 2001, and written by Yoo, at the time a deputy assistant attorney general, and Robert Delahunty, a special counsel. It was directed to Alberto Gonzales, then the White House counsel, who had asked whether Bush could use the military to combat terrorist activities inside the United States.

The law has recognized that force (including deadly force) may be legitimately used in self-defense,” Yoo and Delahunty wrote to Gonzales. Any objections based on the prohibition against unreasonable searches in the Fourth Amendment to the Constitution would vanish, he said, because any privacy offense that comes with such a search would be less than any injury from deadly force.

Yoo and Delahunty also said in the Oct. 23 memorandum that “First Amendment speech and press rights may also be subordinated to the overriding need to wage war successfully.” They added that the “current campaign against terrorism may require even broader exercises of federal power domestically.”

Yoo said the Posse Comitatus Act, a statute first enacted in 1878 and since renewed, would also not present an obstacle to the use of the armed forces. The Posse Comitatus Act generally forbids the use of military forces in domestic law enforcement.

Yoo and Delahunty asserted that the act’s prohibition against use of the military was only for law enforcement functions and that using soldiers against terrorist suspects would be a national security function.

Yoo, a law professor at the University of California, Berkeley, is widely known as the principal author of a 2002 memorandum that critics said authorized torture. The memorandum, signed by Bybee, was repudiated in 2004.

The memorandum issued by Bradbury in January appears to have been the Bush lawyers’ last effort to reconcile their views with the wide-scale rejection by legal scholars and some Supreme Court opinions of the sweeping assertions of presidential authority made earlier by the Justice Department.

Walter Dellinger, a former head of the Office of Legal Counsel during the Clinton administration who was also a law professor at Duke University, said that Bradbury’s memo “disclaiming the opinions of earlier Bush lawyers sets out in blunt detail how irresponsible those earlier opinions were.” He said it was important that it was now widely recognized that the earlier assertions “that Congress had absolutely no role in these national security issues was contrary to constitutional text, historical practice and judicial precedent.”

Attorney General Eric Holder Jr. said Monday morning before the release of the documents: “Too often over the past decade, the fight against terrorism has been viewed as a zero-sum battle with our civil liberties. Not only is that thought misguided, I fear that in actuality it does more harm than good.”

Holder said that the memorandums were being released in light of the legitimate and substantial public interest.

One of the opinions, issued in March 2002, suggests that Congress lacks any power to limit a president’s authority to transfer detainees to other countries. Other memorandums say that Congress has no authority to intervene in the president’s determination of the treatment of detainees, a proposition that has since been invalidated by the Supreme Court.

Bradbury’s memo repudiating these views said that it was “not sustainable” to argue that the president’s power as commander in chief “precludes Congress from enacting any legislation concerning the detention, interrogation, prosecution and transfer of enemy combatants.”

Make My Filibuster

Posted in Barack Obama, politics, Republicans by allisonkilkenny on March 2, 2009

David R. RePass

filibuster2PRESIDENT OBAMA has decided to spend his political capital now, pushing through an ambitious agenda of health care, education and energy reform. If the Democrats in the Senate want to help him accomplish his goals, they should work to eliminate one of the greatest threats facing effective governance — the phantom filibuster.

Most Americans think of the filibuster (if they think of it at all) through the lens of “Mr. Smith Goes to Washington” — a minority in the Senate deeply disagrees with a measure, takes to the floor and argues passionately round the clock to prevent it from passing. These filibusters are relatively rare because they take so much time and effort.

To reduce deadlock, in 1917 the Senate passed Rule 22, which made it possible for a supermajority — two-thirds of the chamber — to end a filibuster by voting for cloture. The two-thirds majority was later changed to three-fifths, or 60 of the current 100 senators.

In recent years, however, the Senate has become so averse to the filibuster that if fewer than 60 senators support a controversial measure, it usually won’t come up for discussion at all. The mere threat of a filibuster has become a filibuster, a phantom filibuster. Instead of needing a sufficient number of dedicated senators to hold the floor for many days and nights, all it takes to block movement on a bill is for 41 senators to raise their little fingers in opposition.

