Thursday, November 27, 2008

Mumbai Massacre: Parsis, Jews, Hindus and the Rise of Warfare for the Masses

People complain about the religious intolerance of the West. And in particular they point to the rising Islamophobia of Western culture. And they are right to worry about such mindlessness in the development of cultural attitudes and the conduct of overt and covert political activity. And lamentably, to some degree, that might be so.

Sadly, the West does not have a monopoly on the cultural and political mechanics of religious hatred. Certain Muslim state governments and Islamic divines have been enthusiastic contributors to cultures of hatred grounded in an abhorrance of the religions of the Jews, the Parsis and the Ba'hai. It appears that the machinery of mindless hatred of Jews and Parsis has again been successfully tapped within the global Muslim community. When mixed with the traditional mutual mistrust between Hindus and Muslims in South Asia, it was neither a surprize that an explosion wa sinevitable or that the target would be a city with a long history of openness and pluralism. And thus my small contribution to what will be an endless discussion of the most successful recent atatcks on the global order in Mumbai November 26-27. Thus, while the media and commentators concentrate on the great issues of the attacks, I focus, if only briefly, on its sad underbelly--the religous hatred that focused attacks on small targets hidden behind the more spectacular targettings and killings of foreigners and Hindus.

It is important to remember that the attackers, whose military planning was well coordinated and highly effective, were quite careful to target, in addition to the places populated by foreigners, the transport and hospital centers, great and small symbols of two small minority communities in Mumbai. These targets, one great, the other insignificant, served as the symbolic expression of two religious communities abhorrent to certain elements of established Muslims communities--Zoroastrians (Parsis) and Jews.
Zoroastrian Iranians came to India 12 centuries ago to avoid Islamic persecution. They settled in the western state of Gujarat. Today the majority of the 69,000-strong community lives in Mumbai in the neighbouring state of Maharashtra. Zoroastrian Iranians came to India 12 centuries ago to avoid Islamic persecution. They settled in the western state of Gujarat. Today the majority of the 69,000-strong community lives in Mumbai in the neighbouring state of Maharashtra. Zubair Ahmed, Zoroastrians Look for the Roots, BBC News Online, July 19, 2005.
More importantly, Prasis have been important contributors to the success of India in developing its economy and contribute stroingly to the democratic institutions of the state. In its native Iran, the religion remains suspect.
Officially, Zoroastrians - along with Jews and Armenian and Assyrian Christians - are a constitutionally protected religious minority with guaranteed parliamentary representation. In practice, complaints of discrimination are widespread. Access to high-level posts in the government and armed forces is blocked. Some Zoroastrians say they are pressured to change their religion. A law awarding Zoroastrians who convert to Islam their entire families' inheritance at the expense of non-converted relatives has caused misery and bitter resentment. Despite legislation decreeing that all religions are entitled to equal blood money (compensation) awards, Zoroastrians say that, in reality, they still receive only half the sums given to Muslims. Zoroastrianism, Ancient Religions Clash in Iran, CAIS News, Oct. 4, 2006.

Though Parsis festivals are tolerated they remain problemmatic for clerics. "Since the Islamic revolution, the clergy has remained opposed to the popular festival, which it sees as superstitious and anti-Islamic. But the ancient ritual has survived many generations and governments." Iranians Celebrate Festival of Fire, BBC News Online, March 14, 2001. Among some Muslime, Parsis are viewed as najis "ritually impure" and thus below the hierarchy of tolerance even beneath Jews and Christians. Despite this, the Iranians have sought to cultivate relations with the Mumbai community--if only to enhance the possibility of profitable relaitons. Thus, the Vice President of the Islamic Republic of Iran and the Chairman of the Iranian Cultural Heritage, Handicrafts and Tourism Organization paid a visit to Mumbai on 2nd May 2008 seeking to enhance efforts to increase tourist pilgrammages to Iran. Iran Vice President in Mumbai, Official Portal of the Islamic Republic of Iran. Yet under Iranian family law they appear to be kaafar and unable to inherit under certain circumstances. And thus the incentive to convert--the ability to acquire all family wealth as against non Muslim relatives. "" And "Ayatollah Ahmad Jannati, head of the Guardian Council, recently described nonMuslims as 'sinful animals' and 'corrupt'. After criticising him, the only Zoroastrian member of parliament (there are 22,000 Zoroastrians in Iran) was charged with the 'dissemination of false information, slander and insult'." Alister Heath, No Wonder the Neo Nazis Salute Iran's President, The Spectator, June 3, 2006.

As the Parsi community has declined in Iran, it has prospered in India. Perhaps overmuch. Among the most consistentloy successful and well known Parsis families in Mumbai are the Tatas. One of the great symbols of both Parsi success within India and of a small voctory over intolerance has been the Taj Mahal hotel. "Legend has it that its creator, a Parsi industrialist called Jamsetji Nusserwanji Tata, commissioned the building after being refused entry to the now-defunct Apollo Hotel, which had a strict Europeans-only policy." Peter Foster, Bombay Terror Attacks: Why the Taj Mahal Hotel Was Chosen, The Telegraph, Nov. 27, 2008. A blow to the Taj Mahal thus struct not only at foreigners, who happened to continue to enjoy its amentities and its symbol of globalized wealth and success, but also struck at the Parsi community as well. The blow was religious as well as economic. Thus the English reporter got it half right when he suggested, somewhat over lyrically
To have pictures of burning Taj Hotel broadcast around the world will have a deeper impact than even perhaps the terrorists intended, striking a blow against a symbol of Indian wealth and progress and sending shivers down the spine of some of the richest and most powerful people on the planet. Peter Foster, Bombay Terror Attacks: Why the Taj Mahal Hotel Was Chosen, supra.
The pictures also remind one that the religious element in warfare is neither tied to the West or Israel, but also exhibits a positive hatred of other religions as well. This is to be lamented, but can hardly be unexpected.

And then there are the Jews. . . . Though busy striking at the heart of foreign presence in India and the symbol of Parsi wealth in Mumbai, as well as the many Hindus caught in the fire, the attackers took the time to target what appears an odd and insignificant site--a Jewish Community Center in Mumbai. Graham Bowley, Status of Jewish Community Center Still Unclear, The Lede, The New York Times, Nov. 27, 2008. "The Chabad-Lubavitch center, the local outpost of a global group that promotes Judaism, is located in Nariman House, one of the buildings that has been attacked in Mumbai. The whereabouts of Rabbi Gavriel, who runs the center, and his wife, Rivka, remain “unknown,” according to the group." Id. Recent press reports suggested that the "centre is the base for the Jewish outreach group Chabad Lubavitch. The Reuters news agency says that four gunmen remain in the building. There have been reports of gunfire. The house, which acts as a centre for prayer and study, attracts many Jewish and Israeli visitors every year." Jewish Center Seized in Mumbai, BBC News Online, Nov. 27, 2008. "Rabbi Shmotkin told the Associated Press: 'It seems that the terrorists commandeered a police vehicle which allowed them easy access to the area of Chabad House and threw a grenade at a gas pump nearby.'" Id.

But, of course, the rationale is easy enough to discern. Religion. And particularly the religion of the Jews. Like the Pasi community, the Jewish community of India is small, ancient, and much of it centers in Mumbai. History of the Jews in India. Like the Parsi community, also, the Jewish community in India was swelled by refugees from the dar al Islam, in the case of the Jews from Iraq, Iran, Afghanistan and Yeman. And symbolically, for certain strains of Islamic thinking, they stand in for Zionism, the current faddish cover for anti Jewish activity. Striking at any Jew any where is a blow against Israel. And so the importance of the Jewish Community Center, a small step from a justification of the murder of Jews in Israel to the justification of all in contact with them. Consider the fatwas of Yusuf al-Qaradawi the Norwegian Muslim cleric Basim Ghozlan,
Qaradawi has issued several Fatwas which define all adult Jews living in Palestine as “occupants” and “combatants”, and therefore legitimate targets of war. . . .The rationale for considering all adult Jews in Palestine as combatants is the fact that adult Israelis, men and women, are registered in the Israeli Defense Force as reservists, even in their civilian life. With reference to Jewish children, Qaradawi makes clear that even if these cannot be killed as combatants, it is acceptable that some Jewish children be killed in vengeance for Arab children having been killed by Jews. At this point one must add that Qaradawi condemns the killing or persecution of Jews which are not participating in the “occupation of Palestine”. Concerning the meaning of his saying that Jews ”occupy Palestine”, this must be understood on the rationale of Islamic Law, not that of the United Nations. Firstly, Qaradawi is referring to the geographical Palestine, i.e., today’s Jordan, the West Bank, Israel, and Gaza. So not only settlements or land seized in 1967 war and since held by Israel, is considered occupied, but also the State of Israel herself. According to a standard interpretation of Islamic law, Israeli territory counts as occupied land for the simple reason that it has been under Islamic jurisprudence previously, something which makes it waqf, that is, eternal Islamic property. The situation is thus somewhat analogue to what we would have seen if Christian leaders were organizing suicide operations in Turkey in order to liberate Istanbul, which fell from Christianity in 1453. Jens Tomas Anfindsen, Theology of Terror in The Islamic Federation (“Det islamske forbundet”), Norwegian daily Vårt Land 2005.01.17.
al Qaradawi has emphasized both that his support of strikes against civilian populations of Jews is restricted to any lands once within the dar al Islam in which the Jews assert political control (though he might have little concern with Jews as a subject minority) and that his views are widely shared at all levels of the Muslim community. "Recently he told Al-Jazeera that he was not alone in believing that suicide bombings in Palestinian territories were a legitimate form of self defence for people who have no aircraft or tanks. He said hundreds of other Islamic scholars are of the same opinion. In this respect, he is very much in tune with what the vast majority of people in the Arab world believe." Magdi Abdelhadi, Controversial Preacher With ‘Star Status,’ BBC News Online, July 7, 2004.

But Islam has no pope. And those who mean to engage in great battles for control of Muslim thought are well aware of this.
Most Muslims would like such a central authority, to avoid constant debate over contradictory and extremist scholarly opinions. But we don't have a pope; we have the Ulama, the association of scholars. To protect the unity of Islam, we urgently need to reach a consensus on the great questions of our time: terror, occupation, and resistance. We took a first step in July 2004, with the foundation of a world union of Muslim legal scholars. I was elected chairman, and my deputies are a Sunni, a Shiite, and an Ibadit (a branch of Islam found mainly in Oman). We thank God for this success. Interview with Al Jazeera Host YUSUF AL-QARADAWI, World Around Us, September 27, 2005.
But for all the attempted control, this cat, once out of the bag, is fair theological play for anyone with sufficient influence to command respect--and the arms to bend others to that influence. In the hands of others, the theological permission to kill, even under narrow circumstances (as abhorrent as those might be to the West (see Larry Catá Backer, Benedict XVI, Faith, Reason and the University: Memories and Reflections, Law at the End of the Day, September 12, 2006.)) are logically available also as the opening to a broader application. A strike at a physical manifestation of global Judaism is thus a strike in the great battle to reclaim (and expand) the dar al Islam. While no doubt large elements of the Muslim Community would disagree, no one is surprised either at the potential for expansion of such doctrines, nor their implementation int he hands of "fanatics" whose actions can be disavowed. . .after the fact, and without affecting the religious foundations that animated the activity.

