    [House Hearing, 113 Congress]
    [From the U.S. Government Publishing Office]

                     EXAMINING CONSTITUTIONAL DEFICIENCIES
                           AND LEGAL UNCERTAINTIES IN
                               THE DODD-FRANK ACT

    =======================================================================

                                    HEARING

                                   BEFORE THE

                           SUBCOMMITTEE ON OVERSIGHT
                               AND INVESTIGATIONS

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED THIRTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  JULY 9, 2013

           Printed for the use of the Committee on Financial Services

                               Serial No. 113-37

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking
        Chairman                             Member
    SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
        Emeritus                         NYDIA M. VELAZQUEZ, New York
    PETER T. KING, New York              MELVIN L. WATT, North Carolina
    EDWARD R. ROYCE, California          BRAD SHERMAN, California
    FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
    SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
    SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
    RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
    PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
    JOHN CAMPBELL, California            STEPHEN F. LYNCH, Massachusetts
    MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
    KEVIN McCARTHY, California           AL GREEN, Texas
    STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
    BILL POSEY, Florida                  GWEN MOORE, Wisconsin
    MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
        Pennsylvania                     ED PERLMUTTER, Colorado
    LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
    BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
    BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
    SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
    ROBERT HURT, Virginia                BILL FOSTER, Illinois
    MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
    STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
    STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
    MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
    MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
    RANDY HULTGREN, Illinois             DENNY HECK, Washington
    DENNIS A. ROSS, Florida
    ROBERT PITTENGER, North Carolina
    ANN WAGNER, Missouri
    ANDY BARR, Kentucky
    TOM COTTON, Arkansas
    KEITH J. ROTHFUS, Pennsylvania

                         Shannon McGahn, Staff Director
                        James H. Clinger, Chief Counsel
                  Subcommittee on Oversight and Investigations

                  PATRICK T. McHENRY, North Carolina, Chairman

    MICHAEL G. FITZPATRICK,              AL GREEN, Texas, Ranking Member
        Pennsylvania, Vice Chairman      EMANUEL CLEAVER, Missouri
    PETER T. KING, New York              KEITH ELLISON, Minnesota
    MICHELE BACHMANN, Minnesota          ED PERLMUTTER, Colorado
    SEAN P. DUFFY, Wisconsin             CAROLYN B. MALONEY, New York
    MICHAEL G. GRIMM, New York           JOHN K. DELANEY, Maryland
    STEPHEN LEE FINCHER, Tennessee       KYRSTEN SINEMA, Arizona
    RANDY HULTGREN, Illinois             JOYCE BEATTY, Ohio
    DENNIS A. ROSS, Florida              DENNY HECK, Washington
    ANN WAGNER, Missouri
    ANDY BARR, Kentucky

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        July 9, 2013.................................................     1
    Appendix:
        July 9, 2013.................................................    27

                                   WITNESSES
                             Tuesday, July 9, 2013

    Gray, Hon. C. Boyden, Boyden Gray and Associates.................     4
    McTaggart, Timothy R., Partner, Pepper Hamilton LLP..............     7
    Merrill, Thomas W., Charles Evans Hughes Professor of Law,
      Columbia Law School............................................     6

                                    APPENDIX

    Prepared statements:
        Gray, Hon. C. Boyden.........................................    28
        McTaggart, Timothy R.........................................    47
        Merrill, Thomas W............................................    66

                     EXAMINING CONSTITUTIONAL DEFICIENCIES
                           AND LEGAL UNCERTAINTIES IN
                               THE DODD-FRANK ACT