Historically, the filibuster was justified as a last-ditch defense of minority rights. Under this principle, an intense opposition should be able to protect itself from the tyranny of the majority. But today, the minority does not have to be intense at all. Its members have only to disagree with a measure to kill it. Essentially, the minority has veto power.

The phantom filibuster is clearly unconstitutional. The founders required a supermajority in only five situations: veto overrides and votes on treaties, constitutional amendments, convictions of impeached officials and expulsions of members of the House or Senate. The Constitution certainly does not call for a supermajority before debate on any controversial measure can begin.

And fixing the problem would not require any change in Senate rules. The phantom filibuster could be done away with overnight by the Senate majority leader, Harry Reid. All he needs to do is call the minority’s bluff by bringing a challenged measure to the floor and letting the debate begin.

Some argue that this procedure would mire the Senate in one filibuster after another. But avoiding delay by not bringing measures to the floor makes no sense. For fear of not getting much done, almost nothing is done at all. And what does get done is so compromised and toothless to make it filibuster-proof that it fails to solve problems.

Better to risk a filibuster — an event that, because of the great effort involved, would actually be rare — than to save time and accomplish little or nothing.

It also happens to make a great deal of political sense for the Democrats to force the Republicans to take the Senate floor and show voters that they oppose Mr. Obama’s initiatives. If the Republicans want to publicly block a popular president who is trying to resolve major problems, let them do it. And if the Republicans feel that the basic principles they believe in are worth standing up for, let them exercise their minority rights with an actual filibuster.

It is up to Mr. Reid. He can do away with the supermajority requirement for virtually all significant measures and return majority rule to the Senate. This is not to say that the Democrats should ride roughshod over the Republicans. Republicans should be included at all stages of the legislative process. However, with the daunting prospect of having to mount a real filibuster to demonstrate their opposition, Republicans may become much more willing to compromise.

David E. RePass is an emeritus professor of political science at the University of Connecticut.

Obama Goes To Bat For Banks

Posted in Barack Obama, Economy, politics by allisonkilkenny on January 25, 2009

Open Left

bankster-chessTen days ago, we reported on Open Left that bankruptcy “cram-down” mortgage relief would not appear in the stimulus, but would appear in a different piece of legislation later this year. Despite our reports, the fight over bankruptcy “cram-down” legislation in the stimulus did not actually end ten days ago. As recently as Thursday, House Democrats will still fighting in to include the measure in the stimulus, and Senator Dick Durbin, the leading proponent of the measure in the Senate, was denying that President Obama was opposed to including the measure in the stimulus.

However, any lingering doubt about the fate of bankruptcy “cram-down” reform in the stimulus can now be put to rest. Senator Durbin has confirmed that President Obama opposes including the measure in the stimulus, and favors including it in later legislation instead (more in the extended entry):

Chris Bowers :: Tough Road Ahead for Bankruptcy Reform

The key to passage of the bankruptcy bill is the Senate, where Democrats need 60 votes to stop a possible filibuster. Ten Democrats — all still in the Senate — would not back the plan in a vote a year ago.
Sen. Dick Durbin, D-Ill., the chief Senate sponsor of the bill, said Obama persuaded him in a White House meeting Friday to remove the bankruptcy proposal from an economic recovery package — to ensure it doesn’t jeopardize the stimulus bill. But Obama pledged his support for the bankruptcy solution, Durbin said.

Obama said he would work with Durbin to attach the proposal to other ”must pass” legislation — with the hope that supporters of the overall bill would not vote against it because of the bankruptcy provisions.

There will definitely be no cram-down in the stimulus now. Further, with ten Senate Democrats opposed to the measure last year, we can also expect a big fight over the measure when the home foreclosure mitigation bill comes up later this year. In fact, The ten Democrats in question are actually eleven, now that Lieberman is back in the caucus. Baucus (MT), Byrd (WV), Carper (DE), Johnson (SD), Landrieu (LA), Lieberman (CT), Lincoln (AR), McCaskill (MO), Nelson (NE), Pryor (AR) and Tester (MT). Without a single Republican defector, this will be a difficult bill to pass at any point.