Yet these are not pleasant thoughts. Indeed, they may be uncomfortable for a political and media elite that have already neatly packaged religious and political strife in neat baskets that permit settlement without upsetting the underlying belief structures that keep religious hatred nicely brewing. We continue to believe in "the deal" and the possibility of settlement with groups whose all or nothing ideologies are also coddled. That sort of economic thinking is ideal for rational merchants, but lead in altogether different directions when the "merchants" making "deals" are neither rational nor part of the internaitonal community of political merchants on which the current global order relies for its functioning. See Larry Catá Backer, Jerry Adams in Barcelona: On the Politics of Self-Determination in Constitutiuonal Systems Law at the End of the Day, June 8, 2006. As such, the attackers, whoever they are, reminded us that religious hatred can easily conflate economics, religion, and all of the plural values on which economic globalization rests. And religious minorities tend to flourish only in societies that are open and tolerant. For states that would turn a blind eye to belief, and its toleration, the attacks remind us that there may well be limiting cases.

In the Mumbai attacks we see both faces of modern warfare. It is both irregular and informal. This is well known. We have surpassed the age of formalist warfare with sets of rules adhered to by a community of states with a substantial monopoly of power. At the same time it is ancient--war no longer is motivated strictly by the territorial or political ambition of princes, but by the lusts of the populace unleashed (and foolishly believed to be controlled) by religious, political, media, social and other elites. In this age of mass democracy, mass politics, mass social movemenst, we have also ushered in an age of mass war. But mass war grounded in ancient enmities.

Tuesday, November 25, 2008

A Post Colonial Spectacle: Carving Up Zimbabwe

I like opera, especially European opera of the 18th through 20th centuries. There is nothing like it for its power to fuse distinctive musical forms within a theatrical experience in which all human proclivities are intensified and exaggerated to illuminate their reality, and its pathos. Over the course of the last year of so we have been witness to a great operatic event. The stage is Zimbabwe. The action revolves around the great battle for control of the levers of power to dispense the national wealth in a country composed of two principal nations, the Shona and the Ndebele peoples, along with the European peoples who colonized modern Zimbabwe last. and least graciously The players include a cast of principal characters from Zimbabwe itself--Robert Mugabe, a member of the Zezuru Shona and adept manipulator of European guilt and Shona pride, and Morgan Tsvangirai, President of the Movement for Democratic Change - Tsvangirai (MDC-T), who grew up in a Karanga Shona region, and became a political rival of Mugabe that has had the luck to avoid an untimely end thus far. To Mugabe's Shona nationalist anti-colonial strong man state politics, Tsvangirai represents the poor man made good--the labor union boss who "is the figurehead for all the disparate groups opposed to Mr Mugabe: unemployed and low-wage black workers; wealthy white farmers and industrialists and ethnic Ndebeles who remember the government's murderous campaign against them in the early 1980s." Joseph Winter, Profile: Morgan Tsvangirai, BBC News Online, October 15, 2004. The object is control of the apparatus of state--its government--through which the spoils of power can be harvested, along with the natural resources that brought the Europeans last to this land. The battle ground is pre colonial--a rematch among the two nations within the European created colonial territory now known as Zimbabwe among the Ndebele progeny of the Zulu and the Shona remnants of the Rozwi Empire.

In the battle the Europeans once played the villain and now play the fool--and willingly perhaps in expiation of the their actions, now judged sinful, which they committed somewhat less successfully than the peoples they found in Zimbabwe in the mid 19th century. To this list is added a bunch of officious inter-meddlers, each with his or her own peculiar agenda. Among the most officious has been the now former leader of South Africa, Mr. Mbeki, once the protege now the last strong mentor of the aging Shona revolutionary. For him, the laborious task of the merchant prince--striking a deal for the preservation of the treasures of Zimbabwe for distribution in a way that benefits all of those anxious to profit thereby. "Because elections tend to be bloody in Zimbabwe, and the political culture stalked by the force of ethnic, religious and other rivalries, managerial internationalism would seek a solution that while appearing to respect the form of democratic organization subverts its essence in the service of violence abatement. Stability, it seems, trumps even the forms of democratic change--and why not? In this case the hope might well be to rid Zimbabwe at last of a dictator without either the continued pretense of more "elections" or the fuss of a potentially quite bloody civil ethnic war in Zimbabwe." Larry Cat'a Backer, Democracy Part XV: In Which Elections Serve as a Prelude to Carving Power in Democratic States, Law at the End of the Day, Sept. 8, 2008.

And so, for the protection of South Africa's north, the preservation of the wealth of the country, and the preservation of networks of power that keep elites in position to exploit state to control those goods necessary to maintain their patronage clients (see Rome: Social Class and Public Display), the full power of international managerialism has been deployed to induce the factional leaders to accept a deal that preserves the form of the state, and the productive capacities of passive citizens, but perhaps little else. See Larry Catá Backer, The Fuhrer Principle of International Law: Individual Responsibility and Collective Punishment. Penn State International Law Review, Vol. 21, No. 3, pp. 509-567, 2003. "For that purpose, in this modern and increasingly medieval age, violence and dialog, properly managed, become the hall marks of law, politics and economics. The rule of law at the international level, serves as the means through which conflict is made permanent, regularized and contained, to be fought through words and bullets. This is the language of law--bureaucratic, managerial, well mannered and brutal in its own way--in which exhaustion serves as victory and the masses are kept protected (for their effective exploitation) and engaged in sensible ways." Larry Catá Backer, On Israel's 60th Anniversary of Statehood: Views From the Empire and the Caliphate, Law at the End of the Day, May 16, 2008. See also Larry Catá Backer, ETA and the Management of Revolution in a Bureaucratic World, Law at the End of the Day, May 14, 2008.

Certainly one gets the sense of the shopkeeper's approach to the buying and selling of Zimbabwe, its state apparatus and the rights to exploit its peoples by pursuing the terms of the "deal" for power sharing that the international community of seeking to sell. Shameful, perhaps, but more troubling is the ease with which such shopkeeper-'s law quickly overwhelms the niceties of democratic governance when it suits. Despite the great efforts of excellent merchants--including Mr. Mugabe and Mr. Tsvangirai--Zimbabwe Deal: Key Points, BBC News Online, September 15, 2008. even the new international managerialism that has been so good to people like Mr.Mugabe, appears insufficient to settle the affairs of Zimbabwe.

Now enter the clowns. Not clowns, really. . .the Elders, a group of ancient distinguished politicians who were conceived as a body by Peter Gabriel and Richard Branson in 1999 and implemented with the imprimatur of Nelson Mandela, Graca Machel and Desmond Tutu in 2001. The Elders, History. Three of their number, Kofi Annan, Graca Marchel and Jimmy Carter, sought to inter-meddle in the negotiations for the division of spoils in Zimbabwe. The Elders to Visit Zimbabwe, The, Nov. 14, 2008. But apparently they got in the way--they were denied entry into the country by one of the parties to the negotiations--Robert Mugabe. See UN Calls for Rapid Zimbabwe Deal, BBC News Online, Nov. 25, 2008. This caused the UN Secretary General Ban no end of grief--especially since it might have upended his own negotiation strategy.
Mr Ban also said he regretted the Zimbabwean government's decision to refuse visas to the group of world leaders known as the Elders, and not to co-operate with their "timely, well-intended effort to assist the people of Zimbabwe". He said he hoped another mission could take place in the near future, given the rapidly deteriorating situation in the country. Id.
But the Elders appear to have gotten in the way of Mr. Mbecki's efforts to broker the division of power. And the division itself evidences both the nature of the the state apparatus and its malleability for the greater ends of siphoning resources for those in control of its apparatus. "President Mugabe and MDC leader Morgan Tsvangirai agreed to form a power-sharing government in September in the wake of disputed presidential elections. Officials say Tuesday's meeting will focus on finalising a draft constitutional amendment which would enable Mr Tsvangirai to be sworn in as prime minister. However, the two sides have still not agreed on who will control the ministry of home affairs, which has responsibility for the police. " Id.

But no matter, the Elders are undaunted, especially since there is a likelihood of impasse at the checkout counter. And the object of the group will be a quick deal --for all the right reasons: to ameliorate the collateral damage these contests for rights to exploitation might have on the Shona and Ndebele nations. But th Elders also showed their hand--they were pushing for the implementaiton of the September 15th deal (Zimbabwe Deal: Key Points, supra) at a time when both Mr. Mugabe and Mr. T are in the midst of hard rebargaining on those terms.
"'We hope that our visit will also add momentum to the global response to longer-term issues of reform and development once an inclusive government is in place and operational,' said Mr Annan. 'It is crucial that the international community supports a Zimbabwe-led process of recovery, and provides sufficient funding for its implementation.' Mr Annan emphasised that this will be a humanitarian mission. 'The delegation will not be involved in the current political negotiations,' he said. 'However, we urge Zimbabwe’s political leaders to move swiftly to fully implement the 15 September agreement, particularly the provisions on humanitarian and food assistance. Delays in forming a government are prolonging the suffering of the people.'" The Elders to Visit Zimbabwe, The, Nov. 14, 2008.
Thus, despite the nice labguage of humanitarianism, the humanitarian objective covered a deployment to force the hands of the negotiators on a deal that apparantly has already been approved by the international community.

"One of the Elders, former US President Jimmy Carter, said on Monday that the situation was 'much greater, much worse than anything we had ever imagined'. Mr Carter described the government in Harare as unwilling to communicate and said President Mugabe did not want to admit that there was a crisis, preferring instead to blame problems on what he called 'non-existent sanctions'." UN Calls for Rapid Zimbabwe Deal, supra.

Aaaah. . . Jimmy Carter, the global elite's most useful face. Now the curtain opens on the next act of the Zimbabwean opera buffa. In the meantime, the negotiations over the purchase price of the Zimbabwean state apparatus continues apace--

Thursday, November 20, 2008

A Constitutional Court for China Within the Chinese Communist Party: Scientific Development and the Institutional Role of the CCP

ABSTRACT: One of the great current debates within Chinese constitutionalism is the role of constitutional review within the Chinese constitutional system. This paper looks at the recent work of Chinese constitutional scholars to suggest the thrust of that debate. It suggests that modern scholarship rightly focuses on the institutionalization and bureaucratization of politics as a hallmark of modern Chinese constitutionalist thought. It then suggests that constitutional review is a viable legitimating tool within Chinese constitutionalism. However, current approaches focus on the wrong set of institutional public actors for the location of such a court. The paper proposes that reading modern Chinese constitutionalism holistically suggests that the highest institutional body within the Chinese constitutional system is the Chinese Communist Party. Under the Chinese Constitutional system, the CCP is and ought to be recognized as the authoritative interpreter of the constitution, and that authority ought to be institutionalized within the constitutional order.