                                  ----------

                             Tuesday, July 9, 2013

                 U.S. House of Representatives,
                              Subcommittee on Oversight
                                    and Investigations,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 2 p.m., in
    room 2128, Rayburn House Office Building, Hon. Patrick T.
    McHenry [chairman of the subcommittee] presiding.
        Members present: Representatives McHenry, Fitzpatrick,
    Bachmann, Duffy, Grimm, Fincher, Hultgren, Wagner, Barr,
    Rothfus; Green, Cleaver, Maloney, Beatty, and Heck.
        Ex officio present: Representative Hensarling.
        Chairman McHenry. The Subcommittee on Oversight and
    Investigations of the Financial Services Committee will come to
    order. Our hearing today is entitled, ``Examining the
    Constitutional Deficiencies and Legal Uncertainties in the
    Dodd-Frank Act.''
        Without objection, members of the full Financial Services
    Committee who are not members of this subcommittee may sit on
    the dais and participate in today's hearing.
        And, without objection, the Chair is authorized to declare
    a recess of the subcommittee at any time.
        We will now proceed with opening statements. And without
    objection, we will limit it to 5 minutes per side. I will first
    recognize myself for 5 minutes.
        Following the most significant financial crisis since the
    Great Depression, Dodd-Frank was signed into law with a promise
    that never again will the taxpayers be forced to bail out Wall
    Street. Simply put, what we now know is that Dodd-Frank does
    not work. Over the past several months, this subcommittee has
    attempted to dissect section by section the parts of Dodd-Frank
    that pretend to rein in the large interconnected financial
    institutions which brought us to the brink 5 years ago. It also
    pretends to end ``too-big-to-fail,'' which is in fact not the
    case.
        What we have discovered is something to the contrary. In
    over 840 pages of law, Dodd-Frank granted an incredible amount
    of power and discretion to the Federal Reserve, the FDIC, and
    the newly created Financial Stability Oversight Council (FSOC).
        Almost 3 years later, as the law slowly works its way
    through the regulatory process, we discover that Dodd-Frank's
    designation and resolution processes protect ``too-big-to-
    fail'' banks, quite to the disadvantage of their small bank
    competition.
        This new economic reality is illustrated when two large
    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, and furthermore
    their ripeness for taxpayer bailouts in times of trouble.
        As the markets quantify this newly designated safety net,
    these banks experience a lower cost of borrowing, which is the
    lifeblood of financial institutions. Likewise, they do say that
    cost of borrowing may not exist, and there is debate about
    that, but the World Bank says clearly that there is a cost-of-
    borrowing advantage.
        Not surprisingly, this impressive and unprecedented power,
    designed to protect the largest and most interconnected
    financial institutions, is also being criticized as being
    unconstitutional. Several States, including Alabama, Georgia,
    Kansas, Michigan, Montana, Nebraska, Ohio, Oklahoma, South
    Carolina, Texas, and West Virginia have joined with the
    National Bank of Big Spring as plaintiffs in its suit against
    the Department of Treasury, the FSOC, the Federal Reserve, the
    FDIC, and the Consumer Financial Protection Bureau (CFPB).
    Their claim is that Dodd-Frank violates the Constitution's
    separation of powers and its protections afforded through due
    process. Legal scholars are analyzing similar constitutional
    claims as well.
        Our founders understood that government is imperfect and
    must be kept in check. As a co-equal branch of government,
    Congress has an obligation to interpret the Constitution and to
    act within the bounds of its interpretation when carrying out
    its oversight and legislative functions.
        As James Madison discussed Congress' rights to interpret
    the Constitution in relation to that of the Judicial Branch, he
    said, ``But the great objection is that the legislature itself
    has no right to expound the Constitution; that whenever its
    meaning is doubtful, you must leave it to take its course,
    until the Judiciary is called upon to declare its meaning.''
    And ``The Constitution is the character of the people of the
    government. It specifies certain great powers as absolutely
    granted and marks out the departments to exercise them. If the
    constitutional boundary of either be brought into question, I
    do not see that any one of these departments has more right
    than another to declare their sentiments on that point.''
        Today, we will be declaring our sentiments on that very
    point: the constitutionality of the Dodd-Frank Act.
    Accordingly, this hearing will examine why certain provisions
    in Title I and Title II of Dodd-Frank may be susceptible to
    constitutional challenge. We will also explore the manner and
    circumstances in which a party with legal interests affected by
    the Orderly Liquidation Authority could challenge the
    commencement of an--let's use it in quote marks, ``orderly
    liquidation''--and thereby delay or prevent the liquidation
    from functioning as intended in the Dodd-Frank Act.
        This panel before us today has an impressive background in
    constitutional law as well as a depth and understanding of the
    Dodd-Frank Act. I certainly appreciate the three gentleman here
    today, their willingness to be here.
        We will now recognize the ranking member of the
    subcommittee, Mr. Green, for 5 minutes.
        Mr. Green. Thank you, Mr. Chairman, and I thank the
    witnesses for appearing.
        And I thank the witnesses for the information that they
    have already provided us. I had an opportunity to peruse your
    written statements, and I am eager to ask a few questions about
    some of the statements that have been made. But I do think that
    each witness has provided us some thoughtful information.
        With reference to Dodd-Frank, Dodd-Frank provides a better
    way. Prior to Dodd-Frank, we had in essence two means by which
    we could deal with a systemic crisis, a crisis that involved
    exigent circumstances. These two ways were: one, bankruptcy,
    which works, but it did not work for Lehman; and two, bailouts.
    Bailouts are not the preferred choice because the public
    somehow thinks and, and I agree, that tax dollars ought not be
    utilized to bail out these large institutions. So, we have
    these two options: bailout; or bankruptcy.
        Dodd-Frank is a better way. And it is interesting to note
    that while we may look at some of the challenges to the
    constitutionality of Dodd-Frank, it is interesting to note that
    Dodd-Frank has not been declared unconstitutional. It is also
    interesting to note that you can challenge any legislation on
    constitutional grounds if you like. The question is, will you
    prevail with your challenge? Will you prevail with your
    challenge? Thus far, no court has declared Dodd-Frank to be
    unconstitutional. I will go on to add that if you are concerned
    about judicial review as it relates to Dodd-Frank, SIFI
    designation has the means by which judicial review can be
    perfected. The Orderly Liquidation Authority has a means by
    which judicial review can be perfected.
        Now, there may be some argument as to whether or not there
    is enough judicial review or the extent to which judicial
    review should take place, but Dodd-Frank has codified judicial
    review in it as it relates to the designation of an entity as
    an SIFI, as well as when orderly liquidation starts to take
    place.
        I believe that Dodd-Frank can be mended, I think there are
    means by which we can do so, and I would like to see some
    legislation that purports to amend it. I may very well support
    some amendments. But I don't think we should end it, and much
    of what I hear seems to be designed to end Dodd-Frank rather
    than amend Dodd-Frank. Technical corrections are always
    appropriate when we have sweeping legislation. Technical
    corrections are in order with Dodd-Frank, and I would support
    some of the technical adjustments that may be made.
        One of our witnesses today has gone so far as to say, in
    terms of the substance, that we may have some debate, but that
    there is a means by which technical corrections can be made to
    Dodd-Frank and it would meet what he perceives as the challenge
    associated with the constitutionality of a given section.
        My belief is that we must move forward with Dodd-Frank. We
    must bring the certainty to the market that it richly deserves,
    and I think that we can do so by having these hearings. But at
    some point, we have to move on. If there is no legislation, at
    some point we have to move on and allow Dodd-Frank to function
    as it should.
        I will now yield the remainder of my time to my colleague,
    the gentlelady to my right.
        Mrs. Beatty. Thank you so much.
        Thank you, Mr. Chairman, and Mr. Ranking Member.
        And thank you to our witnesses who are here today.
        I am happy to be here to further discuss and evaluate the
    constitutional basis for the authorities granted to Federal
    regulators under Titles I and II of Dodd-Frank. These two
    sections collectively compromise the enhanced supervision and
    orderly liquidation authorities within the law.
        In reviewing the submitted testimony from the witnesses
    today, the main concerns appear to be with Title I and Title
    II. There seems to be apprehension that the sections improperly
    restrict the checks and balances created by the Constitution
    and that certain due process rights are violated. I believe
    that these apprehensions are somewhat misguided. With respect
    to Title I, the designation process for enhanced supervision
    does not simply allow the Federal Reserve Board or the FDIC or
    the FSOC to arbitrarily pick and choose which firms to select
    for greater prudential regulation. Instead, I believe the law
    creates clearly identifiable processes for designation and also
    provides an opportunity to challenge such a determination.
        Thank you.
        Chairman McHenry. We will now recognize our distinguished
    witnesses.
        Ambassador Boyden Gray is the founding partner of the law
    firm of Boyden Gray and Associates. He was previously
    Ambassador to the European Union and was White House Counsel to
    President George H.W. Bush. He is a graduate of Harvard and the
    University of North Carolina.
        Professor Thomas Merrill is a law professor at Columbia
    University Law School. He was previously Deputy Solicitor
    General and Clerk to Supreme Court Justice Harry Blackmun. He
    is a Rhodes Scholar, and a graduate of Grinnell College, Oxford
    University, and the University of Chicago.
        Mr. Timothy McTaggart is a partner in the law firm of
    Pepper Hamilton LLP. He was previously a State banking
    commissioner and a lawyer for the Federal Reserve. He received
    his undergraduate and law degrees from Harvard.
        I think some of you have gone to universities we have heard
    of.
        We certainly appreciate your willingness to be here. You
    all are familiar with the lighting system, but green means go;
    yellow, as in traffic, means hurry up; and red means stop. You
    will have 5 minutes to summarize your opening statements.
        And we will begin by recognizing Ambassador Gray.

      STATEMENT OF THE HONORABLE C. BOYDEN GRAY, BOYDEN GRAY AND
                               ASSOCIATES

        Mr. Gray. Thank you very much, Mr. Chairman, for the
    opportunity to discuss parts of this statute with you. It is
    true that nothing has yet been declared unconstitutional, but I
    would say we haven't really had our day in court yet. It may be
    months before we do, but we will, and then we will see what
    they say.
        If there is any message I want to distill from my written
    remarks, it is that unconstitutional aggregations of power,
    which this statute represents, at least parts of it on
    steroids, unconstitutional aggregations of government power
    that deny the checks and balances that are built into our
    Constitution invite and create equally pernicious aggregations
    of private power. They do this by imposing regulatory burdens
    on smaller entities that are less able to handle them than
    their bigger competitors, and the bigger competitors end up not
    necessarily gobbling them up, but watching the consolidation
    take place, and the mergers eventually do happen.
        The centralized institutions of government tend to
    encourage this because they want to find willing private
    parties to implement what they want, and what you end up with
    is a system of crony capitalism with no rule of law and greatly
    diminished opportunity for the little guy. And I think if you
    went back to Adam Smith who was conceded to be sort of the
    architect of our modern miracle of free markets, this was Adam
    Smith's ultimate nightmare, that the private sector would grab
    ahold of government entities for their own purpose.
        Now, I believe this problem is best illustrated by, as you
    suggested in your opening remarks, Mr. Chairman, the
    relationship of Dodd-Frank to ``too-big-to-fail'' and to the
    Orderly Liquidation Authority. Title II, as I understand it
    from what I have been able to sort of get from the
    participants, and it certainly is backed up by what it actually
    does, was modeled after the AIG bailout, the idea being perhaps
    oversimplified to give the government the discretion in a
    takeover situation to do virtually anything it wants without
    any check by Congress, by the Executive Branch, by even the
    Federal Reserve or the courts, and it is the court cutout that
    I think maybe bothers me the most, and that is possibly because
    I am a lawyer.
        As the Dallas Fed has pointed out, it entrenches ``too-big-
    to-fail.'' The whole situation is over before anyone has a
    chance to react. If there is an effort to leak to the public or
    to third parties that have an interest in the proceeding so
    that they might go into court to try to preempt something or
    get review before it is all over, there is a criminal penalty,
    maybe jail time for anyone who releases this information.
        The result is really a bad disadvantage for community banks
    that can't take the regulatory and the funding advantages that,
    Mr. Chairman, you talked about. So we are going to see a lot
    more community bank consolidation, fewer loans from community
    banks, and that means ultimately--I come from a small town that
    produced some pretty good banks, a town called Winston-Salem,
    and what happened there is you don't have any more character
    loans, which even the government acknowledges are far more
    reliable than cookie-cutter loans based on paper checkoffs.
    This situation can only be fixed by untangling this collapse,
    this separation of powers, by restoring proper judicial review.
    I do not want to live in a crony capitalist world.
        I will conclude by saying that it isn't just Titles I and
    II that create this problem. If you look at the CFPB, the power
    grab, the data power grab that they are now engaged in, which
    has certain resonance in other areas, look at the grab for
    power with respect to the auto dealers, and you will see this
    isn't just limited to Titles I and II; it pervades the entire
    Act.
        Thank you for the opportunity to appear.
        [The prepared statement of Ambassador Gray can be found on
    page 28 of the appendix.]
        Chairman McHenry. Thank you, Ambassador Gray.
        I would ask the rest of the panel to pull your microphones
    closer when you speak. They are directionally sensitive. Let's
    just say that they are not the newest and latest and greatest
    of technology, but they will do.
        Professor Merrill, you are now recognized for 5 minutes.