However, there are rays of hope. First, the economic crisis might actually be changing votes. For example, Mike Thompson, one of the sixteen House Blue Dogs who in 2007 sent out a letter opposing cram-down legislation, offered a promising response to Open Left commenter kaleidescope when s/he called Thompson’s office about cram-down legislation in the stimulus:

I called my Representative, Mike Thompson (CA-1), a blue dog, about HR 225.  My experience is that you get better results if you call the local (as opposed to the D.C.) office.  You get to talk to a career staffer instead of an intern. Thompson’s Eureka staffer told me Thompson is starting to edge away from his blue dog affiliations.  She noted that he is fiscally conservative, but that “everything has changed in the economy” since 2007.

Second, there is always the hope of working a deal where the Democrats who are opposed agree to not filibuster, but then vote “no” on an up-or-down, simple majority vote for the legislation.

It is pretty sad that, even with the Democratic trifecta and even with the collapse of the credibility of the banking industry, that the banking lobby can still delay, and possibly even stop, good legislation like this. They can twist Congressional arms into forking over trillions of dollars on their behalf, all the while twisting those arms to make sure homeowners facing foreclosure get nothing. At least it makes it clear who is actually running the country.

Don’t Name That Senator

Posted in Barack Obama, politics by allisonkilkenny on January 25, 2009

David Segal

image4749710xNOW that Gov. David Paterson of New York has completed his operatic quest to fill Hillary Clinton’s Senate seat and Roland Burris, chosen by the embattled Illinois governor to succeed Barack Obama, has made it past Capitol Hill security, we can safely conclude that appointing senators might not be such a good idea.

Actually, Americans came to that conclusion in 1913, when the 17th Amendment mandated regular senatorial elections. Reformers pushed the amendment as an antidote to the inevitable cronyism that surrounded the selections. In essence, however, it just allowed governors to pick replacements, as opposed to state legislatures.

The very problems the amendment was meant to address persist. Consider this: Nearly a quarter of the United States senators who have taken office since the 17th Amendment took effect have done so via appointment. Once Representative Kirsten Gillibrand, Mr. Paterson’s choice, joins the Senate, she will be one of more than 180 senators named by governors since 1913.

By contrast, the Constitution mandates special elections for all vacancies in the House — even though representatives are far less powerful than senators.

Yet only a handful of states routinely fill vacated Senate seats by special election. The result is a tyranny of appointments.

This is bad for the legislature, and the constituents. Even when appointments are not explicitly put up for sale, a governor’s deliberations are surely informed by political expediency and personal ambition. (It would be impossible to look at the New York debacle and not think otherwise.) And even when the process is explicitly political and maybe even corrupt, as appears to be the case in Illinois, it seems as if there’s not a lot anyone can do about it. After all, the Illinois Legislature was unable to wrest power from Gov. Rod Blagojevich to force a special election.

There’s much talk of a “change agenda” in Washington these days. We would do well to add another item to the list: We should stop letting governors appoint senators.

Last year, I sponsored legislation in Rhode Island to require vacancy elections for the United States Senate. Congress should now step in and push all states to do the same. Though Congress’s power to force special elections is untested, it could surely create incentives for putting them in place — or push for another constitutional amendment.

If Congress won’t act, the states should move forward on their own. Special elections have their difficulties — among them, clogged fields of candidates and time-consuming and expensive runoffs.

But these challenges are surmountable. Instant runoff voting, which compresses runoffs into general elections by having voters rank candidates in order of preference, is one solution.

And, as we’ve learned in Illinois and New York, elected officials provide a lot more hope for genuine democracy than their gubernatorially appointed alternatives.

David Segal is a Rhode Island state representative and an analyst for FairVote, a voting rights advocacy group.

House Votes Against Bailout

Posted in Barack Obama, Economy, politics by allisonkilkenny on January 22, 2009

David Sirota

no-strings-bailout-1The U.S. House today publicly rebuked the Obama administration’s economic team, voting overwhelmingly to disapprove the second half of the Wall Street bailout money that Obama has been demanding. Because this resolution of disapproval was rejected by the Senate, the House’s vote does not have the force of law (both chambers would have needed to pass the bill in order to block the money). However, this is a major victory for the progressive movement in that the House has formally gone on record against kleptocracy.

