Sept. 22 (Bloomberg) -- Democrats proposed revising a provision in the Bush administration's financial rescue plan that would bar judicial scrutiny of the U.S. Treasury Department's acquisition of up to $700 billion in troubled assets.

``I think that may be illegal, not to be able to challenge things,'' Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, told reporters. ``I'm not sure that would hold up anyway.''

Today, Dodd offered an alternative rescue plan that would let courts step in when they find that a decision about a troubled loan was arbitrary or illegal. Senate Judiciary Chairman Patrick Leahy of Vermont said in a statement he wrote the language, adding that eliminating court review ``invites abuse.''

Judicial bypass provisions are common in statutes and in some cases have been upheld by the U.S. Supreme Court. Congress, nonetheless, may choose to revise the administration plan to permit some independent review. So far, the issue has been overshadowed by Democratic demands to broaden the rescue plan to include a stimulus package for the economy and help for homeowners having difficulty paying their mortgages.

The proposed rescue echoes some of the most momentous presidential actions in U.S. history, including President Franklin Roosevelt's New Deal and President Harry S Truman's seizure of the nation's steel mills.

The Bush plan bars review by administrative agencies, as well as the judiciary, giving the Treasury secretary the final word on transactions.

Frank Proposal

Democratic Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, would change that provision by giving oversight authority to the U.S. Comptroller General and the Government Accountability Office, Congress's financial watchdog.

Frank's proposal would address concerns that the Bush plan would be an unconstitutional delegation of congressional spending power, said Walker Todd, a former Cleveland Federal Reserve attorney who is now a research fellow at the American Institute for Economic Research in Great Barrington, Massachusetts.

``The number one thing in play here is the constitutional principle that no money shall be withdrawn from the Treasury except pursuant to appropriations by law,'' Todd said.

Still, Todd said that the Supreme Court has been reluctant to overturn laws on those grounds in recent decades. The last time the court declared a law to be an unconstitutional delegation of legislative power was in 1935, when a majority voided parts of Roosevelt's National Industrial Recovery Act.

`Intelligible Principle'

More recently, the court has given Congress broad authority to hand off its responsibilities, requiring only that Congress provide an ``intelligible principle'' for administrators to follow.

``In our increasingly complex society, replete with ever- changing and more technical problems, Congress simply cannot do its job absent an ability to delegate power under broad general directives,'' the high court ruled 8-1 in a 1989 case that upheld federal criminal sentencing guidelines.

The Supreme Court has likewise proven reluctant to strike down measures based on the unavailability of judicial review. University of Michigan securities law Professor Adam Pritchard pointed to a unanimous 1994 Supreme Court decision upholding a ban on judicial review of decisions by the president to close military bases.

``Lots of statutes have those provisions,'' said Gilbert Schwartz, formerly the associate general counsel of the Federal Reserve Board.

Steel Mills

In 1952 the Supreme Court said Truman exceeded his authority by seizing the nation's steel mills to head off a strike. The parallels with that case are limited because it involved a unilateral presidential action, rather than one done with congressional authorization.

In addition, the steel case centered on a government seizure -- not the consensual purchases envisioned under the Bush administration rescue plan.

Should it survive, the judicial-bypass provision likely would prevent a recurrence of the lawsuit flurry that followed the government's 1989 bailout of the troubled savings and loan industry. Investors and thrifts filed more than 120 suits, claiming regulators broke promises of special regulatory treatment.

``One of the reasons they want the nonreviewability provision is they got bogged down in lawsuits for a decade or more after they stepped in to take over the savings and loans that were insolvent,'' Pritchard said.

Tens of Billions

The suits collectively sought tens of billions of dollars in damages from the government.

The rescue plan also could face court challenge as an unconstitutional ``taking'' of property by companies that don't benefit from the bailout, said Stanley Sporkin, a former federal judge who also was enforcement director of the U.S. Securities and Exchange Commission.

Ultimately, the biggest obstacle facing the judicial-bypass provision may be the skepticism it is sparking on Capitol Hill rather than any courtroom problems. Dodd said other lawmakers share his concerns about the legality of the review provision.

``You can't give all this power to any one person, particularly a non-elected person, as much as we respect the secretary, without making sure that conflicts of interest are dealt with, that people are treated fairly,'' Democratic Senator Charles Schumer of New York told reporters.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net.

Last Updated: September 22, 2008 14:05 EDT