    STATEMENT OF THOMAS W. MERRILL, CHARLES EVANS HUGHES PROFESSOR
                      OF LAW, COLUMBIA LAW SCHOOL

        Mr. Merrill. Thank you very much, Mr. Chairman, and thanks
    to the other committee members for inviting me today.
        The focus of my testimony will be on Title II of Dodd-Frank
    and the constitutional problems that section of the Act
    creates. I became interested in this about 18 months ago when I
    was invited to participate in an academic symposium on the
    administrative and constitutional problems presented by Dodd-
    Frank, and since then, I have continued to work on this issue.
    I have a draft article, which I have written with Margaret
    Merrill, and I have taken the liberty of attaching that to my
    statement in its current form.
        The central point that I want to make is that it is true
    that Dodd-Frank has not been declared unconstitutional, but the
    problem is that it contains very serious constitutional
    problems. And any individual or entity that is opposed to being
    subjected to an orderly liquidation would have a strong
    incentive to raise these constitutional issues as a way of
    trying to increase their leverage with the government in the
    event of an orderly liquidation or to perhaps derail it. Those
    constitutional issues will be very difficult to resolve given
    the procedures that the Act establishes for very minimal
    judicial review. So my concern is that the constitutional
    issues will in fact work against the purposes of Title II, that
    Title II will in fact be undermined by the raising of these
    constitutional issues at a time when it is least appropriate
    that they be brought to the fore.
        Most of the constitutional issues relate to the judicial
    review provisions or the lack of judicial review provisions in
    Title II. Conventional bank receiverships, which I think was
    the basic model for Title II, are commenced by an
    administrative appointment of a receiver, but persons aggrieved
    by that are then given the right to go to court within a short
    period of time, typically 30 days, and to seek to have the
    receivership set aside on any legal or factual basis that they
    wish to advance. This was in fact the way in which the House
    bill that preceded the enactment of Dodd-Frank structured the
    commencement of an orderly liquidation.
        The Senate had a different idea. The Senate decided that
    the judicial review process should be put before the
    appointment of the receiver rather than after the appointment
    of the receiver, and you could call this ex ante review as
    opposed to ex post review. The problem with the Senate's
    approach is that if in fact we are in the midst of what might
    be a financial crisis, or if the firm which is to be placed in
    receivership is systemically different, you can't have an
    ordinary judicial trial before you create the receivership.
    This would create adverse publicity and would give rise perhaps
    to a run on the bank or to the type of financial panic that
    Title II is designed to prevent. So the Senate in its desire to
    have ex ante review had a problem with how to structure this
    review in a way that wouldn't give rise to these concerns.
        So what does the bill, as Congress adopted, the Senate
    version, not the House version, unfortunately, what does the
    Senate bill do in order to prevent the type of adverse
    publicity and the panic that a full scale open judicial
    proceeding would entail? First, it provides that the judicial
    hearing will take place in complete secret. Second, it provides
    that most stakeholders, creditors, shareholders, bondholders,
    and most employees receive no notice of the pending
    liquidation. Third, it gives the District Court only 24 hours
    in which to rule on the petition by the Secretary of the
    Treasury to create a receivership and automatically deems the
    receivership approved within 24 hours if the District Court has
    not ruled by that time. Fourth, it provides that the District
    Court can only review two out of seven legal determinations
    that the Secretary of the Treasury has to make in order to
    conclude that a receivership is warranted. Fifth, it limits the
    review of these two issues to a highly differential arbitrary
    and capricious standard. Sixth, it provides for expedited
    appeal of these two issues only, but says there shall be no
    stay of the receivership pending appeal.
        Now, it is important to acknowledge that the Act does
    contain provisions for judicial review of creditors who have
    claims. If they are dissatisfied with the way in which the
    receiver or the FDIC has resolved the claim they can go to
    court and seek to have that set aside, but it does not contain
    any provision for judicial review for other stakeholders.
        Consider, for example, a pension fund that has a major
    investment in a systemically significant firm and is upset
    because it thinks reorganization would be more appropriate than
    liquidation. Such an entity gets no hearing and no notice, none
    administratively, none judicially, none before the receivership
    is commenced, none after the receivership is commenced. This
    creates, as I detailed in my article and statement, very
    serious due process, Article III problems, and First Amendment
    problems. You can go to jail if you disclose the pendency of
    one of these secret judicial proceedings.
        I think the solution is relatively simple: go back to the
    House version rather than the Senate version and have the
    review take place after the receivership commences, not before.
        Thank you.
        [The prepared statement of Mr. Merrill can be found on page
    66 of the appendix.]
        Chairman McHenry. Thank you, Professor Merrill.
         Mr. McTaggart, you are recognized for 5 minutes.