What’s great about this vote is its juxtaposition of true bipartisanship with Beltway buypartisanship. Indeed, as the roll call shows, the House vote for the resolution of disapproval forged a coalition of about a third of the Democratic caucus, and most of the Republican conference – all voting for a progressive cause: namely, preventing Wall Street from ripping off the American taxpayer. Though we are led by the media to believe that “centrism” means corporatism, this vote is the kind of populist bipartisan coalition that reflects the real centrism in the country at large – a centrism where the “center” is decidedly against letting big corporations raid the federal treasury.

Couple this vote with the House’s vote yesterday to attach more strings to the bailout money, and with our work in getting the Senate – through Ohio Sen. Sherrod Brown (D) – to pass a bailout regulation bill, and we’re seeing real progress – or, dare I say, the possibility of real, actual, substantive change.

Let’s remember that this economic fight isn’t over – not by a longshot. The Politico reports that at his confirmation hearing, incoming Treasury Secretary Tim Geithner – one of the architects of the current kleptocratic bailout – suggested that he may ask Congress for even more bailout money. That means the House’s display of strong bipartisan opposition and our work getting the Senate to support tough restrictions is laying the groundwork for the next fight. As these successes accrue, we could also be changing the fundamental dynamics. It’s entirely possible that if/when Geithner comes back to Congress asking for more money, he will submit legislation that is – at its origination – far more progressive in transparency, oversight, and objectives than the original bailout, knowing that it must be more progressive to have a shot at passing the new Congress.

So all in all, we should be pretty unhappy that another $350 billion of taxpayer cash – or roughly $1,100 for every man, woman and child in America – is likely headed to Wall Street, no strings attached. But other than failing to stop that money (an almost impossible task because the new president could have effectively vetoed his way to the money), the legislative wrangling over the bailout has been a huge success for the progressive movement. We’ve helped build a bipartisan coalition in Congress on these issues, and forced the new administration to – at least rhetorically through letters – acknowledge the deep concerns we have with kleptocracy. In defeat, we have scored some real victories that we can build off of.

Obama’s Economic Plan Is Not Going to Save Us

Posted in Barack Obama, Economy, politics by allisonkilkenny on January 22, 2009

The Nation

china_shanghai_stock_market_crash_recessionThe nation’s fast-darkening circumstances define the essential dilemma of Barack Obama’s presidency. His instinct is to govern by consensus, in the moderate middle ground of politics. Yet dire events are pushing the new president toward solutions more fundamental than those he had intended. The longer he resists taking more forceful action, the more likely it is that he will be overwhelmed by the gathering adversities.

Three large obstacles are blocking Obama’s path. The first is one of scale: his nearly $800 billion recovery package sounds huge, but it is perhaps two or three times too small to produce a turnaround. The second is that the financial system–still dysfunctional despite the bailouts–requires much more than fiscal stimulus and bailout: the government must nationalize and supervise the banks to ensure that they carry out the lending and investing needed for recovery. This means liquidating some famous nameplates–led by Citigroup–that are spiraling toward insolvency. The third is that the crisis is global: the US economy cannot return to normal unless the unbalanced world trading system is simultaneously reformed. Globalization has vastly undermined US productive strength, as trade deficits have led the nation into deepening debtor dependence.

While Washington debates the terms of Obama’s stimulus package, others see disappointment ahead. The Levy Economics Institute of Bard College, an outpost of Keynesian thinking, expresses its doubts in emotional language that professional economists seldom use. “The prospects for the US economy have become uniquely dreadful, if not frightening,” Levy analysts reported. The institute’s updated strategic analysis warns that the magnitude of negative forces–the virtual collapse of bank lending, private spending, consumer incomes and demand–“will make it impossible for US authorities to apply a fiscal and monetary stimulus large enough to return output and unemployment to tolerable levels within the next two years.” Instead, the unemployment rate is likely to rise to 10 percent by 2010. Obama’s package amounts only to around 3 percent, annually, of GDP in a $13 trillion economy. Levy’s analysis calculates that it would require federal deficits of 8 to 10 percent of GDP–$2 trillion or more–to reverse the economic contraction. And yet, the institute observed, it is inconceivable that this level “could be tolerated for purely political reasons” or that the United States could sustain the rising indebtedness without terrifying our leading creditors, like China.