There are great shifts in constitutional thinking taking place today in China among elite Chinese constitutional scholars. Among this group of elite constitutional law scholars, Ho Jintao's concept of scientific development (科学发展观,) has taken a concrete turn in the advancement of theories of Chinese constitutionalism under its current normative framework. (Fewsmith Summer 2004). One of the more highly debated issues within Chinese constitutional law circles is constitutional review. The debate centers on the tensions between Western models that seem to insist on the necessity of an independent judiciary with a constitutionally sanctioned supervisory role over administrative and political organs as a condition precedent to constitutional legitimacy. (Henkin 1993). The Chinese constitutional system is criticized for its lack of a robust system of judicial review because it has not embraced either the judicial or the constitutional court model of judicial review. (Hand 2006; Lubman 2000) As one commentator recently noted:
As for judicial review powers, Amended Article 5 of the 1982 Constitution reads, "the People's Republic of China governs the country according to law and makes it a socialist country ruled by law," [and Article 127 provides that the Supreme People's Court is the highest judicial organ. However, constitutionalism in action and text reduced a potential for a rule of law rubric to a non-rule of law rubric, reduced a potential for legal accountability to political accountability. This left China's judicial system without a positive discursive machinery for judicial review: neither constitutional review or constitutional court, nor decentralized (or diffused) or centralized (or concentrated) constitutional review. (Killion 2008, 578-79).
For Western observers of Chinese constitutionalism, then, there is no proper form of constitutional (or judicial) review because there is neither an appropriate institutional mechanism for its exercise set out in the Chinese constitution, nor is such a power otherwise vested in a proper court within the organs of state power.

But the notion of judicial review itself veils a certain variation in its application in Western governmental systems. (Backer 2009a). At one extreme is the Anglo-American model—grounded as it is on memorializations of common law principles of “higher law” notions protected by a self constituting and heavily socialized lawyer-judicial class. (Corwin 1955). This model, powerful and stable, tends to be heavily dependent on the cultural framework of customary law systems, and as a result has found few state adherents outside of states with common law traditions. At the other extreme is the political model of constitutional review—ranging from the now discarded French system of review of lois by the Constitutional Council (Bell et al. 1998) to systems in which the legislature or some other political organ is vested with power to interpret the validity of its own actions. Most states, however, have embraced a compromise model of sorts. This model, developed in modern form from the writings of Hans Kelson (1942; 1961), posit the creation of a distinct organ of state, the constitutional court, that merges the institutional forms and behavior of judicial institutions, with the limited political task of interpreting the constitution generally and the legitimacy of actions by other state organs (including the judicial organs) and private parties. But even this model has engendered criticism over the last century. (Hirschl 2004; Lambert 1921). Still, eminent Western commentators have suggested even the possibility of a culturally contextualized form of constitutional review that invests some organ or another of the state apparatus with the power to deploy the constitution against all constitutional actors. (Ginsburg 2002 (suggesting the development of constitutional review in Korea and Taiwan as a model)).

The Chinese analysis of constitutionalism and rule of law in the context of the possibility of constitutional review mechanisms is interesting both because of its sensitivity to Western academic and political criticism and also because of its insistence on following the internal logic of the current governance framework within China. (Zhu 2007). Yet this sensitivity, in turn, creates both a tension and a certain blindness to the possibilities for reform within the current Chinese political framework that are well worth exploring. This is particularly the case with respect to judicial review. Western academic and political theory suggests judicial review as a foundation of legitimate constitutionalism—by which is meant both a state organ with authority to legitimately interpret the meaning of the constitution (as a system of process and substantive values norms), and to determine whether any action by the state apparatus (or others) exceeds their authority to act under that framework.

This short essay draws on recent work of three Chinese scholars to sketch the contours of the current foundation of one facet of the internal Chinese debate on judicial review. For that purpose it draws on the work of three contemporary scholars, Tong Zhiwei (East China University of Law and Political Science) (2008), Dong Heping (North-West University of Political Science and Law) (2008), and Hu Jinquang (School of Law, Renmin University) (2008), research papers they presented at the “Conference on Constitutionalism in China in the Past 100 Years and Its Future, organized by the School of Law, City University of Hong Kong Centre for Chinese and Comparative Law and its director Lin Feng. That debate evidences a recognition of the importance of authoritative and legitimate mechanisms for constitutional interpretation within the emerging rule of law framework of Chinese constitutionalism, understood as the framework both for constituting a government (and its organs) and for organizing the political community through the Chinese Communist Party (“CCP”).

The essay then posits that the difficulty of constitutional review in China is rooted in an insistence on seeking it in the wrong place. Constitutional review is possible within China, and on Chinese terms, but only within the highest organs of power under the Chinese constitutional system. Those organs are not located within the state apparatus, but rather are vested by the Chinese constitution itself in the CCP. This insight provides a foundation for a pragmatic and Chinese basis for resolution of the tensions between the current governance framework in China and the organization of judicial review that permits a continued adherence to current political norms. Specifically, it proposes that for judicial review of constitutional questions to be successfully implemented in China judicial review ought to be vested in a Constitutional Court as an organ of political power located within the CCP, rather than as part of the state apparatus. But this ought to be a constitutional court with French sensibilities—where a written constitution was regarded “as a means to enshrine and control political reality.” (Bell et al. 1998, 139). In this way the tension between state apparatus, the position of the CCP in governance over the state apparatus, and the need for rule of law based institutionalism might be resolved within a rule of law framework.

More importantly this approach will institutionalize the actual positions of the CCP as the party in power within a constitutionalist system. Justifying the power of the CPP would fold the current oversight role of the CCP within the constitutional framework of the current constitution, provide an institutional framework for the assertion of the CCP’s authority to determine political values, create a mechanism for transparent and regularized political expression, and institutionalize relations between the state apparatus and the CCP as party in power. At the same time, justifying the political role of the CCP at the constitutional level would not necessarily limit the CCP’s political role generally as the party in power.

I. Internal Chinese Debate: A Snapshot Glimpse.

Three contemporary Chinese constitutional scholars nicely frame the debate about constitutional review in Chinese. That debate is possible now because of the development of constitutionalism in China. (Backer 2006). That constitutionalism is grounded on rule of law in both of its aspects—process and values rule of law. (Dowdle 2002; Peerenboom 2002). But constitutional review in China, and the debate about it, appears to be split in two. The more lively debate is focused on the construction of systems of judicial review of administrative action and even action by state organs. Less often discussed is the idea of institutionalizing a system of constitutional review in the sense of developing a set of doctrines and ideas on which an understanding of constitutional law may be grounded beyond its application to state organs. (Backer 2009a).

Though the three views present substantially different solutions to the problems of institutionalization they share an important element in common: the three evidence the strength of the idea of the need for and the establishment of a framework for the bureaucratization of politics in China. And the push to bureaucratization fits in nicely both with the Three Represents principles of Jiang Zemin (Backer 2006) and Hu Jintao’s Harmonious Society campaign. This focus on bureaucratization is a natural extension of some of the most important applications of Hu Jintao’s concept of scientific development, in the form of an institutionalization of governance generally within China. “To thoroughly apply the Scientific Outlook on Development, we must work energetically to build a harmonious socialist society. Social harmony is an essential attribute of socialism with Chinese characteristics.” (Hu Jintao 2007, Part III). The concept of scientific development is intimately tied to the project of institution building and stability within all aspects of Chinese governance—public and private. “Scientific development and social harmony are integral to each other and neither is possible without the other.” Id. It is also a long term project that involves all aspects of political organization. “Building a harmonious socialist society is a historical mission throughout the cause of socialism with Chinese characteristics, as well as a historical process and the social outcome of correctly handling various social problems on the basis of development.” Id.

Professor Tong Zhiweig, East China University of Law and Political Science suggests the difficulties of judicial review. He argues that judicial review is impaired by the relationships of the judiciary to the CCP. He would limit the political intervention of the CCP to “sensitive” cases and pointed to the 1954 Chinese Constitution as a stronger basis for strengthening the judiciary. The object is to increase the rate of a judiciary firmly entrenched in the state apparatus. This might present a fair reading of Hu Jinato’s suggestion of the nature of scientific development in the context of state governance construction. “We must uphold and improve the system of people's congresses, the system of multiparty cooperation and political consultation under the leadership of the CPC, the system of regional ethnic autonomy, and the system of self-governance at the primary level of society. All this will promote continuous self-improvement and development of the socialist political system.” (Hu Jinato 2007, at Part VI). For Professor Tong, then, the framework of analysis can be appropriately limited to the oversight of the actions of the state organs. Judicial review is meant to serve as a mechanism for the self-discipline of state organs within the limits of their functional role within Chinese constitutionalism. But that role is limited the way the authority of state organs are limited. That is, within the limited role accorded to state organs under the Chinese constitution, there ought to be a judicial power co-extensive with that power the object of which is to ensure a proper use of power. But the sovereign power, the political power of the nation is greater than the power accorded state organs under the Constitution. The CCP, as the vanguard party in power is accorded a constitutional role beyond that of the state organs. Yet the judicial power as constructed by Professor Tong neither reaches that power nor includes it within a system of institutionalized self-discipline grounded in the need to adhere to the party line. This is thus administrative review of a French sort, but not necessarily a proposal for an institutionalized constitutional review system.

In contrast Professor Dong Heping of the North-West University of Political Science and Law would look elsewhere for a constitutional review framework. For Professor Dong, the start of the analysis is a core principle of Chinese constitutionalism—scientific development and harmonious society (Hu Jintao 2007, at Part III). As such, the appropriate core constitutional focus is the welfare of the people. But the implementation of that welfare is viewed as the responsibility of the state organs, and principally the National People’s Congress. As such, he advocates a stronger role for the NPC, and indeed he suggests that the NPC might even serve to ensure CCP compliance with its own norms. For Professor Dong, reflecting a strain of Chinese Constitutionalism going back to the early decades of the establishment of the People’s Republic, the ideal is a state structure in which the CCP is subsumed within the system of state organs and together with them comprise the totality of power within the Chinese state. Over all of this system it is possible to erect an institution that would discipline the political and legal framework enshrined in the constitution. This is a view shared by others. (Lin Laifan 2004, 90; Teng Biao 2004). To that extent, it appears that Professor Dong might favor an institution sensitive to political realities, for example one recognizing the different forms of authority vested in the CCP, the NPC and the other organs of state, but all subsumed within the constitutional system. In effect, then, is the need to establish a constitutional court on Kelson’s model. Yet the CCP has strongly rejected this approach in the past. (Beijing Rules Out Constitutional Court To Protect Human Rights And Private Property 2004).