    STATEMENT OF TIMOTHY R. McTAGGART, PARTNER, PEPPER HAMILTON LLP

        Mr. McTaggart. Good afternoon, Mr. Chairman. My name is
    Timothy McTaggart. I thank you for the invitation to appear
    before the subcommittee and present testimony on this important
    topic.
        I am a partner in the Washington, D.C., office of the law
    firm Pepper Hamilton, where I head the firm's bank regulatory
    consumer finance group. I note that my testimony reflects my
    views alone and not those of Pepper Hamilton LLP or its
    clients, and of course, any errors are to be attributable
    solely to me.
        By way of background, I served as a supervisor functioning
    as the bank commissioner for the State of Delaware from 1994 to
    1999. I served under then-Governor Tom Carper, who became the
    Governor of Delaware after serving in the U.S. House of
    Representatives, including on what was then called the House
    Banking Committee. Additionally, I served as counsel to the
    U.S. Senate Banking Committee prior to my service in Delaware.
        Earlier in my career, after graduating from Harvard College
    and Harvard Law School, I had joined the Legal Division at the
    Board of Governors of the Federal Reserve System in Washington,
    D.C. The balance of my career has been in private practice in
    Washington.
        I am going to have to beg the mercy of the chairman. I have
    attached materials which apparently have not made it into the
    package. I have a copy. I am happy to submit it as part of the
    record. So, I have attached materials that I prepared with the
    assistance of Matthew Silver on many of the topics that were
    noticed for today. There is a 14-page document which was to be
    an appendix on the constitutionality analysis of the Dodd-Frank
    Act. Somehow, that got separated out. So I am happy to offer it
    and present it and ask that the summary be included in the
    record as part of my remarks.
        Chairman McHenry. Without objection, it is so ordered.
        Mr. McTaggart. At this point, I would offer a few
    overarching comments pertinent to today's topic concerning the
    constitutionality of the Dodd-Frank Act provisions relating to
    the Financial Stability Oversight Council (FSOC) and the
    Orderly Liquidation Authority (OLA).
        My written summary also contains references to similar
    issues regarding the Consumer Financial Protection Bureau, but
    I am not going to focus on that in this testimony.
        First, the courts have routinely exercised judicial
    restraint in connection with determining whether
    congressionally enacted legislation is unconstitutional. In the
    summary that is provided, the most recent statistics that we
    are aware of show fewer than 170 actions being held to be
    unconstitutional from 1789 through 2002. It is possible that
    total undercounts more recent activity from the end of the
    Rehnquist court and during the Roberts court, but as a matter
    of historical record, starting with Marbury v. Madison, it
    shows the relatively rare overturning of congressional action
    through the Nation's history. Moreover, the record shows an
    absence of economic regulation and statutory frameworks being
    declared unconstitutional.
        The second point, there are undoubtedly major policy
    choices embedded and omitted in the Dodd-Frank Act. Of course,
    the difference in policy choices reflected in the enacted
    legislation does not make the legislation unconstitutional.
    There may be lingering important questions about the
    effectiveness of the Dodd-Frank Act, I have many myself, to
    address major policy challenges such as the ``too-big-to-fail''
    issue. But the debate, of course, over the effectiveness of the
    Dodd-Frank Act does not go to the constitutionality of the Act.
        Third, the genius in our American system of government is
    the separation of powers among the three branches and the
    checks and balances among the branches. While we often focus on
    the executive's power to veto congressional legislation, for
    example, or the ability of Congress to check the executive
    power through appropriate oversight, we less frequently focus
    on the ability of Congress to check the Judiciary by enacting
    legislation which, for example, limits the jurisdiction of the
    courts or sets standards of review to be followed by the
    courts. Congress has the inherent authority to limit the time
    period available for judicial review and to set other
    requirements concerning the standard of review to be applied by
    the courts in reviewing administrative actions.
        So it seems to me the crux of the question being considered
    by the subcommittee is whether the prior Congress, which
    enacted Dodd-Frank, overstepped its bounds in order to do so.
    From my perspective, with respect to the limits on judicial
    review relating to timing and the scope of review in the OLA, I
    would conclude that Congress did indeed ensure and sought to
    ensure due process was afforded to the affected financial
    institutions. With respect to the structural choices made by
    Congress to create the FSOC, I would conclude that Congress did
    not impermissibly delegate away its authority.
        Now, there are a great many topics, including whether the
    Dodd-Frank Act ended ``too-big-to-fail'' or whether the OLA
    will be a viable alternative to existing Chapter 11 bankruptcy
    processes for bank holding companies, which previously were not
    included in the FDIC's resolution authority. The bank
    regulatory agencies perhaps would be experts to provide
    testimony.
        But I am prepared to answer questions, and I thank you for
    the opportunity to testify.
        [The prepared statement of Mr. McTaggart can be found on
    page 47 of the appendix.]
        Chairman McHenry. We thank the panel, and we will now
    recognize Members for questions.
        I will begin by recognizing myself for 5 minutes, and I
    will begin with you, Professor Merrill.
        What is required to establish a violation of the due
    process clause contained in the Constitution?
        Mr. Merrill. As the text of the Constitution suggests,
    there are three basic requirements: you have to show that you
    have life, liberty or property at stake; you have to show that
    the government is threatening to deprive you of those
    interests; and then you have to show that the government is
    threatening to do so in a way inconsistent with due process of
    law. Due process of law means all sorts of different things,
    but in this context, it means a notice that the government is
    going to act adversely against one of those interests and that
    you have not been given a fair opportunity to present your side
    of the story before the government takes final action.
        Chairman McHenry. So now we are looking at the Orderly
    Liquidation Authority contained within the Dodd-Frank Act. Do
    you think that a party who might be threatened with this
    resolution of the Orderly Liquidation Authority, a creditor, a
    shareholder, an officer, a director, do you believe that they
    would have a property interest?
        Mr. Merrill. Absolutely.
        Chairman McHenry. Okay, so that would be protected under
    due process?
        Mr. Merrill. Unsecured creditor claims are property, and
    the position of being president of the bank is property, so I
    think that covers the waterfront here.
        Chairman McHenry. Okay. So, in a resolution under the
    Orderly Liquidation Authority, would the State then be
    depriving the party of his or her property interests under this
    construct?
        Mr. Merrill. Arguably, with respect to a creditor, you
    might say that we would have to wait to see what happens until
    the receiver resolves the creditor's claim and the creditor has
    a right to go to court.
        But with respect to a number of stakeholders, let's take
    shareholders, for example. Suppose you have a mutual fund or
    suppose you have a State employee pension plan that has
    invested in one of these systemically significant companies and
    they strongly believe that liquidation is inappropriate, that
    the company is experiencing a short-term credit crunch, but
    they could be successfully reorganized.
        A shareholder like that is not given any notice under Dodd-
    Frank before a liquidation is commenced. They are not given any
    notice or a hearing after the liquidation is commenced. And the
    statute says this company has to be liquidated, and the
    shareholders have to take the first hit. So very likely a very
    substantial financial interest is going to be wiped out without
    any notice or any hearing, administratively, judicially or
    otherwise.
        Chairman McHenry. So, therefore, the Secretary and the
    FSOC's decision to send an institution through the Orderly
    Liquidation Authority denies those individuals of due process
    because it doesn't give them adequate notice and an opportunity
    to contest the decision?
        Mr. Merrill. That is my reading, unfortunately, of the way
    the statute is currently drafted.
        Chairman McHenry. Okay. Ambassador Gray, obviously, with
    the work that you are doing, you believe that institutions do
    have a property right and interest and their due process would
    be violated through the Orderly Liquidation Authority, is that
    correct?
        Mr. Gray. That is correct.
        Chairman McHenry. Okay. So do you believe the State would
    be depriving those parties of his or her property interests?
        Mr. Gray. I believe that is correct. I also believe that it
    is a cognizable injury to deprive one of the protections
    granted by the separation of powers. It is a slightly different
    argument.
        Chairman McHenry. Explain that argument.
        Mr. Gray. It is related, but it is not the same. And it is
    true that there are pieces of separation of powers denial
    throughout our U.S. Code, and especially in the banking
    industry, but there is nothing like this aggregation, the
    collapsing of all of these issues all in one place, due process
    and separation of powers and non-delegation and et cetera, et
    cetera. So I believe there is more than one ground for
    challenge, and I believe the courts will take notice of this
    when they have the opportunity.
        Chairman McHenry. Okay. Professor Merrill, to your point on
    inadequate notice, why might Dodd-Frank provide inadequate
    notice?
        Mr. Merrill. The administrative procession that leads up to
    a decision to commence a liquidation is done in secret, and
