Is Financial Reform Unconstitutional?

Democrats' proudest moment in 2010 was when they passed the health care reform bill. If not for that legislation, the summer's gigantic financial regulation package probably would have been their most major accomplishment. Of course, each is as controversial as it is significant. As a result, we're already starting to see opponents of the health care bill challenge it in court. Before long we may see similar cases against the financial reform bill. In fact, its constitutionality could be even more questionable.

That's what former George H.W. Bush White House counsel C. Boyden Gray argues in a recent Washington Post op-ed. He says that some of the bill's most significant regulatory changes are flagrantly unconstitutional. His arguments are rather compelling.

Resolution Authority

He begins by questioning how the current structure of the new resolution authority, the regulatory capacity for the government to seize a giant firm and wind it down, could possibly be constitutional. This is probably the most important part of attempting to end "Too Big to Fail." He writes:

Take, for example, the resolution/seizure authority of Title II, ostensibly designed to end bailouts and "too big to fail" risks. The Treasury can petition federal district courts to seize not only banks that enjoy government support but any non-bank financial institution that the government thinks is in danger of default and could, in turn, pose a risk to U.S. financial stability. If the entity resists seizure, the petition proceedings go secret, with a federal district judge given 24 hours to decide "on a strictly confidential basis" whether to allow receivership.

There is no stay pending judicial review. That review is in any event limited to the question of the entity's soundness - not whether a default would pose a risk to financial stability or otherwise violate the statute.

The court can eliminate all judicial review simply by doing nothing for 24 hours, after which the petition is granted automatically and liquidation proceeds. Anyone who "recklessly discloses" information about the government's seizure or the pending court proceedings faces criminal fines and five years' imprisonment. As for judicial review of the liquidation itself, the statute says that "no court shall have jurisdiction over" many rights with respect to the seized entity's assets (thus apparently eliminating many actions that would otherwise be permitted to seek compensation in the federal Court of Claims).

This provides an enormous amount of power for the executive branch to have over the private sector, and it's relatively unchecked by courts and Congress.

Of course, the reason for all of the speed and secrecy is practicality. Think about Lehman. Let's say this resolution authority was in place back in 2008. A swift, clean, resolution might have been helpful. But a very slow, very public resolution probably wouldn't have made things any better. The market would have been clouded with uncertainty for months or years concerning Lehman's fate. In such circumstances, it's difficult to create a constitutionally permissible resolution process that wouldn't cause the market to panic. It just might not be feasible.

Consumer Financial Protection Bureau

He also believes the new Consumer Bureau will have more power than the Constitution would permit:

The director of the consumer bureau is independent of both the Federal Reserve, which houses and funds it, and the White House. Dodd-Frank precludes the House and Senate Appropriations Committees from reviewing the bureau's budget. As for the judiciary, the courts must accept statutory interpretations written by the director, who can thus refashion, without any effective judicial, legislative or White House oversight, all of the country's credit-related law, including the 18 or so federal consumer finance statutes that are administered by six agencies (some of which must also yield exclusive enforcement as well to the consumer bureau).

Again, where are the checks and balances?

Presented by

Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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