Wall Street reform that flouts the law
Obamacare has dominated the public debate over the legality and desirability of the White House's regulatory agenda, but the legislation seeking to reform Wall Street may in fact create more serious constitutional difficulties.
The Dodd-Frank legislation passed in the summer is supposed to remedy weaknesses in the U.S. financial system - ensuring transparency and accountability, and removing risks that banks are "too big to fail." Yet the bill created a structure of almost unlimited, unreviewable and sometimes secret bureaucratic discretion, with no constraints on concentration - a breakdown of the separation of powers, which were created to guard against the exercise of arbitrary authority.
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).
There is little precedent for this kind of unreviewable "Star Chamber" proceeding, even with respect to government-supported entities; there is much less justification for applying such treatment to financial companies that are not federally regulated or supported. Some have suggested that the legislation's secrecy and discretion are designed to permit the kind of favoritism seen in the rescue of bankrupt automakers and the AIG bailout, with an indirect taxpayer subsidy available as government loans to favored creditors and to be repaid by "assessments" (also known as taxes) on large banks and non-bank financial firms. Whether or not this is the purpose, it is nonetheless likely to be the effect.
This means the U.S. Treasury and Federal Deposit Insurance Corp. are acting as a sometimes secret legislative appropriator, executive and judiciary all in one. Although there is little direct precedent, it is hard to believe that the Supreme Court would not throw out parts of this scheme as violations of either the Article III judicial powers, due process or even the First Amendment, assuming the justices do not find all of it a violation of the basic constitutional structure.
The Consumer Financial Protection Bureau and the Financial Stability Oversight Council created by the legislation suffer similar defects. 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).
The stability council - composed of 10 representatives of the Treasury, the Fed and other regulators - has the authority to (1) determine which non-bank financial institutions are subject to Title II seizure and (2) control virtually all of the activities of any financial institution for almost any purpose on a two-thirds vote of its members. The courts are not authorized to review whether the council has correctly interpreted the statute, though there isn't much statutory direction for the courts to interpret in any event.
Courts have historically dealt with overly broad and vague statutes by construing them narrowly to avoid constitutional difficulties where possible. But Dodd-Frank strips the courts of the right to make statutory and constitutional determinations in critical circumstances, a throwback to the very first draft of the Troubled Assets Relief Program from the Treasury Department, which would have permitted no judicial review at all.
At the end of the day, blurring the lines of government undermines oversight and muddies the boundaries between government and the most powerful financial players. It is hard to see the courts accepting this violation of the fundamentals of limited government.
The writer was White House counsel in the George H.W. Bush administration.