This last point is taken up by Professor Hu Jinquang, of the Rennin University School of Law. He focuses on a critical issue of the nature of judicial review. Professor Hu correctly distinguishes between judicial review and constitutional review. He, too, focuses on the principles of scientific development—in his case focusing on the centrality of economics as foundational framework for state organization. Professor Hu suggests that a central element of state power is state power over the economy. That is sensible in light of the Marxist Leninist emphasis on economics as urtext for politics and social order. A consequence (also consist with Marxist Leninist theory) is a necessary focus of state organs on the executive power, and in a rule of law context, on administrative law. In that context, the constitution vests the National People’s Congress Standing Committee as the supreme organ of constitutional interpretation for administrative law and its application by state organs. Yet the movement since 1979 has been on shrinking the ambit of direct involvement of government organs in economic direction as the movement to private economic activity advanced. Still, while the breadth of authority of state organs is shrinking, the public authority over all activity should be growing. That power is founded on the role of the CCP as the vanguard party. In a sense, then, the extent of political authority contemplated under the Chinese Constitution does not give rise to an organ of state with an interpretive power of equal breadth outside the CCP.

The approaches of these three eminent authorities are firmly grounded in an understanding of current constitutional realities. Principally among them are the notions that the state organs do not define the entirety of national power, that the constitution distinguishes between state power (vested in the state organs) and national political power (vested in the CCP), that while the elaboration of state power may be bureaucratized within well defined institution the elaboration of political power remains outside either institution or bureaucracy, that the institutionalization of the CCP’s own governance is internal to it and beyond the direct regulatory power of the constitution. It suggests a distinction between the framework for the constitution of state organs—subject to constitutional constraints and the locus of law—and that of the CCP and its own internal governance (and external power). The latter, it seems, is subject to constitutional liberty grounded in its constitutional role as party in power. As such, the constitution appears to favor a two paths approach based on the distinctive roles of state and party apparatus.

The discourse is developed under an ambiguity in the current constitution. The Constitution vests the Standing Committee of the National People's Congress with power to interpret the Constitution. (Constitution People’s Republic of China § 67(1)). What this means in practical terms has caused some debate within China. Part of that debate is fueled by the differences between this form of constitutional vesting of interpretive power and that generally found in the constitutions of other states. And, of course, there is always the suspicion that there is no difference between modern Chinese constitutionalism and the gesture constitutionalism of the former Soviet Union. At least three alternatives have been proposed. The first suggests the establishment of a constitutional oversight organ within the NPC. The other suggests the extension of a constitutional review power in the Supreme People’s Court. (Jiang 2003, 281-289). The later proposal is grounded in a purported application of separation of powers principles to the Chinese constitution. But while it might be clear that the legislature is hardly in the best position to review the legitimacy of its acts, it is not clear why the judiciary ought to be assigned the task under a Chinese constitutional system that does not adopt Western separation of powers principles. Moreover, scholars have a suggested the creation of a constitutional court as well, among them, Li Zhong. (Jiang 2003, 283-84).

These lacunae and ambiguities help explain the decisive rejection of a constitutional court model for China by the authorities in 2004. At the time of its rejection, Zhang Chunsheng, from the Law Committee of the 10th National People's Congress, explained the reasons a constitutional court was not under consideration.

"The system in China is different from that in America or European countries," he said. "They have the division of three powers - constitutional, legislative and executive - so their constitutional courts have the right to supervise the executive and legislative bodies." But on the mainland, only the National People's Congress and its Standing Committee had the legal entitlement to supervise the implementation of the constitution. "So we cannot put in place a constitutional court or supreme court to supervise the implementation of the law," he said. ((Beijing Rules Out Constitutional Court To Protect Human Rights And Private Property 2004))

Yet difference among legal and constitutional systems, standing alone, is hardly an adequate reason for rejecting a judicial model for an organ charged with constitutional interpretation. Nor is recourse to the constitutional assignment of a review power in the National People’s Congress necessarily an impediment under the constitution when read on the basis of its framework principles.

To the extent that the NPC is the supreme organ of state power, with constitutional authority at its level of constitutional authority, that authority remains inadequate to review any greater power. This remains an open question in China. Some scholars believe that under the constitutional system the CCP must be under the constitutional review authority of the NPC. “Cai Dingjian further argues that Communist Party is the only party in power and participates directly in decision making and management of state affairs. Therefore the Communist Party must respect the law and put itself under the oversight of the people’s congresses.” (Jiang 2003, 256). And, indeed, an insistence, following Western patterns, of seeking to locate review powers within the state apparatus marks much of the current movement for constitutional review within China. The efforts to force the hand of the NPC over the Sun Zhigang incident nicely evidence the application of this view in practice among Chinese scholars and activists.

Chinese legal reformers viewed the controversy over Sun Zhigang's death as an opportunity both to challenge the C&R system and to establish a precedent for constitutional review in China. . . . Legal scholars hoped that by filing the Review Petition, they would breathe life into this mechanism. [FN42] "This is not aimed just at the Sun Zhigang case," said Xu Zhiyong. "We are concerned about the system itself. A mechanism for reviewing violations of the Constitution should be established and initiated in order to root out abuses and innovate continually." Scholars expressed strong support for the Review Petition and concluded that its filing was as significant as the Sun Zhigang case itself. (Hand 2006, 124-125).

But importantly, others within China suggest that the NPC’s constitutional oversight is limited to equal or inferior organs and that, as a consequence such oversight cannot include the CCP. “First, the Constitution provides for the Communist leadership over the state. Second, the Constitution expressly lists those under the NPC’s oversight and does not include the Communist Party.” (Id.).

The consequences are easy to discern: institutionalization of a judicial function must necessarily remain tied to the administrative aspects of governance. But such a judicial function cannot be understood as including a power sufficient under the current constitutional framework to support judicial review. This model vests power in substantial contrast to the patterns of power inscribed in the American constitution that supported both the notion of judicial supremacy within the scope of its function and the possibility of characterizing the interpretation/review function as historically judicial. (Marbury v. Madison). Despite efforts to the contrary (Lee 2005), Chinese constitutionalism is unlikely to readily incorporate any form of judicial model of constitutional review embedding in the state apparatus. It follows that the focus on an amorphously constituted power of constitutional interpretation vested in an organ of state power can lead to a view that constitutional review, as such, and perhaps the constitution itself, is an embodiment of principle rather than a bureaucratization and institutionalization of state and political power. (Clarke 2003).

But Chinese scholars do not believe that (Zhu 2007). The discussion of constitutional review, then, can best be understood in contemporary China as a search for systems of testing disputes over legal rights derived from the constitution. Constitutional law, as such, remains an essentially political task, and as such, part of the political tasks of the vanguard party within the framework of its own internal institutional systems. It is possible to develop systems that test state organ’s fidelity to law, but not systems that reduce the power of the CCP to serve as the embodiment of the political will of the people and of the values enshrined in the constitution. There is the great difficulty of Chinese constitutionalism—the incorporation of the CCP within the framework in a way that realistically acknowledges it position within the hierarchy of constitutional actors. As long as the focus remains of the state and its organs, constitutionalism will remain confused. It is to the issue of the CCP within the Chinese constitutional state and its relevance for constitutional review debates that the essay turns next.

II. The Bureaucratization of Constitutional Interpretation in the CCP in the Form of a Constitutional Court?

Chinese constitutionalist discourse focuses its bureaucratization process discourse on the organs of state power, and on administrative regulation. And there is a sound theoretical foundation for that limited discourse. For all that I believe this approach is too self-limiting. It may be possible to justify a system of institutionalized constitutional review within the strictures and value systems of the Chinese Constitution and its political framework without distorting that system. For that purpose it is necessary to apply the higher law principles of constitutionalism and its elaboration at the appropriate level of national governance. That level is not within the state apparatus, but within the highest institutional expression of constitutionally sanctioned political power in China—the organs of the CCP itself. (Backer 2009). “The Chinese state is an aggregate, a fusion of outward and inward institutional manifestations of power, of CCP and State within China.” (Backer 2006, 60). I agree with Jiang that it cannot be denied that “the Constitution is the paramount criterion to be cited in overseeing the other constitutional branches.” (Jiang 2003, 257). However, the consequence of this understanding is not necessarily the constitution of the organs of the state apparatus as either the highest organs of national power, or the supreme institutional manifestation of sovereign power under the Constitution, Instead, I believe that the Constitution itself vest that position and authority in the CCP. To that extent, the CCP, rather than the inferior organs of state power, may be the appropriate place under the constitution, to vest paramount constitutional review as well as the elaboration of constitutional values. (Backer 2009).

Within China, of course, the ubiquitousness of the CCP is hardly worth comment. And that is where the difficulties come for outsiders seeking to engage Chinese constitutionalism. Zhu Suli noted accurately that

Despite the many political differences between the CCP and its former arch-rival, the Nationalist Party (known as the Guomindang or GMD) and despite the fact that the CCP never used the GMD's often deployed concept of the "party-state," in practice, the CCP inherited the political tradition, initiated by Sun Yat-sen5 and pursued by the GMD, comprised of a "party construction of the state," "party rule of the state," and "party above the state." Indeed, eventually, the CCP's influence over society and the machinery of the state would far exceed that achieved by the GMD. (Zhu 2007, 535).
Zhu accurately understands the nature of political—and now owing to the constitutional development in China, the legal—hierarchy and its implications for the development of a legal system founded on the rule of law. “In contemporary China, nearly every political force has either been integrated into the CCP, or, as in the case of former and present capitalists, counter-revolutionaries, bad elements, and rightists during the Cultural Revolution (1966-1976), denied political expression.” (Zhu 2007, 538). The CCP is an integral part of the governance structure of the Chinese nation. Its role is not merely that of a factional party on the Western model. This role has been acknowledged within China as a framework for understanding the development of democratic institutions. (Lin Feng 2008).

The institutional role of the CCP has been increasingly elaborated in a constitutionalist sense since the establishment of the principles of Three Represents within the substantive framework of Chinese constitutionalism. “The Three Represents suggests that in China, the CCP exists in two guises simultaneously. First, the CCP serves as a supreme political party. Second, the CCP serves as the paramount institution of state power; it is both a political (the Party) and governance (the State) entity.” (Backer 2006, 72).

But the Three Represents and the principles of scientific development also point to a form of democratization within Chinese rule of law principles. Its origins can be traced to Deng Xiaoping theory “Deng was interested in defining a middle path, using ‘reform and opening up’ to oppose ‘leftism’ and using the ‘four cardinal principles’ to oppose ‘bourgeois liberalization.’” (Fewsmith 2001, 27). That middle path produced a system in which state organs would be given substantisal administrative authority, but political authority, the framework for the political system, would be retained by the higher organs of the CCP, all under the constitution. (Backer 2009). Zhu also nicely understands the implications for democratic governance and the development of democratic principles contextually applied. “[I]n the more than two decades since China began its reform and "opening up" in 1978, and especially following the inclusion of the concept of the "the three representatives" in the Party's and PRC's constitutions, the CCP has pursued becoming a governing party that represents the basic interests of the greatest number of people and that has daily strengthened its ability as a governing party.” (Zhu 2007, 538).

