Dodd-Frank's "Systemically Important" Designations and Orderly Liquidation Authority Raise Constitutional Questions
Jul 9 -
Not only did the Dodd-Frank Act fail to end “Too Big to Fail,” its provisions regarding the designation of large firms as “systemically important” and the resolution of such firms may also be unconstitutional, the Oversight and Investigations Subcommittee heard from expert witnesses today.
“Almost three years later, as the law slowly works its way through the regulatory process, we discover the Dodd-Frank designation and resolution process not only protects Too Big To Fail banks, it subsidizes their business, quite to the disadvantage of their smaller bank competition,” said Subcommittee Chairman Patrick McHenry (R-NC). “This new economic reality is illustrated when the two largest credit rating agencies continue to single out the eight largest banks for a systemic ratings uplift by virtue of their size, interconnectedness and difficulty to unwind, which make them ripe for a taxpayer bailout in times of trouble. As the markets quantify this newly designed safety net, these banks’ experience a lower-cost of borrowing, which is the lifeblood of a financial firm.”
A panel of constitutional scholars testified at the subcommittee hearing today, highlighting the constitutional deficiencies and legal uncertainties of Dodd-Frank.
“It is no mere coincidence that Dodd-Frank both entrenches the Too Big to Fail problem and violates the Constitution’s system of checks and balances,” said C. Boyden Gray, a former White House Counsel and Ambassador to the European Union who is now a founding partner in a law firm. “By giving regulators effectively unlimited power, and by removing the checks and balances that ordinarily prevent the abuse of power, Dodd-Frank fosters the very conditions that give rise to Too Big to Fail.”
Thomas W. Merrill, a professor at Columbia Law School, said in his testimony that Dodd-Frank raises “serious constitutional questions” and may violate, among other provisions, the Due Process Clause, Article III, the First Amendment, and the Bankruptcy Clause. “Dodd-Frank says you can be sent to jail for up to five years for disclosing the truth about a civil case brought against you by the government.”