Is Financial Reform Unconstitutional?

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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?

In this case, however, it's a not as obvious why the Constitution is sacrificed. There's no practical problem with adding additional oversight for the Bureau. If a sensible new regulation is imposed to protect consumers, why would Congress, the President, judges, or the Federal Reserve want to stand in its way? This could be remedied by revising the legislation.

Systemic Risk Council

Gray has a similar worry when it comes to the new Systemic Risk Council, the sort of macroeconomic SWAT team that will try to spot and fix potential problems before they endanger the market. Again, the courts don't have any authority to question how it controls and regulates large firms. The Constitution would presumably require such a check.

The reason for the Council's power is similar to the practical point about resolution made above. For the Council to be effective, it must have the power to act and speed to do so quickly. Courts would get in the way. But also like the Consumer Bureau, there might be some room for additional oversight, particularly when decisions aren't very time-sensitive.


So what's going on here? Why does it look like Congress trampled all over the Constitution in drafting this financial regulation? It's important to remember that during the financial crisis some very fundamental views of government and economics came into question. It appeared to some as though capitalism had failed. As the banking industry was bailed out, one of my acquaintances particularly far-left on the political spectrum celebrated, saying without a hint of sarcasm, "Isn't this great? We're all socialists now!"

Some used the financial crisis as proof that economic freedom doesn't work. When banks and finance companies are left to their own devices, look the mess they made, critics said. So Congress looked to wise government bureaucrats and regulators instead to save the market from itself. What about the Constitution? Their dismissal of its principals weren't as implicit as it might seem. After all, they believe that freedom failed.

It will be very interesting to see how the Supreme Court rules on the issues that Gray raises. It sure sounds like some parts could be struck down. The only real chance some of these provisions have is for the Court to develop some sort of "only in case of emergency" rule, where checks and balances can be temporarily ignored if swiftness, secrecy, and unilateral authority are necessary. Certainly, there's nothing in the Constitutions about that, but proponents of these regulations would probably argue that the founding fathers didn't have to contend with markets that can move in a millisecond.

The question this raises should be clear: is attempting to ensure our economic safety is worth sacrificing our economic liberty?

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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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