    that is the way bank receiverships are done, and that is the
    way Dodd-Frank is written for these systemically significant
    non-bank firms. The problem is that if you had an open
    administrative process, you would trigger the type of financial
    panic that people want to prevent, that people don't want to
    have creditors and counterparties cashing out and triggering a
    financial contagion. So there is no administrative notice.
        With respect to the stakeholders, other than the firm
    itself, the statute says that the judicial proceeding to
    appoint a receiver takes place in secret, and it makes it a
    Federal crime to recklessly disclose the fact that proceeding
    is taking place. That would include, of course, intentionally
    disclose.
        So there is no way that a shareholder or a creditor or a
    bondholder or any of these stakeholders will find out about
    this liquidation until it has been announced that the court has
    approved the appointment of a receiver, and the liquidation at
    that point under the statute has to take place.
        Chairman McHenry. My time has expired. We will now
    recognize the ranking member, Mr. Green, for 5 minutes.
        The ranking member asked me to recognize Ms. Beatty
    instead. I will recognize Ms. Beatty for 5 minutes.
        Mrs. Beatty. Thank you, Mr. Chairman, and Mr. Ranking
    Member.
        And thank you gentlemen.
        Mr. McTaggart, much has been said today, and in your
    documents, regarding the process by which designation occurs.
    Specifically, Mr. Gray's testimony states that it is no great
    surprise that big banks would seek to leverage their size,
    their interconnectedness, and other qualities to obtain favor
    from the government. The comments appear to suggest that the
    designation as an SIFI clearly confers strong benefits upon the
    largest institutions, and yet if this was the case, we would
    expect that all large and medium-sized financial institutions
    would be seeking to be designated as SIFIs. In fact, it appears
    to be just the opposite, that most of the borderline financial
    firms are making efforts to be excluded from the SIFI class of
    firms.
        So the question is, do you believe that SIFI designation is
    a way for big financial institutions to curry favor with the
    government, and if so, why is it that one of our larger
    insurance companies is challenging its non-bank SIFI
    designation?
        Mr. McTaggart. That is a fine and excellent question. With
    respect to the challenge, the Prudential Insurance Company is,
    as I understand it, acting within the requisite appeal period
    to challenge its SIFI designation. Importantly, it is not to
    challenge the constitutionality of the functioning of the
    statute, but the SIFI choice that was made and applied to it.
    So clearly, to the premise of your question, in that instance,
    they do not presumably find it beneficial to be designated as
    an SIFI.
        On the broader question of whether SIFI status conferred
    the special designation, or does it proliferate the ``too-big-
    to-fail'' question, my personal view is that it is a dramatic
    change with the enactment of the statute. I think it is pretty
    clear that institutions that previously were of concern 20 to
    30 years ago as being systemically important--you think of
    Continental Bank in Illinois and so forth--are not likely to be
    the ones that would fall within the SIFI designation today. So,
    it has shifted.
        I think the one unspoken comment, but I think it is a
    critical one, from a policy standpoint, is that typically it is
    not just a single institution--and I am speaking as a former
    supervisor--that gets in trouble at once. It might be two or
    three because they are sort of in the same bad investments or
    other choices.
        So, that is really the challenge I see prospectively for
    the Fed and the Treasury in terms of how they manage and
    supervise the SIFI institutions once the next crisis, whatever
    it happens to be, occurs. I think that is the difficulty. And
    it is not clear that those institutions would be viewing the
    SIFI designation as a benefit.
        Mrs. Beatty. Thank you.
        I yield back.
        Chairman McHenry. The gentlelady yields back.
        We will now recognize the vice chairman of the
    subcommittee, Mr. Fitzpatrick of Pennsylvania.
        Mr. Fitzpatrick. I thank the chairman for calling the
    hearing, and certainly, we all appreciate the testimony of the
    witnesses here today.
        In his opening statement, Mr. Green noted correctly that
    Dodd-Frank has not been found unconstitutional, but I think two
    of you in your statements said that is as of yet, and it is
    still early in the game.
        Professor Merrill, you outlined in your testimony the
    ability of the courts to review the FSOC's decisions to subject
    a company to Federal Reserve supervision under Title I. Can you
    just go through again, if you would, the constitutional
    questions that you have in that regard?
        Mr. Merrill. No, my testimony is only devoted to Title II.
    I did not speak to Title I and the systemic designation under
    Title I. So I have no opinion on that.
        Mr. Fitzpatrick. With respect to--you talked about notice
    and the opportunity to be heard.
        Mr. Merrill. That is under Title II, yes.
        Mr. Fitzpatrick. Okay, Title II. I'm sorry.
        Mr. Merrill. In my view, the statute makes a fatal mistake
    in trying to push judicial review into this extremely truncated
    24-hour period between the Executive Branch's decision to seek
    an orderly liquidation and the court's issuance of the order
    approving the orderly liquidation. So the court does not have
    enough time to consider this, the firm does not have enough
    time to prepare dissent, and as I mentioned, all of these other
    stakeholders are given no notice at all. In fact, it would be a
    crime to give them due process. So it is sort of like a super
    due process violation when your rights are vaporized and you
    have absolutely no way of getting any notice or an opportunity
    to have a hearing before that takes place.
        One of the issues the district court has to resolve in this
    24-hour period is whether or not the company is in default or
    in danger of default, and the statute defines default or danger
    of default in probabilistic terms. It says, it is likely that
    the firm will not be able to meet its obligations; it is likely
    that its debts will exceed its assets and so forth.
        Can you imagine a company that is resisting orderly
    liquidation being able to mount a defense in 24 hours to show
    that it is not in danger of default, and the type of accounting
    and actuarial information they would have to develop? And can
    you imagine the court being able to digest that information in
    24 hours and make a meaningful ruling? I can't. It seems to me
    what the statute does is it tries to conscript the courts and
    draw upon their prestige in legitimizing this process, which is
    essentially a total executive process, without allowing the
    courts to act in a meaningful way or giving parties due
    process.
        Mr. Fitzpatrick. So, professor, why is it then that Dodd-
    Frank might provide inadequate opportunity to challenge the
    Secretary's determination? Is it entirely that it can't be done
    within 24 hours, or are there additional reasons?
        Mr. Merrill. It is partly that it can't be done in 24
    hours. It is partly that significant stakeholders are given no
    notice so they can't show up and participate in the hearing at
    all. I think the only way to really cure this, consistent with
    the need for confidentiality and speed, is to do what is done
    under bank receivership law, which is to give firms and other
    stakeholders a right to challenge it after a receiver is
    appointed. Receivership law allows you to go to court within 30
    days. You can raise any issue you want. You can challenge the
    factual base of the receivership.
        Now, it is true that not many firms do take advantage of
    it. Once its receivership has been declared, it is difficult to
    persuade a court to undo it. But I think having that power is
    critically important because otherwise it is entirely left up
    to the discretion of the executive as to who they push into
    this liquidation process, and there really isn't a chance for
    the courts to act as check on that. And just the availability
    of judicial review, I think, would act as a significant check
    on potential executive abuse. We can't assume the executive
    will always be acting in perfectly good faith here.
        Mr. Fitzpatrick. And finally, professor, I think you
    testified that you preferred the Senate version--
        Mr. Merrill. No, the House version.
        Mr. Fitzpatrick. The House version. That was review after
    receivership. Review after receivership?
        Mr. Merrill. Yes.
        Mr. Fitzpatrick. So what Mr. Green said in his opening
    statement is that the bill could be amended, and there might be
    amendments which he would be consider which are important. So,
    in the 30 seconds I have left, if you or any of the witnesses
    could tell us, if you could propose one amendment which would
    be most effective and most important to Dodd-Frank, what would
    that amendment be?
        Mr. Merrill. Just go back and look at the House bill that
    was passed in late 2009 or early 2010 and look at the
    provisions for appointment of receiver and adopt that and take
    out the provisions that the Senate added in 2010. The Senate
    added this ex ante review with all of these constitutional
    problems. I think the House bill would pass constitutional
    muster.
        Mr. Fitzpatrick. I think my time has expired. Thank you.
        Chairman McHenry. I will now recognize Mrs. Maloney for 5
    minutes.
        Mrs. Maloney. I want to thank you, Mr. Chairman, for
    calling this hearing, and I also want to thank Ranking Member
    Green.
        In 2008, when a large financial company was on the verge of
    failure, regulators had two options in front of them. They
    could either let the company file for bankruptcy, which was
    what happened with Lehman, or they could bail the company out,
    which happened with AIG; and neither turned out to be a good
    alternative.
        Dodd-Frank gave regulators a third choice by creating an
    orderly liquidation process for large financial companies that
    is similar to the power that the FDIC has with commercial
    banks. By most accounts, the FDIC performed a vital role in