Stimulus alone by a single nation will not work, in other words, given the distorted economic system that Obama has inherited. The stern warning from the Levy analysts and other skeptical experts is that the United States has no choice but to undertake deeper systemic reforms right now, rather than wait for recovery. Will Obama have the nerve to tackle these fundamentals? To do so he would have to abandon some orthodox assumptions about free trade and private finance that he shares with his economic advisers.

The most obvious and immediate obstacle to systemic change is the dysfunctional financial system. It remains inert and hunkered down in self-protection, despite the vast billions in public money distributed so freely, no strings attached, in the last days of the Bush administration. We will learn soon enough whether Obama intends to start over with a more forceful approach. Obama and his advisers are eager to get another $350 billion in bailout funds, but they have remained silent on whether this will finance a government takeover of the system. Without such a move, the taxpayers will essentially be financing the slow death of failed institutions while getting nothing in return.

The most complex barrier to recovery is globalization and its negative impact on the economy. Given our grossly unbalanced trade, we have kept the system going by playing buyer of last resort–absorbing mountainous trade deficits and accumulating more than $5 trillion in capital debt to pay for swollen imports, while our domestic economy steadily loses jobs and production to other nations. Renewed consumer demand at home will automatically “leak” to rival economies and trading partners by boosting their exports to the US market–which subtracts directly from our GDP. This is the trap the lopsided trading system has created for recovery plans, and it cannot be escaped without fundamental reform.

To put it crudely, Obama’s stimulus program might restart factories in China while leaving US unemployment painfully high. In fact, some leakage may occur via the very banks or industrial corporations that taxpayers have generously assisted. What prevents Citigroup and General Motors from using their fresh capital to enhance overseas operations rather than investing at home? The new administration will therefore have to rethink the terms of globalization before its domestic initiatives can succeed.

A global recovery compact would require extremely difficult diplomacy but could be possible because it is in everyone’s self-interest. The United States could propose the outlines with one crucial condition: if the trading partners are unwilling to act jointly, Washington will have to proceed unilaterally. A grand bargain could start with US agreement to serve once again as the main engine that pulls the global economy out of the ditch. That is, the United States will have to continue as the buyer of last resort for the next few years, and China and other nations will have to bail us out with still more lending. In the short run, this would dig us into a deeper hole, but the United States could insist on a genuinely reformed system and mutually agreed return to balanced trade, once global recovery is under way.

Congress can enact the terms now–a ceiling on US trade deficits that will decline steadily to tolerable levels, as well as new rules for US multinational enterprises that redefine their obligations to the home economy. Unlike in other advanced nations, US companies get a free ride from their home government when they relocate production abroad. That has to change if the United States is to reverse its weakening world position. Tax penalties plus national economic policy can drive US multinationals to keep more of their value-added production at home. These measures can be enforced through the tax code and, if necessary, a general tariff that puts a cap on imports. Formulating these provisions now for application later, once the worst of the crisis is over, would give every player the time to adjust investment strategies gradually.

President Obama and his team may at first scorn the notion of saving the world while negotiating a bailout for the United States. They will be reluctant to talk about reforming the global system by threatening to invoke emergency tariffs. But we are in uncharted waters. Impossible ideas abruptly begin to seem plausible. Six months from now, if the Obama recovery does not materialize, the president may discover he has to reinvent himself.

William Greider has been a political journalist for more than thirty-five years. A former Rolling Stone and Washington Post editor, he is the author of the national bestsellers One World, Ready or Not, Secrets of the Temple, Who Will Tell The People, The Soul of Capitalism (Simon & Schuster) and–due out in February from Rodale–Come Home, America.

