Eight States Join Suit Challenging Dodd-Frank

Eight more states have joined a lawsuit challenging the constitutionality of the Dodd-Frank Act.

Alabama, Georgia, Kansas, Montana, Nebraska, Ohio, Texas and West Virginia are the latest plaintiffs to join the suit, which was filed in June in U.S. District Court for the District of Columbia by State National Bank of Big Spring, Texas; the Competitive Enterprise Institute; and the 60 Plus Association. The states of Michigan, Oklahoma and South Carolina joined the suit in September.

The original suit focused in large part on the Consumer Financial Protection Bureau, complaining that it "aggregates the power of all three branches of government in one unelected, unsupervised and unaccountable bureaucrat," as former White House counsel C. Boyden Gray, founder of Boyden Gray & Associates in Washington, said when the suit was filed. Gray and O’Melveny & Myers represent the private plaintiffs.

The 11 state attorneys general are focusing their challenge on Title II of the Dodd-Frank Act, which gives the secretary of the Treasury so-called “Orderly Liquidation Authority."

Intended as a third way between bankruptcy and bailout, the new authority allows the Treasury secretary to order the Federal Deposit Insurance Co. to take over and liquidate a nonbank determined to be "in default or in danger of default," if its collapse would have a "serious adverse effect on the financial stability of the United States."

In a news release, West Virginia Attorney General Patrick Morrisey said that “Title II of the Dodd-Frank Act and the Orderly Liquidation Authority negatively impacts West Virginia and its taxpayers. The Orderly Liquidation Authority allows un-elected Washington bureaucrats to pick winners and losers among affected creditors, entirely abandoning the rule of law.”

Added Texas Attorney General Greg Abbott, “Under this law, unelected federal bureaucrats can unilaterally liquidate financial institutions in which the state invests taxpayer dollars. The State of Texas could be denied basic due process rights and taxpayers’ dollars could recklessly be put at risk.”

In November, the federal government filed a motion to dismiss the suit, arguing that the plaintiffs lack standing. "Their theory that the orderly liquidation authority — which has never been invoked — may be applied to a financial company of which their pension funds are allegedly creditors is pure conjecture,” states the motion, which lists 29 government lawyers as counsel and was signed by Wendy Doty, a trial attorney in the Justice Department's federal programs branch.

Comments

[MIke Moore]

Memo to the Texas and West Va. AG's: your states' citizens would likely lose far more under the traditional bankruptcy route than the new authority (check out the costs and delays of the Lehman Bros. bankruptcy if you want a reference).

Memo to the Kansas AG: give Sheila Bair (an alumnus of your fine state) a call for her very well-informed opinion on the merits of the Dodd-Frank liquidation authority before you proceed further on what appears to be a very ill-founded lawsuit.