Monday, December 08, 2008

The Unbearable Weirdness of TARP Contracts

In my last post, I complained that our esteemed Treasury Secretary was handing out cash to banks without making sure they'll use it to help un-freeze the credit freeze.

To be fair to Mr. Paulson (not that we're ever unfair), the standard agreement that banks sign to get cash infusions does contain this lovely language:

"WHEREAS, the Company agrees to expand the flow of credit to U.S. consumers and
businesses on competitive terms to promote the sustained growth and vitality of the U.S. economy."


"WHEREAS, the Company agrees to work diligently, under existing programs, to modify the terms of residential mortgages as appropriate to strengthen the health of the U.S. housing market."

But here's the thing: These earnest promises show up only in the "whereas" clauses - part of what lawyers call the "preamble" or the "recitals" to the contract - not in the contract itself.

I don't pretend to be a law professor, or any kind of expert on the enforceability of stuff that gets stuck in the preamble to a contract. However, as a lawyer I can say with conviction that if you really want the guy on the other side of a contract to do something, you put that in the main part of the document, not in the preamble.

In five seconds of careful research, I found this lawyerly blog post on preambles. It says that under New York law - which, as it happens, governs these Treasury agreements - "a term appearing in a recital ... is not part of the contract." So maybe the banks are off the hook. Or maybe not. Bring on the law professors.

Like so many aspects of the bailout, the deal between Treasury and the banks is fuzzy, so fuzzy that even lawyers can't figure out exactly what it is. Meanwhile, our nation is left to ponder more and more mysteries: things like "Katy Perry, why do you exist?" and "banks, are you going to lend out your stupid bailout money or not?"