    stabilizing our economy during this period. Regulators were
    screaming for the same type of authority that would have helped
    them better manage AIG and Lehman Brothers than the two options
    that we had, which were: let it fail; or bail it out. They are
    both unacceptable. Neither one is a good alternative.
        Now, some of my colleagues say that they would simply let
    large companies file for bankruptcy. They can do that now. And
    I would like to point out that we have already tried
    bankruptcy. We tried that with Lehman, and the result was a
    massive financial crisis. And I don't consider this an
    acceptable solution. But a financial institution or their
    creditors can push them into bankruptcy now if they so choose.
    But Dodd-Frank tried to give another alternative to help
    confront a financial crisis. I believe someone called it
    ``executive abuse.'' It wasn't executive abuse. The financial
    system was crashing. Secretary Paulson was begging for some
    authority to help him better handle the crisis.
        So I guess my question to you is if this is about the
    constitutional authority that we have under Dodd-Frank, under
    Title II, it is really Title II, I would say--and I would like
    to begin with Mr. McTaggart and others if they would like to
    comment--Title II is really an extension of the FDIC commercial
    liquidation authority and powers that they have for commercial
    banks, and this was already challenged in court and the court
    upheld the authority under the FDIC to manage in a crisis
    situation.
        I would say in most of the--we were in a crisis situation
    that cost this country $12 trillion; some economists say it is
    $16 trillion. We are still suffering from it. I for one don't
    want to go back to it. But most economists and most books that
    have been written about the crisis, to tell you the truth I
    can't stand to read them because living through it once was
    enough, but if you do read them, most of them really laud the
    FDIC and the role that they played in trying to stabilize the
    economy.
        So, your comments on the constitutionality of Dodd-Frank,
    Mr. McTaggart, please?
        Mr. McTaggart. Sure. Those are wonderful observations.
        It is clearly the case that a large part of the Dodd-Frank
    resolution process is derived from the history and the
    experience that the FDIC has had. I would point out that the
    bankruptcy process is still available and the Orderly
    Liquidation Authority is an alternative that is to be utilized
    essentially if there are decisions made that the bankruptcy
    process is not going to be satisfactory by the appropriate
    regulators.
        One point that I would like to just, I guess, correct the
    record on in terms of the orderly liquidation timing, and I
    have great respect for the courts, including, of course, the
    United States District Court for the District of Columbia, they
    have issued a local civil rule to deal with orderly
    liquidation, and it is not a 24-hour period.
        At least 48 hours prior to the filing of a petition under
    the Act, the Secretary of the Treasury has to provide notice
    under seal to the clerk of the court that the petition will
    likely be filed with the court. Additionally, a petition under
    the Act by the Secretary of the Treasury must contain all
    relevant findings and recommendations. The petition is assigned
    to the chief judge or the acting chief judge, thus the
    petitions will be directed to someone who has fully reviewed
    the Act, the related precedent, and has experience on matters
    under the Act. The financial company named in the petition may
    file an opposition to the petition under seal, may appear at
    the hearing to oppose the petition. Each petition in opposition
    shall be accompanied by a proposed order, thus making a
    response by the judge in a 24-hour period somewhat easier.
        So, again, I am not suggesting that it completely changes
    the timeframe, but it is more than 24 hours.
        Chairman McHenry. The gentlelady's time has expired.
        We will now recognize the gentlelady from Minnesota, Mrs.
    Bachmann, for 5 minutes.
        Mrs. Bachmann. Thank you so much, Mr. Chairman, and I want
    to thank you also for holding this hearing and for inviting
    these witnesses. This has been an excellent hearing.
        I think my first question will be to Mr. Merrill. I have
    appreciated your testimony. Again, I would like if you could go
    back--you made comments--to this issue of dealing with how
    Title II would violate constitutional principles when we are
    dealing with uniform bankruptcy law and we are dealing with
    vesting substantial discretion in the executive to invoke the
    Orderly Liquidation Authority? Could you give us a summation of
    that again? I think this is a very important point, that we
    need to understand the constitutional vulnerability.
        Mr. Merrill. All right. I would be happy to respond to that
    and also respond to a couple of points that were just made by
    Mr. McTaggart.
        It is true that most of Title II was borrowed from FDIC
    receivership law and that the courts have upheld the FDIC's
    receivership process, whereby there is an administrative
    appointment of a receiver and then the process unfolds after
    that.
        The big difference between the FDIC law and Title II is
    that under FDIC receivership law, an aggrieved party can go to
    court and ask the court to set aside the receivership and can
    raise any issue that they want to raise. Under Title II, there
    is no review after the receiver is appointed. That is the end
    of the game as far as stakeholders are concerned, other than
    ordinary creditors, who may get some relief from the FDIC as
    receivers.
        So the shareholders, the directors, the officers of the
    company, who all have to be mandatorily fired under Dodd-Frank,
    have no way to protect their interests because there is no
    judicial review before or after, under Title II. There is under
    the FDIC Act. There is not under Title II.
        Second, this local D.C. rule that has been mentioned, the
    D.C. court was clearly uncomfortable when it looked at this
    statute. It asked the Secretary of the Treasury to please
    notify it 48 hours in advance so that they could try to get a
    judge lined up and so forth. But that local rule can't change
    the basic skeletal provisions of the statute, which make it a
    crime to inform most stakeholders that there is going to be a
    liquidation, no notice whatsoever, which gives the judge only
    24 hours between the time he sees the government's petition and
    the time he has to rule and which gives the company whatever is
    left of the 24 hours to try to respond and address the issues
    that the government raises in its petition for liquidation.
        So I think the local rule helps a little bit at the
    margins, perhaps, but it does not address the fundamental
    flaws, due process, Article III and so forth that this statute
    creates.
        Mrs. Bachmann. And, Mr. Merrill, based upon the latter part
    of your answer, would you classify that as a potential
    vulnerability under First Amendment grounds?
        Mr. Merrill. Yes. The statute says, you can go to jail for
    5 years for telling the world that the government is trying to
    liquidate your firm. That is unprecedented. I know of no
    analogy that would sustain that, and I think the court in a
    proper case where a firm thinks that it is improper to be
    putting it through liquidation, that there is some kind of
    abuse, I am not suggesting there was abuse in the past, but in
    the future there might be, a firm that thinks the government is
    trying to put it through liquidation inappropriately, they
    can't leak this to The New York Times or the Washington Post
    without having the officers of the firm be trucked off to jail
    for 5 years. That is an extraordinary incursion on the First
    Amendment, in my view, and I think the courts would be very
    uncomfortable with that.
        Mrs. Bachmann. Mr. Merrill, have you ever seen anything
    like this before in your history, in your academic life and in
    your practical work that you have done? Have you seen any kind
    of restrictions and constitutional problems in this vein
    before?
        Mr. Merrill. No. I think this is completely unprecedented.
    I think you had some interesting models with which you could
    work. You had the bankruptcy code. You had the FDIC
    receivership law, and for whatever reason, at the last minute,
    the Senate came up with this novel hybrid, which essentially
    dragoons the court into rubber stamping the executive in this
    highly expeditious fashion with no notice, no hearing
    opportunity that is meaningful, and with the stakes being so
    enormously huge. We are talking about all kinds of people
    having huge financial interests at stake here. I don't think
    there is anything remotely like it in U.S. law. In fact, you
    can't--in looking at the Article III issue, I couldn't really
    find any precedents where the courts had been told that they
    had to rule within 24 hours on highly complicated issues that
    are very difficult for anybody to figure out in a matter of
    months.
        Mrs. Bachmann. Then, you really do have a denial of due
    process?
        Mr. Merrill. Yes. Potentially. Again, when the process is
    ever used, I think there will be due process violations. And
    all sorts of stakeholders will have a strategic incentive to
    raise those constitutional concerns, which will very likely
    cause the whole process to go off the rails and become chaotic.
        Mrs. Bachmann. I thank you for your observations because I
    think they are stunning. And I think in fact you have even
    underscored for this committee how important that is.
        I yield back, Mr. Chairman.
        Chairman McHenry. The gentlelady's time has expired.
        We will now recognize Mr. Heck for 5 minutes.
        Mr. Heck. Thank you, Mr. Chairman. I pass.
        Chairman McHenry. Okay. We will now recognize Ms. Wagner
    for 5 minutes.
        Mrs. Wagner. Thank you, Mr. Chairman.
        And I thank the witnesses for being here with us this
    afternoon. I would like to especially welcome one of my former
    colleagues from the diplomatic team, Ambassador Boyden Gray.
        Welcome. And I will start with you, Ambassador Gray. Once
    the Treasury Secretary invokes the Orderly Liquidation
    Authority for a troubled firm under Dodd-Frank, the district
    court can only review two, I believe, of the seven