The current scholarship on constitutional institutionalization in China thus continues to reflect the fundamental difficulties of fashioning a bureaucratization of politics with Chinese characteristics true to the values framework of the Chinese national political system, where the CCP thus represents the whole of the political power, and political citizenship within China. (Backer 2009). And essentially the problem reduces itself to the mechanics of legitimating rule of law constitutionalism while preserving the vanguard status of the CCP. “The problem of the rule of law in China can be understood as concentrating on the resolution of the questions of the long-term fundamental role of the CCP in China, and of the relationship between the CCP and the State apparatus it has created—and now dominates—in the service of the masses. (Backer 2006, 73). The difficulty flows from a conceptual error—the attempt to bring over from Western political and constitutional theory the idea that there is a necessary equation between state power and law. The Chinese have suggested a different approach, one in which the state authority is subject to a higher law power—the CCP—itself the focus of the obligation to develop democratic principles and representative policies within its established values framework. (Backer 2009).

Recent developments in Chinese constitutional theory have made clear that the CCP is not above the great governance principles of the Three Represents or Scientific Development through construction of a harmonious society. As an American commentary noted at the time, “Chinese scholars often worry that the country suffers from an eroding system of beliefs and a lack of common aspirations and values. To help build a new values system, the party's objective "is to try to perfect the socialist democratic legal system," one in which "the rule of law is to be carried out completely, and people's interests and rights are to be respected and guaranteed," the plenary statement said.” (Fan 2006).

Hu Jinato made that very clear as well. “To thoroughly apply the Scientific Outlook on Development, we must strengthen our efforts to build the Party in earnest. As is required by the Party's lofty mission of governing and rejuvenating the nation, our efforts to improve the Party's governance capability and maintain and develop its vanguard nature must serve our task of directing scientific development, promoting social harmony, guiding development and progress in China and better representing and realizing the fundamental interests of the overwhelming majority of the people.” (Hu Jintao 2007, at III). And this involvement has found expression in the structure of Party discipline, especially in connection with the campaigns against corruption. As Fewsmith nicely explains,

“Efforts to institutionalize procedures—and enhance the ‘governing ability’ of the CCP—were extended to the party in February 2004 with the promulgation of the “Regulations of the Communist Party of China of Inner-Party Supervision (Trial)’ and the ‘Communist Party of China Regulation on Disciplinary Measures.’ The regulations try to institutionalize several procedures of inner-party life, including requiring voting (but not necessarily secret voting) for major decisions (Article 13) and requiring party standing committees and discipline inspection commissions at all levels to make annual reports on their activities to the relevant plenary sessions (Article 19). (Fewsmith 2004, 5).
It is clear, then, that one of the great successes of the Three Represents theory, as refined by the principles of scientific development and the objective of building a harmonious society has produced a set of powerful values in China—values with political effect, core, constitutional values.

It is also clear that bureaucratization is meant to encompass not merely the elements of state organization but also the overarching authority of the CCP within the Chinese constitutional system. As Hu Jinato noted, under the constitutional system, the CCP must:

Improve the mechanism of restraint and oversight and ensure that power entrusted by the people is always exercised in their interests. Power must be exercised in the sunshine to ensure that it is exercised correctly. We must have institutions to govern power, work and personnel, and establish a sound structure of power and a mechanism for its operation in which decision-making, enforcement and oversight powers check each other and function in coordination. We will improve organic laws and rules of procedure to ensure that state organs exercise their powers and perform their functions and responsibilities within their statutory jurisdiction and in accordance with legal procedures. We will improve the open administrative system in various areas and increase transparency in government work, thus enhancing the people's trust in the government. (Hu Jinato 2007, at Part VI, 6).
The suggestion is clear—as a constitutive and vanguard element of Chinese Constitutionalism, the CCP has a vital institutional role to play within the constitutional system. That role is grounded in bureaucratization and institutionalization of rule of law governance. "We will focus on tightening oversight over leading cadres and especially principal ones, over the management and use of human, financial and material resources, and over key positions. We will improve the systems of inquiries, accountability, economic responsibility auditing, resignation and recall. We will implement the intra-Party oversight regulations, strengthen democratic oversight and give scope to the oversight role of public opinion, pooling forces of oversight from all sides to make it more effective." (Hu Jinato 2007, at Part VI, 6). The role is political—but its expression can be institutionalized. And maybe that institutionalization is necessary to continue to develop both CCP and State: from a system in which the CCP represents a collection of individuals who together comprise a revolutionary vanguard (to which political power over the state and its organs might be appropriate) to a system in which the CCP becomes the source and protector of the core values of Chinese society to which an ever broadening base subscribes. That is, the CCP moves from a revolutionary vanguard party outside the system, to become the system itself—the values and principles that ground the construction and operation of all organs of political power in the nation. (Backer 2009).

For that purpose, the CCP cannot continue to rely on the forms and behaviors of the time it sat outside the state. As the guardian of national values—now enshrined through law in the constitution—it must adopt the forms of inside governance. It is no longer adequate to rely on revolutionary forms suitable for a vanguard party out of power and whose legitimacy is endangered. (Kirby 2001). It can no longer be true that “Parties become a quasi-constitutional structure in another sense as they serve as an alternative for or a necessary stage on the road toward constitutionalism: within the party, party discipline and guiding principles perform the function the function of law and statutes.” (Zhu 2007, 551). Constitutionalism has already been attained, and its forms adopted as a core party line. (Backer 2006). Rule of law is now internal to the CCP as well as external to the organs of state government. As Jiang Zemin suggested in the Three Represents, the revolutionary movement in China has shifting from outside to inside. The object is now to inculcate the appropriate fidelity to the Chinese Constitutionalism and the political values it enshrines among all the people. (Backer 2006). The methodology for that revolutionary goal is derived from the principles of scientific development in the service of a harmonious society. Its form is that of democratic centralism, positing both participation and obedience within the elite structures of the CCP. (Thørson 2004, 204-212). This is a concept at the heart of the innovative direction of CCP governance. “Institutionally, we will emphasize improving democratic centralism.” (Hu Jintao 2007, Part 12). At last we come to the substantive value of bureaucratization within the values framework of emerging constitutionalism.

The institutionalization of the interpretive function of political power requires a collective body dedicated to that purpose. The object is to elaborate systems that serve to legitimate the expression of political values consistent with the constitutional system. The state organs or additional organs created at that level are inadequate to the task. Their scope of power is essentially administrative. Political power is ultimately vested in the CCP. It seems logical to propose a bureaucratization of political power over the interpretation of constitution not in the state but in the CCP itself. “When a given legal system includes a constitution, the “rule of law” requires that the sovereignty of the constitution be protected.” United Mizrahi Bank Ltd v. Migdal Village, Supreme Court Israel C.A. 6821/93, 49(4) P.D. 221 (1995). The Chinese constitution vests the state organs with administrative power and the CCP with a superior authority to supply and protect the substantive values of the constitutional order. Those values, under which all provisions of the constitution must be interpreted, include Marxist Leninist Mao Zedong thought, Deng Xioaping Theory, and the important thought of the Three Represents. This, in the aggregate constitutes, the political gründnorm of the Chinese constitutional state. (Kelson 1961, 124). “Party organizations at all levels and all Party members must act under the Constitution and laws on their own initiative and take the lead in upholding the authority of the Constitution and laws.” (Hu Jinato 2007, Part VI, Section 3). The Chinese Constitutional framework thus provides an important insight, one that is worth emphasizing—under the Chinese Constitutional system, the CCP is and ought to be recognized as the authoritative interpreter of the constitution.

That leaves us with the question—what form should that institutionalization take within the CCP? It is possible that a committee form—for example a special committee of the highest organ of the CCP, might be an appropriate place for institutionalization of the interpretation function. There is some appeal to this approach. It mimics the current suggestions for organizing an interpretation function within the NPC apparatus. And it retains the bureaucratization forms that privilege the political character of interpretive decision making within the Chinese constitutional system—the great ideological campaigns through which substantive constitutionalism has developed over the last quarter century. (Backer 2006).

But constitutional values formation and interpretation are distinct functions. Interpretation—including the application of constitutional norms to the organs of the state apparatus, is distinct from the process of formulating constitutional values. Interpretation goes to the bureaucratization of politics that the current Chinese scholarship described above points. For that purpose the form of a Constitutional Court would be useful. (Kelson 1942). That is an institution, that is part of the highest level of political power, and independent of the institutions that actually exercise governmental power directly through law, is best situated to offer the constitutional system a necessary protection from abuses of power, internal and external, individual and institutional. It is not that the function of this institution is juridical in the traditional sense. The opposite is truer—the function is essentially political—and in the service of the constitutional order. (Ohlinger 2003). As a constitutional court, the CCP would incorporate another aspect of collective governance within the organ of the nation most legitimately able to exercise the power. The determinations of that body would remain political, and the touchstone would have to be the normative grounding of Chinese constitutionalism as specifically set forth in the constitution—including the vanguard status of the CCP and the principles under which the CCP must function.

It’s principal function would be similar to that reserved for the first modern constitutional court—the control of legislative discretion in line with constitutional limits (including the limits of state power organs under the guidance of the CCP). “Kelsen recognized the need for an institution with power to control or regulate legislation. In the case of post-World War I Austria, the concern was mostly for maintaining federal arrangements, that is, regulating the relationship between the national and provincial governments.” (Ferejohn 2002, 52). In the case of China, the constitutional court might, in the first instance, be most useful in maintaining the arrangement between state power and political power—that is between the NPC architecture and the CCP. But it would maintain this constitutional division of power in an institutionally legitimate way—under the constitution, now understood as creating a separation of functions substantially distinct from that in the West—separation of power with Chinese characteristics. “So, constitutional judges as they function now, in Europe and elsewhere, regulate legislative production, administrative production, and judicial action. That is their position.” (Id., 53). A valuable insight with utility for a Chinese model developing bureaucratized forms of legitimacy in its own context. The point is not to create a judicial arm through which citizens might constitutionalize political power, but to create an institutional mechanism to legitimate the expression of that political power as constituted within the framework of the Chinese constitution itself. This is a critical distinction. Thus, “although the CCP has its own ideology and exercises significant influence on the judiciary, taken as a whole, this ideology is not necessarily incompatible with the general view of justice shared by ordinary people. (Zhu 2007, 543). The judicial power can remain administrative and within the organs of the state system. Constitutional power ought to be collegially administered within an appropriate institutional form. The issue, as modern Chinese scholars note, is bureaucratization, the development of appropriate institutional frameworks for regularizing the hierarchy of lawful authority recognized under the Chinese Constitution.

And lastly, where might this institutional interpretive function of the CCP be located? Perhaps within or drawn from an organ of the Central Committee of the CCP as a Constitutional Court for the nation? Perhaps it ought to be constituted as a system through which citizens may complain to the appropriate Party officials who might then refer matters of constitutional interpretation to the appropriate central authority. This essay does not seek to wrestle with the specific issues of implementation. Hu Jintao himself might help us on this score as well.