Help Georgia and Minnesota Democrats

Posted in politics by allisonkilkenny on November 17, 2008

 

georgiaIn Georgia, a run-off is scheduled for December 2nd between State Representative Jim Martin and Senator Saxby Chambliss.  We need to raise money for the run-off campaign.  Voting started today so we need to get busy.  Victory Fund limit is $12,300.  To contribute to this race, go to http://www.actblue.com/page/senatepostseason and click on Martin. 
Contributions to this race DO count against your federal limit.
 
minnesotaIn Minnesota, about 206 votes separate Norm Coleman and Al Franken out of 2.88 million cast.  We need money to pay for canvassers, lawyers and training recount volunteers.  They trained 1,000 people this weekend but still need more.  To contribute to the recount, go to http://www.actblue.com/page/senatepostseason and click on Franken.  The limit for the recount is $12,300 per person. 

Contributions to the Re-count do NOT count against your federal limit.  If you have maxed out federally you can still contribute to the recount. 
 

Join November5.org and Create Real Change

Posted in activism, environment by allisonkilkenny on November 11, 2008

logo2

Join November5.org, the citizen group that serves as a Congressional watchdog.

Update from Nov5:

We are off to a great start. In the 5 days since we launched November5.org, nearly 10,000 of you have signed up for this effort!

Getting our country back on track by using the leverage we can exert over Congress is an approach that naturally fits with third party and independent voters, as well as many who voted for Democrats and Republicans. Millions of us realize that we must now put our shoulders to the wheel of justice and push harder than ever.

If we all move fast to get our friends and family involved, we could have 1000 active and organized citizens in each Congressional district in 2009. To do this, we need you to encourage people to sign up today by forwarding this link: www.november5.org.

Remember to emphasize to others that what will make November5 different from many other similar efforts is that we will have no allegiance to any political party. We want to create a non-partisan mechanism to get problems solved. Action will result when members of Congress hear loud and clear from their constituents back home. This will not be about raising big money for expensive television ads during the Super Bowl. It will involve using tried and true organizing techniques – and all the local creativity we can muster – to make sure that our Representatives respond to our voices, district by district, person by person.

We want to focus on the victories – big and small – that we can achieve. Too much citizen advocacy involves sending emails or letters to Washington, D.C. We need a return to raising our voices on the ground “back home,” where Congressional elections are decided.

High on our list is a plan to pass privately-delivered, publicly-funded health care. This approach would save hundreds of billions of dollars over the current for-profit system, enough to provide coverage for every American. After all, how can you be civically active if you are worried about your health care? Many organizations do great work on this issue (see Physicians for a National Health Program), but there is a need for much more citizen muscle behind it. That’s where we’ll come in.

Other issues we are looking at include: new regulation of Wall Street, a $10 living wage, the elimination of unnecessary weapons systems that cost tens of billions, a strong drive for investment in solar, wind, and conservation – against coal and nuclear – and a federal law requiring paper ballots and establishing uniform rules for ballot access for all candidates.

Soon, we will email you with more details on how this website will enable you to organize in your district, and on how we will keep building November5 in the coming weeks.

Now, though, it all comes down to getting all of the people who agree with the basic approach of shifting our focus to Congress in 2009 signed up for November5. This is the critical building phase and we all have to do everything we can to get the word out.
Onward for Justice, 

The November5 Team Five Things You Can Do Right Now:

A Quiet Windfall For U.S. Banks

Posted in Economy by allisonkilkenny on November 10, 2008

With Attention on Bailout Debate, Treasury Made Change to Tax Policyno-strings-bailout-1

By Amit R. Paley
Washington Post Staff Writer
Monday, November 10, 2008; A01

 

The financial world was fixated on Capitol Hill as Congress battled over the Bush administration’s request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention.

But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.

The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin.

“Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no,” said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. “They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks.”

The story of the obscure provision underscores what critics in Congress, academia and the legal profession warn are the dangers of the broad authority being exercised by Treasury Secretary Henry M. Paulson Jr. in addressing the financial crisis. Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers.