    determinations made by the Secretary. Is that correct?
        Mr. Gray. That is correct. It can only review whether the
    firm is a financial firm and whether it is in trouble.
        Mrs. Wagner. So the other five factors of determination are
    in a way exempt from the court review and the company has no
    right to challenge them? Is that correct, sir?
        Mr. Gray. That is correct. When this issue first surfaced
    in something I wrote, I don't know how long ago now, the
    Treasury's letter to the Washington Post said, there is a huge
    check in all of this, which is that we must find that this
    entity poses a threat to the stability of the United States.
    That finding is specifically excluded from court review.
        Mrs. Wagner. So if they are unable to challenge those other
    five factors, what types of concerns does this give you over
    due process?
        Mr. Gray. It is a denial of due process not to give someone
    his or her day in court. And it isn't just that. The Congress
    is basically cut out. You are basically cut out because what
    finances this is not required of you. You have no way of
    monitoring it because the orderly liquidation, or the Treasury
    has its own internal taxing power effectively to finance all
    this without any oversight by you. So there are multiple
    problems here. And I think--and you may have another question,
    but I want to emphasize that problems are accumulating right
    now. This isn't just a difficulty that is going to arise when
    and if this kind of a takeover occurs. We are seeing the
    results of this now as larger institutions get funding
    advantages based on the implicit bailout of what this provision
    authorizes, and smaller banks, community banks that really do
    service local communities like yours, these local smaller banks
    are having a hard time competing and dealing with the
    regulations.
        Mrs. Wagner. And in fact, it codified ``too-big-to-fail,''
    is what is happening.
        Mr. Gray. Right. It codifies ``too-big-to-fail.'' And it
    perpetuates it. So, this is happening today. There is a bigger
    problem at some point, but right now, we have a problem and it
    needs to be corrected.
        Mrs. Wagner. Thank you, Ambassador Gray.
        If I could move on, Professor Merrill, what standard can
    the court use to review the Secretary's decision that the
    company is a financial company and that it is in default or in
    danger of default?
        Mr. Merrill. The statute is quite explicit in saying that
    the court can only ask whether or not both of those
    determinations are arbitrary and capricious.
        Mrs. Wagner. How would an arbitrary and capricious review
    of the Treasury Secretary's decision differ from a de novo
    review?
        Mr. Merrill. It is hard to say. The arbitrary and
    capricious language, I think is borrowed from the
    Administrative Procedures Act, which refers to arbitrary and
    capricious or otherwise not in accordance with law. And so
    ordinarily when that standard is invoked, the courts have
    authority to decide questions of law. It is not clear that
    Dodd-Frank authorizes the courts to review questions of law. If
    that is the case, I think it is quite clearly unconstitutional,
    for that reason among all the other reasons that we discussed.
    Under bank receivership law, and under the House bill that was
    rejected by the conference committee, the court would have de
    novo review powers, which means the court would make the
    record, the parties would submit evidence to the court that
    they think is relevant, and the court would hear witnesses, and
    the court would decide all the legal questions independently of
    what the agency decided.
        Mrs. Wagner. And the determination, I assume, is based on
    the merits of its argument?
        Mr. Merrill. Yes. The huge difference between de novo
    review and arbitrary and capricious, whatever that means
    without ``not in accordance'' with law being added.
        Mrs. Wagner. Very quickly, Professor Merrill, how is the
    court's ability to review the Treasury Secretary's decision to
    invoke the OLA different from its ability to review the FDIC's
    decision to resolve a failed bank under the Federal Deposit
    Insurance Act, for instance?
        Mr. Merrill. Under the FDIC Act, the court has the power,
    at the behest of any affected person, to set aside the
    receivership for any and all reasons, and to develop a record,
    and to decide questions independently. Under the Dodd-Frank
    Act, the court is restricted to reviewing these two issues out
    of seven and only under this arbitrary and capricious standard,
    which we don't know quite what that means, but it sounds very
    deferential.
        Mrs. Wagner. Thank you, Professor.
        I believe my time has expired. Thank you, Mr. Chairman.
        Chairman McHenry. We will now recognize the ranking member,
    Mr. Green, for 5 minutes.
        Mr. Green. Thank you, Mr. Chairman.
        Let's start with the first option available, which is
    bankruptcy. Bankruptcy is not precluded by Dodd-Frank. And I
    think all of our scholars will agree that bankruptcy is still
    available. But for fear that I may be mistaken, if you agree
    that bankruptcy is still available, would you kindly extend a
    hand into the air?
        This is sort of like voir dire.
        Okay. Thank you.
        Let the record reflect that all of the members of the panel
    have indicated that bankruptcy is still available.
        In fact, there has to be a determination of the entity, the
    company, the large company I might add, there has to be a
    determination that it is either in default or in danger of
    default.
        Is that a fair statement, Mr. Merrill?
        Mr. Merrill. That is an accurate statement, yes.
        Mr. Green. Okay. Default or in danger of default. There
    also has to be, before we get to that determination,
    involvement of the FDIC, the Federal Reserve, and then you have
    to confer with the President of the United States. So we are
    talking about a time of exigent circumstances when we have
    perhaps what we had in 2008, when banks would not lend to each
    other, when you could not have other businesses that could go
    through the bankruptcy process--go to the bankruptcy process
    and assist a business that was in fact in bankruptcy. We do
    have these extreme circumstances where bankruptcy does not
    prove to be an option. Only after we have justified that there
    is an extreme circumstance do we then go to OLA. Now Mr.
    Merrill, do you agree with that, that there is this
    justification process? I know your point is that it is all a
    part of the executive. And I will get to that in just a moment.
    But that is your point, correct?
        Mr. Merrill. That is right. And I don't necessarily
    disagree with your characterization--
        Mr. Green. Okay. Let me continue. So once we do get to the
    district court, we have rule 85 to contend with. Now, for those
    who are concerned about secrecy, rule 85 indicates that if the
    petition of the Treasury Secretary is granted, then the
    Secretary has to show cause why the veil of secrecy should not
    be lifted. Do you agree that rule 85 does this?
        Mr. McTaggart. I am familiar with the rule. Perhaps the
    other panelists are not. But that is correct.
        Mr. Green. So rule 85, which applies to the district court
    that the case must be filed in, this is a court of venue and of
    jurisdiction, so you have to go to this court, this local rule
    has already been promulgated to address the very question of
    secrecy that has been raised.
        Next point before I get to you, Mr. Gray. We will try to
    get to you in just a moment, but there is one other thing that
    I have to do. The ruling of the district court is not the final
    word. In fact, you can appeal from the district court to the
    next level, which would be the appeals court, circuit court,
    and you can appeal from there to the Supreme Court. So the
    district court ruling is not the final word.
        This can go all the way to the Supreme Court of the United
    States of America. And the Supreme Court has supreme authority.
    Supreme Courts make rulings that we don't always like, but
    hopefully we will continue to respect them. Now, with reference
    to the process itself of appeal, and of filing the petition, do
    you agree that in major questions of any type, you have
    constitutional scholars on both sides of the issue? It is not
    unusual to have constitutional scholars on both sides of an
    issue. We just had several cases before the Supreme Court
    recently, with constitutional scholars on both sides of the
    issue. Do you agree, Mr. Merrill, that you have constitutional
    scholars on both sides of issues?
        Mr. Merrill. On many issues, you do. I am not sure that
    there are going to be two constitutional scholars on either
    side of the question of whether there is no hearing or
    opportunity.
        Mr. Green. We already have--you do not consider your friend
    sitting next to you a scholar? Is that what you are saying?
        Mr. Merrill. I haven't heard him speak specifically to the
    issue.
        Mr. Green. I will let you decide who is a constitutional
    scholar or not. Let us just say for our purposes that we have
    people who hold themselves out as experts who will testify on
    both sides of this issue. That will happen. It is happening
    right now. And until a court rules, we don't have an issue that
    has been declared unconstitutional. We don't have any aspect of
    this law that has been declared unconstitutional. So I
    appreciate your taking it to court, those of you who are
    litigating. I have no quarrel with your taking it to court. I
    will respect the decision of the courts. But I do think that we
    can't conclude now that it is unconstitutional. What we have
    are opinions.
        I yield back, Mr. Chairman.
        Chairman McHenry. Spoken like a well-informed former judge.
        We will now recognize Mr. Rothfus of Pennsylvania for 5
    minutes.
        Mr. Rothfus. Thank you, Mr. Chairman.
        Ambassador Gray and Professor Merrill, in addition to
    arguing that certain provisions of Dodd-Frank may be
    susceptible to constitutional challenge, you both suggested
    that basically it is bad policy and may fail to achieve the
    purpose of ending taxpayer-funded bailouts of large complex
    financial companies. Professor Merrill, why might Title II
    preserve a version of taxpayer funded socialization of losses?
        Mr. Merrill. I think when you read the fine print of Title