We will strictly implement democratic centralism, improve the system that combines collective leadership with division of responsibilities among individuals, and oppose and prevent arbitrary decision-making by an individual or a minority of people. We will introduce a system of voting for use by local Party committees in discussing and deciding on major issues and appointing cadres to important positions. . . . All Party members must firmly uphold the centralized and unified leadership of the Party, conscientiously abide by the Party's political discipline, always be in agreement with the Central Committee and resolutely safeguard its authority to ensure that its resolutions and decisions are carried out effectively. (Hu Jintao 2007, Part 12).

Democratic centralism, CCP organization and the need to advance the position of rule of law practices within the CCP as well as in the state organs (Hu Jintao 2007, Part VI), point to an organ of the Central Committee as the most likely place within the CCP to place this interpretive and disciplinary rule of law function. A constitutional court will serve as an excellent site for a true practice of democratic centralism—"freedom of discussion, unity of action" (Lenin 1906)—not its Soviet style empty gesture, where the centralism is emphasized at the expense of democratic deliberation within the CCP. In this, a constitutional court mechanism would enhance the democratic leadership of the CCP within the constitutional framework. (Lin Feng 2008).

III: Conclusion.

The CCP expresses the highest political power in the nation. It, like the organs of state, are now committed to rule of law based on the construction of values and procedures that implement a certain values vision of the state and guard against the assertions of personal power against the collective. The form of a traditional constitutional court might serve as a useful form of institutionalizing the exercise of political power constitutionally vested in the CCP. Hu Jintao has suggested the CCP’s obligation to

Continue to strengthen the Party's governance capability and focus on building high-quality leading bodies. Strengthening the Party's governance capability has an overall impact on Party building and the cause of socialism with Chinese characteristics. In building the leading bodies at all levels, we must focus our efforts on promptly and effectively improving their art of leadership and governance capability. Following the requirement of scientific, democratic and law-based governance, we will improve the way of thinking of leading bodies, the governing competence of leading cadres, their styles of leadership and governance, the leadership system, and the working mechanisms of the leading bodies of local Party committees that have had their staffing restructured. (Hu Jintao 2007, Part 12).
The bureaucratization of constitutional power, centered on the CCP, and grounded in democratic centralism, lends itself strongly to the forms of a constitutional court, which itself represents the Western essence of democratic centralism. As one author recently put it:

The strengthening of the party’ s role in China runs counter to the ruling paradigm in contemporary China studies, which through the 1990s, have focused on the societal aspect of party/state-society relations, resulting in a plethora of studies on civil society, social organizations, private entrepreneurs and other forms of non-governmental development. In fact, this focus on society and social movements has pushed the party out to the ruling paradigm. It is high time to bring the party back in. (Brødsgaard 2004, 87).
A constitutional court within the CCP may be the next natural step in the evolution of constitutionalism with Chinese characteristics. And more importantly, perhaps, it will represent another step in the scientific development of Chinese constitutionalism by placing the CCP within the overall construction of a constitutional system which acknowledges the CCP as the source of political citizenship and the state apparatus working under its guidance in the construction of a well run and constitutionally limited administrative state.


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Tuesday, November 18, 2008

Report From the National Feedlot: Looking at the U.S. Investments in Banks Under EESA 2008

My research assistant, Sandra Gonzalez del Pilar prepared the following update on activity under the Emergency Economic Stabilization Act of 2008.


The Troubled Asset Relief Program (“TARP”) originally contemplated under the Emergency Economic Stabilization Act of 2008 (“EESA”) –enacted into law on October 3, 2008- has mutated and will likely continue to morph. First, the Treasury Secretary announced the creation of a Capital Purchase Program (“CPP”) under the TARP on October 14, 2008, by which the Treasury would use $250 billion of the $700 billion of EESA funds to invest in financial institutions. (Treasury Announces TARP Capital Purchase Program Description. October 14, 2008). According to the Treasury Secretary “The purpose of the CPP is to encourage U.S. financial institutions to build their capital base, which in turn will increase the capacity of those institutions to lend to U.S. businesses and consumers and to support the U.S. economy. The terms of the investment limit certain uses of capital by the issuer, including most repurchases of company stock, and increases in dividends. Under this voluntary program, Treasury will purchase up to $250 billion of senior preferred shares on standardized terms, which will include warrants for future Treasury purchases of common stock. The CPP is available to qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies engaged solely or predominately in financial activities permitted under the relevant law.” (United States Department of the Treasury Tranche Report to Congress, November 4, 2008. Page 1, 2). The deadline to apply to the CPP by qualifying financial institutions was November 14, 2008, 5:00 p.m. (EDT).

By October 28, 2008 the Treasury had settled capital purchase transactions of preferred stock with warrants with 8 of the first nine financial institutions participating in the CPP (the settlement of the capital purchase transaction of the 9th institution will be made before January 31, 2009), according to the first Tranche Report to Congress issued by the Treasury on November 4, 2008 in accordance with Section 105(b) of the Emergency Economic Stabilization Act of 2008 (EESA). (United States Department of the Treasury Tranche Report to Congress, November 4, 2008.). By November 14, 2008, the Treasury had completed settlements with an additional 21 financial institutions, for a total of 30 financial institutions totaling $158,561,409,000 in Capital Purchase Program investments, according to the Transactions Report issued by the Treasury on November 17, 2008. (Capital Purchase Program. Transaction Report issued on November 17, 2008.).

On November 12, 2008, while providing an update on the state of the financial system, the economy, and the Treasury strategy for continued implementation of the $700 billion financial rescue package, the Treasury Secretary announced that purchasing illiquid mortgage-related assets is not the most effective way to use the TARP funds. (Remarks by Secretary Henry M. Paulson, Jr. on Financial Rescue Package and Economic Update. November 12, 2008). The Treasury will now design further strategies to build capital in financial institutions, examine strategies to support consumer access to credit outside the banking system, and examine strategies to mitigate mortgage foreclosures through different venues than the original commitment to purchase illiquid mortgage assets.


Restrictions on Certain Transactions: Pursuant to Section 4.3 of the Securities Purchase Agreement Standard Terms, the financial institution shall not merge or consolidate with, or sell, transfer or lease all or substantially all of its property or assets to, any other party unless the successor, transferee or lessee party (or its ultimate parent entity), as the case may be (if not the financial institution), expressly assumes the due and punctual performance and observance of each and every covenant, agreement and condition of the Securities Purchase Agreement to be performed and observed by the financial institution.

Transferability; Restrictions on Exercise of the Warrant: According to the Securities Purchase Agreement Standard Terms, Section 4.4, the Treasury is permitted to transfer, sell, assign or otherwise dispose of all or a portion of the purchased securities or warrant shares at any time, and the financial institution shall take all steps as may be reasonably requested by the Treasury to facilitate the transfer of the purchased securities and the warrant shares, as long as the Treasury does not transfer a portion or portions of the warrant with respect to, and/or exercise the warrant for more than one-half of the initial warrant shares in the aggregate until the earlier of (i) the date on which the financial institution has received aggregate gross proceeds of not less than the purchase price and (ii) December 31, 2009.

Registration: The Treasury acknowledged that the Purchased Securities and the Warrant Shares have not been registered under the Securities Act of 1933 or under any state securities laws. It acquired the purchased securities pursuant to an exemption from registration pursuant to Section 4(2). The Securities Purchase Agreement Standard Terms, Section 4.5, however, states the Treasury’s Registration Rights. Namely, the financial institution agrees that as promptly as practicable after the closing date, but not later than 30 days after such closing date, the financial institution shall prepare and file with the SEC a Shelf Registration Statement covering all Registrable Securities, or designate an existing Shelf Registration Statement filed with the SEC to cover the Registrable Securities. To the extent the Shelf Registration Statement has not been declared effective or is not automatically effective upon such filing, the financial institution shall use reasonable best efforts to cause such Shelf Registration Statement to be declared or become effective and to keep such continuously effective and in compliance with the Securities Act and usable for resale. The financial institution will also grant to the Treasury piggyback registration rights for the warrants and the common stock underlying the warrants and will take such other steps as may be reasonably requested to facilitate the transfer of the warrants and the common stock underlying the warrants.

Restriction on dividends and Repurchases: Pursuant to Section 4.8(a) of the Securities Purchase Agreement Standard Terms, prior to the earlier of the third anniversary of the closing date and the date on which the Preferred Shares have been redeemed in whole or the Treasury has transferred all of the Preferred Shares to third parties, neither the financial institution nor any subsidiary of the financial institution shall without the consent of the Treasury: (i) declare or pay any dividend or make any distribution on the Common Stock (other than regular quarterly cash dividends of no more than the amount of the last quarterly cash dividend per share declared, dividends payable solely in shares of Common Stock, and dividends or distributions of rights or Junior Stock in connection with a stockholders’ right plan); (ii) redeem, purchase or acquire any shares of Common Stock or other capital stock or other equity securities of any kind of the financial institution, or any trust preferred securities issued by the financial institution or any affiliate of the financial institution (other than redemptions, purchases or other acquisitions of the preferred shares, of shares of common stock or other junior stock in connection with the administration of any employee benefit plan in the ordinary course of business consistent with past practice (“Permitted Repurchases”)). The financial institution shall not repurchase any Preferred Shares from any holder thereof, whether by means of open market purchase, negotiated transaction, or otherwise, other than Permitted Repurchases, unless it offers to repurchase a ratable portion of the Preferred Shares then held by the Treasury on the same terms and conditions.

Executive Compensation: Section 4.10 of the Securities Purchase Agreement Standard Terms states that the financial institution shall take all necessary actions to ensure that its Benefit Plans with respect to its Senior Executive Officers comply in all respects with Section 111(b) of the EESA and shall not adopt any new Benefit Plan with respect to its Senior Executive Officers that does not comply with the same until such time as the Treasury ceases to own any debt or equity securities of the financial institution acquired pursuant to the Securities Purchase Agreement.


The Senior Preferred stock has a regulatory capital status of Tier 1, and a term of perpetual life. It ranks senior to common stock and pari passu with existing preferred shares other than preferred shares which by their terms rank junior to any existing preferred shares. The liquidation preference is $1,000 per share. However, the Treasury may agree to purchase Senior Preferred stocks with a higher liquidation preference per share, in which case the Treasury may require the Financial Institution to appoint a depositary to hold the Senior Preferred and issue depositary receipts.

