In his first term, President Obama passed two of the most sweeping expansions of federal power in history. The first, his federal takeover of the health care system, narrowly survived at the Supreme Court thanks to the refashioning of its mandate into a tax by Chief Justice John Roberts. The second , his federal takeover of the financial system, may not fare as well.
That law, Dodd-Frank, is being challenged in State National Bank of Big Spring v. Geithner. The lead plaintiff is a community bank that has had several of its business lines shut down by Dodd-Frank. Co-plaintiffs include the libertarian powerhouse the Competitive Enterprise Institute, the leading conservative seniors group the 60 Plus Association, and the states of South Carolina, Oklahoma, and Michigan. The case contends, correctly, that provisions of Dodd-Frank violate the separation of powers as well as the Constitution's bankruptcy clause.
The constitutional defects of Dodd-Frank are numerous, serious, and by design. Even the New York Times acknowledged when the bill passed that it was "basically a 2,000-page missive to federal agencies, instructing regulators to address subjects ranging from derivatives trading to document retention. But it is notably short on specifics, giving regulators significant power to determine its impact."
These vast new regulatory powers are delegated without constitutionally required checks and balances.
Consider the so-called Orderly Liquidation Authority, under which the Treasury can petition a federal district court to seize any bank (or non-bank declared systemically important) that it deems a threat to financial stability. A judge would have to decide within 24 hours not to allow the seizure or it would be automatically approved. Liquidation would then proceed with no possibility of judicial review in accordance with arbitrary procedures that could treat similarly situated creditors differently at the whim of regulators.
Neither the company being liquidated nor the creditors would have access to any legal recourse, violating the due process clause. And this process is completely different from the normal bankruptcy process, despite the constitutional requirement that Congress pass "uniform Laws on the subject of Bankruptcies."
C. Boyden Gray, counsel for the plaintiffs in the case, has written: "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."
The new so-called Consumer Financial Protection Bureau, with sweeping powers to regulate nearly any consumer financial transaction in the economy, is also constructed to be outside of constitutionally required checks and balances. It is not subject to annual appropriations in Congress, instead being funded by the Federal Reserve - which is nonetheless itself prohibited from exercising oversight. All power is vested in one individual, Richard Cordray, who Obama "recess appointed" on a day the Senate considered itself not to be in recess. While the CFPB's decisions are subject to judicial review, there is a requirement in Dodd-Frank that judges give extraordinary deference to the agency.
Dodd-Frank was created in a corrupt feeding frenzy of special interests exploiting the financial crisis to advance their own longstanding agendas. Every left-wing special interest-from the trial lawyers, to the racial grievance groups, to the unions-got a special payoff in the bill. But the whole structure of the bill rests on an unconstitutional foundation.
Every state attorney general should follow the strong leadership of South Carolina's Alan Wilson, Oklahoma's Scott Pruitt, and Michigan's Bill Schuette and join the effort to stop this outrageous unconstitutional takeover of our financial system.