Adventures in the zone of twilight: separation of powers and national economic security in the Mexican bailout.

• Author: Covey, Russell Dean

Introduction: Was the Mexican Bailout Legal?

On January 12, 1995, President Clinton requested legislation providing $40 billion in loan guarantees to prevent Mexico from defaulting on bonds worth billions of dollars. Less than three weeks later, the President preempted the ongoing congressional debate on the guarantees and, without any formal congressional action, unilaterally negotiated a combination of additional loans from international institutions (the International Monetary Fund (IMF) and the Bank for International Settlements (BIS)) and promised Mexico $20 billion from the Exchange Stabilization Fund (ESF), an obscure revolving fund in the Treasury normally used to stabilize the dollar on world currency markets.(1)

It is far from clear that the President had the legal authority to take this action. While the administration claimed to be responding primarily to the dramatic devaluation of the peso, the main purpose of the loans was not to restore the value of Mexico's currency, but to prevent its looming default on dollar-denominated securities threatened by the depletion of its hard-currency reserves, and thereby to boost confidence in Mexican markets and curtail further capital flight.(2) U.S. aid was extended not through intervention in exchange markets to prop up or stabilize the Mexican currency, but rather through a package of loans and loan guarantees provided directly to the Mexican government.(3) The package was thus only incidentally an act of "currency stabilization," and is more accurately described as a grant of foreign aid.(4) In other words, it was a classic case of government "bailout,"(5) though one of virtually unprecedented magnitude.(6)

In taking this unilateral action, President Clinton received praise from congressional leaders.(7) Republican Speaker of the House Newt Gingrich called the action "courageous."(8) Congressional leaders from both parties further agreed that the President had the statutory authority to deliver the funds to Mexico without any subsequent congressional authorization or appropriation.(9)

Nonetheless, a significant number of Senators and Representatives opposed the plan and questioned its legality.(10) Ultimately unsuccessful attempts were made in both the House and Senate to prevent the package from proceeding or to curtail aid already being delivered.(11)

Though the Mexican bailout is substantially complete, the doctrine of separation of powers requires a close look at the use of revolving funds like the one employed to aid Mexico, particularly when such funds are drawn on without congressional authorization.(12) This Note argues that the ESF was used improperly and that, despite the informal approval of congressional leaders, President Clinton had neither statutory nor constitutional authority to extend the aid package to Mexico in the absence of a formal congressional appropriation. Though the President's admittedly substantial latitude to act in matters affecting national security might have provided him with the emergency authority to preempt the legislative process and spend unappropriated dollars, this Note argues that such preemption remains illegal, at least until Congress ratifies the appropriation retroactively.(13)

Part I examines the statutory authority claimed by the administration to fund the bailout. It argues that the statute relied upon by the President,(14) the legislative history of the relevant provisions, the historical use of the ESF, and statements made by administration officials all indicate that there was no statutory authorization for the administration's use of the Fund. Part 11 analyzes the constitutional issues raised by the bailout under the framework set forth by Justice Jackson in Youngstown Sheet & Tube Co. v. Sawyer; it concludes that the President lacked the necessary constitutional authority Jackson's framework suggests must exist in the absence of congressional authorization.(15) Even if authorization may be inferred through a more liberal interpretation of the statute's text and history, Congress has never established any "intelligible principle" to guide the use of the Fund. The bailout therefore also constitutes an impermissible delegation of legislative authority and, consequently, is constitutionally infirm.

While the Note argues that the unguided use of revolving funds constitutes an incursion on the congressional appropriations power and cannot be tolerated in a political regime of separated powers, national security concerns do require the President to retain administrative flexibility in order to perform the constitutional duties of Commander in Chief. This requirement is especially pertinent in light of recent transformations in communications technology and information systems that have caused significant changes in the nature of threats to national security. Part Ill recognizes that these changes, which have given rise to increasingly volatile and interdependent international financial markets, require the executive branch to have substantial discretion to obligate monies to protect the nation's financial integrity. However, procedural restraints on that discretion are necessary to ensure that Congress is not prevented from exercising its exclusive power of the purse. The interests of a functional but fair democratic system require a balance between these competing concerns. Accordingly, Part IV suggests ways to provide the President with clear authority to protect "economic security" while keeping Congress firmly in control of the purse strings.