The change to Section 382 of the tax code — a provision that limited a kind of tax shelter arising in corporate mergers — came after a two-decade effort by conservative economists and Republican administration officials to eliminate or overhaul the law, which is so little-known that even influential tax experts sometimes draw a blank at its mention. Until the financial meltdown, its opponents thought it would be nearly impossible to revamp the section because this would look like a corporate giveaway, according to lobbyists.

Andrew C. DeSouza, a Treasury spokesman, said the administration had the legal authority to issue the notice as part of its power to interpret the tax code and provide legal guidance to companies. He described the Sept. 30 notice, which allows some banks to keep more money by lowering their taxes, as a way to help financial institutions during a time of economic crisis. “This is part of our overall effort to provide relief,” he said.

The Treasury itself did not estimate how much the tax change would cost, DeSouza said.

A Tax Law ‘Shock’

The guidance issued from the IRS caught even some of the closest followers of tax law off guard because it seemed to come out of the blue when Treasury’s work seemed focused almost exclusively on the bailout.

“It was a shock to most of the tax law community. It was one of those things where it pops up on your screen and your jaw drops,” said Candace A. Ridgway, a partner at Jones Day, a law firm that represents banks that could benefit from the notice. “I’ve been in tax law for 20 years, and I’ve never seen anything like this.”

More than a dozen tax lawyers interviewed for this story — including several representing banks that stand to reap billions from the change — said the Treasury had no authority to issue the notice.

Several other tax lawyers, all of whom represent banks, said the change was legal. Like DeSouza, they said the legal authority came from Section 382 itself, which says the secretary can write regulations to “carry out the purposes of this section.”

Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company’s losses to offset their gains and avoid paying taxes.

Lawmakers decried the tax shelters as a scam and created a formula to strictly limit the use of those purchased losses for tax purposes.

But from the beginning, some conservative economists and Republican administration officials criticized the new law as unwieldy and unnecessary meddling by the government in the business world.

“This has never been a good economic policy,” said Kenneth W. Gideon, an assistant Treasury secretary for tax policy under President George H.W. Bush and now a partner at Skadden, Arps, Slate, Meagher & Flom, a law firm that represents banks.

The opposition to Section 382 is part of a broader ideological battle over how the tax code deals with a company’s losses. Some conservative economists argue that not only should a firm be able to use losses to offset gains, but that in a year when a company only loses money, it should be entitled to a cash refund from the government.

During the current Bush administration, senior officials considered ways to implement some version of the policy. A Treasury paper in December 2007 — issued under the names of Eric Solomon, the top tax policy official in the department, and his deputy, Robert Carroll — criticized limits on the use of losses and suggested that they be relaxed. A logical extension of that argument would be an overhaul of 382, according to Carroll, who left his position as deputy assistant secretary in the Treasury’s office of tax policy earlier this year.

Yet lobbyists trying to modify the obscure section found that they could get no traction in Congress or with the Treasury.

“It’s really been the third rail of tax policy to touch 382,” said Kevin A. Hassett, director of economic policy studies at the American Enterprise Institute.

‘The Wells Fargo Ruling’

As turmoil swept financial markets, banking officials stepped up their efforts to change the law.

Senior executives from the banking industry told top Treasury officials at the beginning of the year that Section 382 was bad for businesses because it was preventing mergers, according to Scott E. Talbott, senior vice president for the Financial Services Roundtable, which lobbies for some of the country’s largest financial institutions. He declined to identify the executives and said the discussions were not a concerted lobbying effort. Lobbyists for the biotechnology industry also raised concerns about the provision at an April meeting with Solomon, the assistant secretary for tax policy, according to talking points prepared for the session.

DeSouza, the Treasury spokesman, said department officials in August began internal discussions about the tax change. “We received absolutely no requests from any bank or financial institution to do this,” he said.

Although the department’s action was prompted by spreading troubles in the financial markets, Carroll said, it was consistent with what the Treasury had deemed in the December report to be good tax policy.

The notice was released on a momentous day in the banking industry. It not only came 24 hours after the House of Representatives initially defeated the bailout bill, but also one day after Wachovia agreed to be acquired by Citigroup in a government-brokered deal.