Pursuant to the Certificate of Designations (Certificate of Designations of fixed Rate Cumulative Perpetual Preferred Stock), the terms of the Senior Preferred Stock are:

Dividends Rights (Section 3): Applicable Dividend Rate means (i) during the period from the Original Issue Date to, but excluding, the first day of the first Dividend Period commencing on or after the fifth anniversary of the Original Issue Date, 5% per annum and (ii) from and after the first day of the first Dividend Period commencing on or after the fifth anniversary of the Original Issue Date, 9% per annum. The Dividend Payment Rate is February 15, may 15, august 15 and November 15 of each year. Holders of Designated Preferred Stock are entitled to receive, on each share of Designated Preferred Stock out of assets legally available therefore, cumulative cash dividends with respect to each Dividend Period. So long as any share of Designated Preferred Stock remains outstanding, no dividend or distribution shall be declared or paid on the Common Stock or any other shares of Junior Stock or Parity Stock. No Common Stock, Junior Stock or Parity Stock shall be directly or indirectly purchased, redeemed or otherwise acquired for consideration by the financial institution or any of its subsidiaries unless all accrued and unpaid dividends for all past Dividend Periods, included the latest completed Dividend Period, on all outstanding shares of Designated Preferred Stock have been or are simultaneously declared and paid in full.

Liquidation Rights (Section 4): Liquidation Preference: In the event of any liquidation, dissolution or winding up of the affairs of the financial institution, whether voluntary or involuntary, holders of Designated Preferred Stock shall be entitled to receive for each share of Designated Preferred Stock, out of the assets of the financial institution or proceeds thereof (whether capital or surplus) available for distribution to stockholders of the financial institution, subject to the rights of any creditors of the financial institution, before any distribution of such assets or proceeds is made to or set aside for the holders of Common Stock and any other stock of the financial institution ranking junior to Designated Preferred Stock as to such distribution, payment in full in an amount equal to the sum of (i) the Liquidation Amount per share and (ii) the amount of any accrued and unpaid dividends, whether or not declared, to the date of payment. If in any distribution the assets of the financial institution or proceeds are not sufficient to pay in full the amounts payable with respect to all outstanding shares of Designated Preferred Stock and the corresponding amounts payable with respect of any other stock of the financial institution ranking equally with Designated Preferred Stock as to such distribution, holders of Designated Preferred Stock and the holders of such other stock shall share ratably in any such distribution in proportion to the full respective distributions to which they are entitled. With regards to liquidation rights, the merger or consolidation of the financial institution with any other financial institution or other entity, including a merger or consolidation in which the holders of Designated Preferred Stock receive cash, securities or other property for their shares, or the sale, lease or exchange (for cash, securities or other property) of all or substantially all of the assets of the financial institution, shall not constitute a liquidation, dissolution or winding up of the financial institution.

Redemption (Section 5): Designated Preferred Stock may not be redeemed for a period of three years from the date of the original issue date, except with the proceeds from a Qualified Equity Offering (“Qualified Equity Offering” shall mean the sale by the financial institution after the date of the investment of Tier 1 qualifying perpetual preferred stock or common stock for cash) which results in aggregate gross proceeds to the financial institution of not less than 25% of the issue price of the Designated Preferred Stock. After the third anniversary of the date of the original issue date, the Designated Preferred Stock may be redeemed, in whole or in part, at any time and from time to time, at the option of the financial institution. All redemptions of the Designated Preferred Stock shall be at 100% of its issue price, plus (i) in the case of cumulative Senior Preferred, any accrued and unpaid dividends and (ii) in the case of noncumulative Designated Preferred Stock, accrued and unpaid dividends for the then current dividend period (regardless of whether any dividends are actually declared for such dividend period), and shall be subject to the approval of the appropriate Federal Banking Agency. Following the redemption in whole of the Designated Preferred Stock held by the Treasury, the financial institution shall have the right to repurchase any other equity security of the financial institution held by the Treasury at fair market value.

Voting Rights (Section 7): The holders of Designated Preferred Stock have no voting rights except as otherwise required by law or whenever at any time or times, dividends payable on the shares of Designated Preferred Stock have not been paid for an aggregate of six quarterly dividend periods or more, whether or not consecutive, the authorized number of directors of the financial institution shall automatically be increased by two and the holders of the Designated Preferred Stock shall have the right, with holders of share of any one or more other classes or series of Voting Parity Stock outstanding at the time, voting together as a class, to elect two directors, “Preferred Directors”, or each a “Preferred Director” to fill the created directorship at the financial institution’s next annual meeting of stockholders (or at a special meeting called for that purpose prior to the next annual meeting) and at each subsequent annual meeting of stockholders until all accrued and unpaid dividends for all past dividend periods including the latest completed dividend period on all outstanding shares of Designated Preferred Stock have been declared and paid in full. At this time the voting right will terminate with respect to the Designated Preferred Stock.

Holders of Designated Preferred Stock have class voting rights on (i) any authorization, creation, or issuance of shares ranking senior to the Designated Preferred Stock; (ii) any amendment, alteration or repeal of any provision of the Certificate of Designations for the Designated Preferred Stock or the Charter; or (iii) any consummation of a binding share exchange or reclassification involving the Designated Preferred Stock, or of a merger or consolidation of the financial institution with another financial institution or other entity which would adversely affect the rights of the Designated Preferred Stock holder.


According to the Capital Purchase program Summary of Warrant Terms (TARP Capital Purchase Program. Term Sheet):

The Treasury will receive ten-year warrants, immediately exercisable, in whole or in part, to purchase a number of shares of common stock of the financial institutions with an aggregate market price equal to 15% of the Senior Preferred Stock amount on the date of the investment, subject to a reduction. The initial exercise price for the warrant, and the market price for determining the number of shares of common stock subject to the warrants, shall be the market price for the common stock on the date of the Senior Preferred investment, calculated on a 20-trading day trailing average), subject to customary anti-dilution adjustments.

Voting Rights: Pursuant to Section 6 of the Form of Warrant to Purchase Common Stock, does not entitle the Treasury to any voting rights or other rights as a stockholder of the Company prior to the date of exercise of such Warrant.


The Treasury Secretary settled capital purchase transactions of preferred stock with warrants with the following nine companies on October 28, 2008:

1) BANK OF AMERICA CORPORATION - $15 BILLION: According to Form 8-K filed by Bank of America with the Securities Exchange Commission on October 30, 2008, Bank of America Corporation agreed to issue 600,000 of Bank of America’s Fixed Rate Cumulative Perpetual Preferred Stock, Series N; and a warrant to purchase 73,075,674 shares of common stock, par value $0.01 per share for an aggregate purchase price of $15 billion in cash.

2) BANK OF NEW YORK MELLON CORPORATION - $3 BILLION: According to Form 8-K filed by Bank of New York Mellon Corporation with the Securities Exchange Commission on October 30, 2008, the U.S. Treasury agreed to purchase 3,000,000 shares of Bank of New York Mellon Corporation’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B, and a ten-year warrant to purchase up to 14,516,129 voting common stock shares, par value $0.01 per share at an exercise price of $31.00 per share, for an aggregate purchase price of $3.0 billion in cash.

3) CITIGROUP INC. - $25 BILLION: According to Form 8-K filed by Citigroup Corporation on October 30, 2008 with the Securities Exchange Commission, Citigroup Inc. agreed to issue the Treasury 25,000 of its Fixed Rate Cumulative Perpetual Preferred Stock, Series H, and a ten-year warrant to purchase 210,084,034 common stock shares, at an exercise price of $17.85 par value $0.01 per share, for an aggregate purchase price of $25 billion in cash.

4) THE GOLDMAN SACHS GROUP, INC. - $10 BILLION: According to Form 8-K filed by The Goldman Sachs Group, Inc. on October 31, 2008 with the Securities Exchange Commission, The Goldman Sachs Group agreed to issue and sell the U.S. Treasury 10,000,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series H, and a ten-year warrant to purchase up to 12,205,045 shares of the Company’s voting common stock, par value $0.01 per share, at an exercise price of $122.90 per share, for an aggregate purchase price of $10.0 billion in cash.

5) JP MORGAN CHASE & CO. - $25 BILLION: According to Form 8-K filed by JP Morgan Chase & Co. on October 31, 2008 with the Securities Exchange Commission, JP Morgan Chase agreed to issue to the United States Department of the Treasury, in exchange for aggregate consideration of $25,000,000,000, 2,500,000 shares of the its Fixed Rate Cumulative Perpetual Preferred Stock, Series K, par value $1 and liquidation preference $10,000 per share (and $25,000,000,000 liquidation preference in the aggregate), and a warrant to purchase up to 88,401,697 shares of the Company’s common stock, par value $1 per share, at an exercise price of $42.42 per share.

6) MORGAN STANLEY – $10 BILLION: According to Form 8-K filed by Morgan Stanley on October 30, 2008 with the Securities Exchange Commission, Morgan Stanley agreed to issue and sell to the Treasury Department 10,000,000 shares of its Series D Fixed Rate Cumulative Perpetual Preferred Stock, par value $0.01 per share, and a warrant to purchase up to 65,245,759 shares of common stock, par value $0.01 per share for an aggregate purchase price of $10 billion.

7) STATE STREET CORPORATION - $2 BILLION: According to Form 8-K filed by State Street Corporation on October 31, 2008 with the Securities Exchange Commission, State Street Corporation agreed to issue and sell to the Treasury Department 20,000 shares of its Series B fixed rate cumulative perpetual preferred stock, $100,000 liquidation preference per share, and a warrant to purchase 5,576,208 shares of State Street’s common stock at an exercise price of $53.80 per share.

8) WELLS FARGO & COMPANY - $25 BILLION: According to Form 8-K filed by Wells Fargo & Company on October 30, 2008 with the Securities Exchange Commission, Wells Fargo & Company agreed to issue to the United States Department of the Treasury, 25,000 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series D without par value having a liquidation amount per share equal to $1,000,000, for a total price of $25 billion. As part of its purchase of the Series D Preferred Stock, the Treasury Department received a ten-year warrant to purchase 110,261,688 shares of Wells Fargo & Company common stock at an initial per share exercise price of $34.01. Pursuant to the Securities Purchase Agreement, the Treasury Department agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant.

9) MERRILL LYNCH & CO., INC. - $10 BILLION (SETTLEMENT DEFERRED): According to Form 8-K filed by Merrill Lynch & Co., Inc. on October 30, 2008 with the Securities Exchange Commission, Merrill Lynch & Co., Inc. entered into a securities purchase agreement with the U.S. Treasury setting forth the terms upon which Merrill Lynch would issue a new series of preferred stock and warrants to the U.S. Treasury (“TARP Purchase Agreement”). In view of the pending merger agreement with Bank of America Corporation, Merrill Lynch determined that it will not sell securities to the U.S. Treasury under the TARP -Capital Purchase Program (“CPP”) at this time, but may do so in the future under certain circumstances. The TARP Purchase Agreement provides for delayed settlement of a sale of $10 billion of a new series of Merrill Lynch preferred stock and warrants to purchase 64,991,334 shares of Merrill Lynch Common Stock at an exercise price of $23.08 per share. The TARP Purchase Agreement provides that the closing will take place on the earlier of (i) the second business day following a termination of the Merger Agreement with Bank of America and (ii) a date during the period beginning on January 2, 2009 and ending on January 31, 2009 if the Merger Agreement is still in effect but the merger has not been completed by the specified date, but, in the case of either (i) or (ii), in no event later than January 31, 2009. In addition, prior to January 2, 2009, if the Merger Agreement is still in effect but the merger has not been completed, Merrill Lynch has the right, after consultation with the Federal Reserve and Bank of America, to request that the U.S. Treasury consummate the CPP investment on or prior to January 1, 2009. The TARP Purchase Agreement will terminate at 12:01 am on February 1, 2009 if the investment has not been made by that date.