1. Statutory Authority for the Mexican Bailout

   Of the three principal components of the bailout package, only one required a direct outlay from the U.S. Treasury: the $20 billion that was obligated from the Exchange Stabilization Fund (ESF). The President has claimed statutory authority to spend ESF monies under 31 U.S.C. [sections] 5302, but neither the text of [sections] 5302 nor its legislative history supports this claim.

   1. The Text of [sections] 5302

      Section 5302 authorizes the Secretary of the Treasury, with the approval of the President, to "deal in gold, foreign exchange, and other instruments of credit and securities the Secretary considers necessary."(16) To this end, [sections] 5302 creates a revolving "Exchange Stabilization Fund." The revenues from its activities--proceeds from sales, investments, and earnings-are repaid into the Fund and remain available for future use absent any additional congressional appropriation.(17) The Fund was created with a $2 billion appropriation in 1934, which, as of March 1995, had grown to roughly $37.5 billion.(18)

      The text of the statute enumerates three purposes for which expenditures from the ESF are authorized.(19) First, the Fund is available to meet U.S. obligations under the Bretton Woods Agreement.(20) Second, the Fund provides a mechanism to carry out U.S. obligations under [sections] 3 of the Special Drawing Rights Act.(21) Third, the Fund is available, in the opaque language of the statute, "to carry out this section."(22) However, since there is no further specification of the purposes of [sections] 5302 beyond its title--"stabilizing exchange rates and arrangements"--one must turn to the legislative history of [sections] 5302 to determine what further purposes might be incorporated into "this section."(23)

   2. Legislative History of [sections] 5302

      The ESF was originally created as part of the Gold Reserve Act of 1934 by a New Deal Congress intent on protecting the dollar on international exchange markets. The Fund, once described as "the most ingenious instrument ever developed in the monetary systems,"(24) was inspired by fears that rival trading nations, particularly Britain, but also France, Italy, and Germany, would capture large segments of the world market by deflating their own currencies relative to the dollar. As explained in a House committee report, "The reason for its establishment in this case is to defend the American dollar and our gold stocks against the invasion of similar funds operated by competitor nations." A British fund, established months earlier in an amount equivalent to $175 million, the committee reported, "'was so effective in driving our dollar up that we were forced off the gold standard. It is to prevent a repetition of this experience that we create the stabilization fund preparatory to the return to gold redemption.'"(25) Since 1934, the law has been amended several times,(26) but none of the changes in the authorizing language have substantially altered its intended purpose: to allow the government to protect the dollar and maintain desirable exchange rates against foreign currencies.

      The most significant alteration in the law's language was made in 1976 following the collapse of Bretton Woods and the accompanying shift from fixed to floating exchange rates. Whereas the original language of [sections] 10(a) of the Act authorized the Secretary of the Treasury to use the resources of the Fund "for the purpose of stabilizing the exchange value of the dollar,"(27) Congress amended the law to authorize the Secretary of the Treasury to use the ESF "as he may deem necessary to and consistent with the United States' obligations in the International Monetary Fund."(28) This change was justified because "under the amended IMF Articles of Agreement there is no obligation to stabilize the dollar at a par value."(29) Though the amendment reflected the new international monetary situation, it did not substantively expand the range of authorized uses of the ESF. Rather, it provided statutory recognition of the Nixon administration's 1971 decision to adopt a floating-exchange-rate regime.(30) Legislative history, in fact, indicates that Congress intended this amendment to restrict the acceptable purposes of the ESF. According to the Senate report, "use of the ESF would be authorized only for purposes consistent with the United States obligations in the IMF regarding orderly...