The Treasury notice suddenly made it much more attractive to acquire distressed banks, and Wells Fargo, which had been an earlier suitor for Wachovia, made a new and ultimately successful play to take it over.

The Jones Day law firm said the tax change, which some analysts soon dubbed “the Wells Fargo Ruling,” could be worth about $25 billion for Wells Fargo. Wells Fargo declined to comment for this article.

The tax world, meanwhile, was rushing to figure out the full impact of the notice and who was responsible for the change.

Jones Day released a widely circulated commentary that concluded that the change could cost taxpayers about $140 billion. Robert L. Willens, a prominent corporate tax expert in New York City, said the price is more likely to be $105 billion to $110 billion.

Over the next month, two more bank mergers took place with the benefit of the new tax guidance. PNC, which took over National City, saved about $5.1 billion from the modification, about the total amount that it spent to acquire the bank, Willens said. Banco Santander, which took over Sovereign Bancorp, netted an extra $2 billion because of the change, he said. A spokesman for PNC said Willens’s estimate was too high but declined to provide an alternate one; Santander declined to comment.

Attorneys representing banks celebrated the notice. The week after it was issued, former Treasury officials now in private practice met with Solomon, the department’s top tax policy official. They asked him to relax the limitations on banks even further, so that foreign banks could benefit from the tax break, too.

Congress Looks for Answers

No one in the Treasury informed the tax-writing committees of Congress about this move, which could reduce revenue by tens of billions of dollars. Legislators learned about the notice only days later.

DeSouza, the Treasury spokesman, said Congress is not normally consulted about administrative guidance.

Sen. Charles E. Grassley (R-Iowa), ranking member on the Finance Committee, was particularly outraged and had his staff push for an explanation from the Bush administration, according to congressional aides.

In an off-the-record conference call on Oct. 7, nearly a dozen Capitol Hill staffers demanded answers from Solomon for about an hour. Several of the participants left the call even more convinced that the administration had overstepped its authority, according to people familiar with the conversation.

But lawmakers worried about discussing their concerns publicly. The staff of Sen. Max Baucus (D-Mont.), chairman of the Finance Committee, had asked that the entire conference call be kept secret, according to a person with knowledge of the call.

“We’re all nervous about saying that this was illegal because of our fears about the marketplace,” said one congressional aide, who like others spoke on condition of anonymity because of the sensitivity of the matter. “To the extent we want to try to publicly stop this, we’re going to be gumming up some important deals.”

Grassley and Sen. Charles E. Schumer (D-N.Y.) have publicly expressed concerns about the notice but have so far avoided saying that it is illegal. “Congress wants to help,” Grassley said. “We also have a responsibility to make sure power isn’t abused and that the sensibilities of Main Street aren’t left in the dust as Treasury works to inject remedies into the financial system.”

Carol Guthrie, spokeswoman for the Democrats on the Finance Committee, said it is in frequent contact with the Treasury about the financial rescue efforts, including how it exercises authority over tax policy.

Lawmakers are considering legislation to undo the change. According to tax attorneys, no one would have legal standing to file a lawsuit challenging the Treasury notice, so only Congress or Treasury could reverse it. Such action could undo the notice going forward or make it clear that it was never legal, a move that experts say would be unlikely.

But several aides said they were still torn between their belief that the change is illegal and fear of further destabilizing the economy.

“None of us wants to be blamed for ruining these mergers and creating a new Great Depression,” one said.

Some legal experts said these under-the-radar objections mirror the objections to the congressional resolution authorizing the war in Iraq.

“It’s just like after September 11. Back then no one wanted to be seen as not patriotic, and now no one wants to be seen as not doing all they can to save the financial system,” said Lee A. Sheppard, a tax attorney who is a contributing editor at the trade publication Tax Analysts. “We’re left now with congressional Democrats that have spines like overcooked spaghetti. So who is going to stop the Treasury secretary from doing whatever he wants?”

What You Do Now

Posted in Barack Obama, politics by allisonkilkenny on November 5, 2008

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