Completion of the CPP investment prior to the termination of the Merger Agreement is subject to Bank America’s approval. Bank of America has agreed that it will not unreasonably withhold or delay its consent. After January 1, 2009, Bank of America may not withhold its consent if, after consulting with Bank of America, Merrill Lynch reasonably determines that the failure to obtain the CPP investment would have a material adverse impact on Merrill Lynch. After January 30, 2009 until 12:01 a.m. on February 1, 2009, Merrill Lynch will have the unilateral right to obtain the CPP investment and Bank of America has consented in advance to the investment at such time if the merger has not been completed at that date.


The following documents were issued on October 31, 2008 by the Treasury Department as guidelines for publicly traded financial institutions applying for the CPP:

1) Securities Purchase Agreement: This document describes the terms of the financial institution's agreement to issue shares and fulfill other requirements in exchange for Treasury's investment.

2) Form of Letter Agreement: This contractual agreement describes the firm-specific information necessary to implement the securities purchase agreement and represents the financial institution's commitment to the terms of the Securities Purchase Agreement.

3) Certificate of Designations: This document creates the preferred shares.

4) Form of Warrant – Stockholder Approval Not Required: This document describes the terms of the warrants Treasury receives when stockholder approval is not required.

5) Form of Warrant--Stockholder Approval Required: This document describes the terms of the warrants Treasury receives when stockholder approval is required.

6) Term Sheet.

7) SEC, FASB Letter on Warrant Accounting.


So far so good. By November 14, 2008 an additional 21 banks had received quite a bit of money. These included:

11/14/2008, Bank of Commerce Holdings, Redding CA, Purchase: Preferred Stock w/Warrants $17,000,000 at Par

11/14/2008, 1st FS Corporation, Hendersonville NC: Purchase Preferred Stock w/Warrants $16,369,000 at Par

11/14/2008, UCBH Holdings, Inc., San Francisco CA: Purchase Preferred Stock w/Warrants $298,737,000 at Par

11/14/2008, Northern Trust Corporation, Chicago IL: Purchase Preferred Stock w/Warrants $1,576,000,000 at Par

11/14/2008, SunTrust Banks, Inc., Atlanta GA: Purchase Preferred Stock w/Warrants $3,500,000,000 at Par

11/14/2008, Broadway Financial Corporation, Los Angeles CA: Purchase Preferred Stock w/Warrants $9,000,000 at Par

11/14/2008, Washington Federal Inc., Seattle WA: Purchase Preferred Stock w/Warrants $200,000,000 at Par

11/14/2008, BB&T Corp. Winston-Salem NC: Purchase Preferred Stock w/Warrants $3,133,640,000 at Par

11/14/2008, Provident Bancshares Corp., Baltimore MD: Purchase Preferred Stock w/Warrants $151,500,000 at Par

11/14/2008, Umpqua Holdings Corp., Portland OR: Purchase Preferred Stock w/Warrants $214,181,000 at Par

11/14/2008, Comerica Inc., Dallas TX: Purchase Preferred Stock w/Warrants $2,250,000,000 at

11/14/2008, Regions Financial Corp., Birmingham AL: Purchase Preferred Stock w/Warrants $3,500,000,000 at Par

11/14/2008, Capital One Financial Corporation, McLean VA: Purchase Preferred Stock w/Warrants $3,555,199,000 at Par

11/14/2008, First Horizon National Corporation, Memphis TN: Purchase Preferred Stock w/Warrants $866,540,000 at Par

11/14/2008, Huntington Bancshares, Columbus OH: Purchase Preferred Stock w/Warrants $1,398,071,000 at Par

11/14/2008, KeyCorp, Cleveland OH: Purchase Preferred Stock w/Warrants $2,500,000,000 at Par

11/14/2008, Valley National Bancorp, Wayne NJ: Purchase Preferred Stock w/Warrants, $300,000,000 at Par

11/14/2008, Zions Bancorporation, Salt Lake City UT: Purchase Preferred Stock w/Warrants $1,400,000,000 at Par

11/14/2008, Marshall & Ilsley Corporation, Milwaukee WI: Purchase Preferred Stock w/Warrants $1,715,000,000 at Par

11/14/2008, U.S. Bancorp, Minneapolis MN: Purchase Purchase Preferred Stock w/Warrants $6,599,000,000 at Par

11/14/2008, TCF Financial Corporation, Wayzata MN: Purchase Preferred Stock w/Warrants $361,172,000 at Par.

The banks appear to be gaming the system. And why not! This is free money--in the sense that the sort of due diligence and negotiation attendant on "real" loans are nowhere to be seen in connection with these "bailout" purchases. But whatever one thinks of the strategies for acquiring this easy money, what also appears to be true is that little is actually being used for the purpose for which Congressional votes (and voter approval prior to the Presidential election) were sought--to stabilize the financial markets (in this case the debt markets) and to reduce the exposure of banks to their bad risk taking (though quite profitable while the going was good--to their shareholders' delight).

In what might become embarrassing to the Democratic Party Congressional leadership on the cusp of control of the political branches of the federal government, House Judiciary Committee Chairman John Conyers, Jr. (D-MI) and Government Oversight Subcommittee Chairman Dennis Kucinich (D-OH) have suggested some of the ironies involved in the bailout.

"It is very troubling to learn that the $700 billion rescue package sold to the American consumer as necessary ensure to continue loans to small businesses and consumers, is apparently being used instead to squeeze smaller banks out of the market,"e; said Conyers. "I’m concerned about the federal government using these funds to take sides in mergers and to promote consolidation within the financial markets instead of reviving our economy."l

"It seems evident that bailout funds are being used in unintended and objectionable ways," said Kucinich, a leader in opposition to the bailout. "Nowhere is this more clear than in my district in Ohio, where National City was recently purchased by PNC; a bank that did not receive bailout money was purchased by a bank that did. Federal money should not be used to subsidize consolidation of the banking industry."

Press Release, Conyers, Kucinich Express Alarm Regarding the Use of Funds from the $700 Billion Rescue Package (October 29, 2008). Of course, this braodside was delivered before the election--both men may be more willing to behave under Democratic Party leadership--but the point is still well taken. The point is nicely refined in the letter delivered to the the financial governance tsarevitches under the Emergency Economic Stabilization Act of 2008. See letter to Secretary Henry Paulsen et al., dated October 29, 2008. Most interesting is the obvious--the fear that the bank bailout creates a framework to accomplish a neat trick, to use the organs of the federal government to avoid the fundamental principles of financial market integrity that the Emergency Economic Stabilization Act was meant to further by the use of federal money to consolidate the dominant position of a group of banks designated by government officials. (See Letter, supra, at page 3).

Yet, that sort of consolidation might well have been accomplished through the market--using the mechanisms of bankruptcy. And what of the poor? Or those who suffer directly as a consequence of bank failures? Some might suggest that it is possible to set up programs of subsidies for them as easily as it appears to be to set up programs for the protection of inefficient managers through the EESA. Or better yet--use the market. With several trillion dollars at their disposal, the American government is in the position to fund business. But why fund inefficient business or businesses whose controlling groups have engaged in risky behavior (for the benefit of their shareholders) and come up short. Let them fail, and then serve as an underwriter of groups seeking to purchase what is left. In that position, the American government might be able to negotiate terms governing the acquisition (for example labor protective) and guard against the self-referencing and self-protective round robin acquisitions among groups of weak or overwrought institutions currently the recipients of largess. Certainly the government would be no worse off, and might be better off for having permitted other actors into the acquisition game--including offshore interests. Those interests would, of course, have to be domesticated if they sought to use public funds for such acquisitions--a way to repatriate capital. Indeed, the critical role for the government with several trillion dollars at its disposal and a mandate to preserve the integrity of the financial system (and the domestic economy) might be to serve as a bankruptcy lender--one of the key weaknesses of the current systemic mess. See Jonathan D. Glater, Advantage of Corporate Bankruptcy Shrinks, New York Times, Nov. 19, 2008, at B1 ("More companies that file for bankruptcy protection are shutting down, lawyers say, because they cannot obtain enough financing to operate while they reorganize." Id.). Where creditors now find it hard to extend credit to companies in bankruptcy, the government could serve that purpose and thus increase the likelihood that the market might better discipline itself without too much dislocation. That is, stronger companies might emerge without the risk of large job losses but with the benefit of eliminating the corporate leadership that helped cause the problem in the first place. So, rather than provide money where needed most, the American finance tsarevitches are using the federal rescue and market integrity preservation money to aid banks intent on eating each other. Bon appetite!

Also left without much in the way of comment is the legal position of the United States as the owner of these shares and warrants. If the United States is now to be treated, with respect to those shares as a market participant, one might expect that certain principles might also not apply--sovereign immunity for one. To the extent that the United States acquires the right to name members to the board of directors, or even acquire a controlling interest in these companies, might the United States also acquire the fiduciary obligations that might go with that position? More interesting still would be the position of the United States as significant shareholder of entities over which it asserts significant regulatory oversight. None of these issues have been thought through by the current or incoming administraiton. Each is a time bomb. The Europeans have a head start on conceptualizing the problem--though their solution may be unpalatable in the American context. See, e.g., Larry Catá Backer, The Private Law of Public Law: Public Authorities as Shareholders, Golden Shares, Sovereign Wealth Funds, and the Public Law Element in Private Choice of Law, Tulane Law Review, Vol. 82, No. 1, 2008. For the Europeans, the American program of purchasing interests in banks constitutes a direct governmental subsidy of an industrial sector. It would be considered regulatory in effect, and the businesses would be considered to lose their character as private concerns. For a good discussion by one of my students, see Travis S. Hunter, Should Receiving Government Bailout Money Change Fiduciary Duties?, PorkBarrel Blogging, Nov. 12, 2008.

Americans continue to indulge in the belief that such enterprises are private--but entities in which the United States has both an ownership interest and regulatory control can hardly be considered an equal player in private markets, unless the United States commits itself that way. But there is little indication that the United States will treat its own private investments the way it has insisted that similar investments by foreign sovereign wealth funds in American businesses be treated. See Larry Catá Backer, Sovereign Wealth Funds and the Financial Crisis: Norwegian Sovereign Wealth Funds, India, and the Rising Private Power of Public Organizations, Law at the End of the Day, October 23, 2008; Larry Catá Backer, Sovereign Wealth Funds: A Smattering of Opinions that Count But Perhaps Ought Not, Law at the End of the Day, August 22, 2008.