    II, you will find that there is authority for the Treasury
    Department to provide funding to facilitate an orderly
    liquidation. And the statute says that the Treasury has to be
    reimbursed. The taxpayers are not going to be paying for this
    up front. But in reimbursing the Secretary of the Treasury, you
    start with the shareholders and then the unsecured creditors,
    and then you file lawsuits against the officers and directors,
    who might have been responsible to claw back their
    compensation. But if there is still a shortfall, then the
    statute authorizes special assessments to be imposed on major
    financial companies to pay back the Treasury for the funding
    that it advanced to this liquidation. Those special assessments
    are really a tax by any other name. Those assessments would be
    passed on to consumers in part, or would be taken from
    shareholders of bank corporations that have to pay these
    assessments. And so, that is a kind of socialization of losses
    of the sort that the bailout regime represented. I think it is
    a perpetuation of that in a different guise.
        Mr. Rothfus. Thank you.
        And Ambassador Gray, despite the passage of Dodd-Frank, do
    larger firms, in your opinion, enjoy an unfair funding
    advantage relative to smaller firms?
        Mr. Gray. There are, I think, nearly a half dozen studies
    which make that point. There is one from Bloomberg that says
    the advantage is $80 billion-plus a year in terms of profits. I
    believe the Dallas Fed has gone into some detail about this,
    identifying somewhere in the neighborhood of 50 basis points
    advantage. And so I don't think there is any question that
    there is an advantage. One very high ranking official at one of
    the big Wall Street institutions said to me, ``We are not
    interested in an all-out attack on these provisions of Dodd-
    Frank because if our regulators knew we weren't going to be
    bailed out, they would raise our capital requirements.'' So I
    think there is a general understanding that this is a form of
    bailout. There are, I think as a result perhaps of the
    questions that you are raising here in this hearing and the
    questions that have been raised by the lawsuits, some efforts
    now to actually raise capital requirements to soften the ``too-
    big-to-fail,'' to cut into the ``too-big-to-fail'' problem. But
    that in itself is a recognition that there is a ``too-big-to-
    fail'' entrenchment problem that is perpetuated, if not
    deepened, by Dodd-Frank.
        Mr. Rothfus. Professor Merrill, would you consider the
    truncated notice window at play with Title II to be
    extraordinary?
        Mr. Merrill. Yes.
        Mr. Rothfus. Would it be fair to call this maybe even a
    sudden death determination? Is that what happens in this
    truncated process?
        Mr. Merrill. I am sorry, could you repeat that?
        Mr. Rothfus. Can you make an argument that this is almost
    like a sudden death provision? You have 24 hours, or 48 hours
    basically to respond to the government that is basically going
    to order the winding up of a business.
        Mr. Merrill. Yes. If there is any kind of contested issue
    at all with respect to danger of default or default, I think it
    is just completely unrealistic to imagine that the firm has any
    way to muster a defense and present it to the court in an
    orderly fashion and have a meaningful decision on that. I think
    this is all a charade.
        Mr. Rothfus. Mr. McTaggart, can you identify any other law
    that allows such a truncated notice window before a company is
    going to be ordered to be wound up?
        Mr. McTaggart. I am not sure that I can, but I would note
    that based upon the supervisory process, institutions are not
    ordinarily deteriorating within a 24-hour period. So typically
    there is going to be a matter of perhaps weeks, perhaps a month
    prior to this final decision. I respect your point of view of
    course with regard to the shortness of it. And to respond
    specifically to your question, I can't reference another
    framework.
        Mr. Rothfus. And Professor Merrill again, if we can take
    just a reminder of some of the stakeholders here, employees of
    these companies?
        Mr. Merrill. They get no notice, other than the very top
    officers.
        Mr. Rothfus. Pension funds.
        Mr. Merrill. No notice.
        Mr. Rothfus. And ultimately the taxpayers who may have to
    be responsible for any kind of pension liability.
        Mr. Merrill. Obviously not.
        Mr. Rothfus. Thank you.
        Chairman McHenry. We will now recognize Mr. Barr of
    Kentucky for 5 minutes.
        Mr. Barr. Mr. Gray, Mr. McTaggart testified that there was
    a local rule that provided for a notice that the OLA process
    was to be invoked. Do you agree with Mr. McTaggart's testimony,
    and can a local rule cure an unconstitutional statute?
        Mr. Gray. I don't believe so. I have never heard of that
    being the case. I think the local rule is useful because it is
    a blueprint for what is wrong with the statute. But I don't
    think it overrules the statute or can overrule the statute.
    There will not be 48 hours or 72 hours notice, or a length of
    time for a district court to react, let alone 48 hours. There
    will be 24 hours. That is what the statute says. And any notice
    that goes out to potentially interested parties would violate
    the statute and subject anyone at the court who did this to
    criminal penalty, jail, and financial. So the rule is, as I
    say, useful for the problems it identifies, but I do not think
    it can solve them.
        Mr. Barr. To Ambassador Gray and to Professor Merrill,
    could the government in litigation over the constitutionality
    of the Dodd-Frank law, could the government conceivably defend
    the constitutionality of the statute on the grounds that--or by
    invoking either the exceptions clause in article three or by
    invoking article three, section one language conferring to
    Congress the power to create inferior courts and, by extension,
    define the contours of the jurisdiction of those inferior
    courts?
        Mr. Merrill. I hadn't thought about that. It would be an
    interesting argument. The statute doesn't purport to affect the
    jurisdiction in the sense you are referring to it, of the
    courts. It confers jurisdiction on the district court, the
    Court of Appeals, and the Supreme Court. And it doesn't say
    that it is limiting their jurisdiction or it is regulating the
    appeals process. It just simply drastically limits the issues
    that they can consider. I would add in this regard that there
    is a real question as to what sort of relief these courts can
    grant. The statute, as I read it, suggests that the only thing
    the district court can do other than approve the petition is to
    send the case back to the Secretary of the Treasury for more
    findings to support his determination. And then when you appeal
    to the appeals court and the Supreme Court, there is no stay
    pending appeal. So what can the appeals court and what can the
    Supreme Court do? I am not sure they can do anything other than
    send the case back to the Treasury Secretary for more findings.
    Meanwhile, liquidation is proceeding apace. So it is not clear
    that this statute gives these courts any authority to overturn
    the receivership process.
        Mr. Gray. Could I make one additional point?
        Mr. Barr. Yes.
        Mr. Gray. Just to respond to something that was said
    earlier, the restrictions on what the district court can look
    at, only two of the five factors--two of the seven, excuse me,
    that they cannot look at five of the factors, that restriction
    carries on to the Court of Appeals and to the Supreme Court. So
    the appellate courts are as restricted as the district court in
    that regard.
        Mr. Barr. Mr. Gray, you have opined that you have concerns
    about Dodd-Frank potentially violating the separation of powers
    doctrine, and in particular, you have cited the nondelegation
    doctrine. Can you amplify for the committee your concerns with
    respect to the nondelegation doctrine?
        Mr. Gray. I think the nondelegation doctrine is violated
    here, but I don't think that if that were the only problem I
    would be here, or at least I would have been involved in filing
    a lawsuit. That is a real problem. But what aggravates it so
    terribly is the addition of the restrictions on court review.
    To look at it from a different angle, courts have, since the
    Schechter Poultry case, the so-called ``sick chicken case,''
    the courts have never really thrown out a statute like the
    National Recovery Act wholesale in response to a nondelegation
    argument, which is that Congress granted too much unguided
    authority to the Executive Branch.
        What they have done is engaged in a doctrine known as the
    doctrine of constitutional avoidance, where they construe the
    statute more narrowly so as to avoid the constitutional issues.
    Now, if someone came along and did this, if someone came along
    for example and said--some judge that we might be before said,
    there really is a Tucker right available to go in and claim not
    just liquidation value but everything you have lost in one of
    these takeovers, and that is a fully available remedy in the
    court of claims, I don't think that is what the statute means,
    but if a court tried to construe it that way, I would view it
    is a partial victory. But I don't think that is what is
    available. I think the drafters of this statute were extremely
    careful in making sure that no avenue was available to raise
    these issues before they were basically foreclosed in a secret
    proceeding.
        Mr. Barr. My time has expired, but Mr. Chairman, if I could
    ask just one quick follow-up question to Mr. Gray on that. The
    reason why I ask about the nondelegation doctrine is that I
    wanted you to maybe comment on the Consumer Financial
    Protection Bureau's structure as being particularly
    unaccountable to the Congress in that it receives its
    appropriations from the Federal Reserve instead of Congress,
    and yet Congress has delegated a great deal of rulemaking
    authority, quasi-legislative power to this agency that is
    otherwise very unaccountable to the Congress.
        Mr. Gray. That is correct. It has granted huge authority to
    the CFPB. It has said to the House and Senate, you are out of
    it, the funding will come from the Fed, which itself is
    precluded from interfering. You are instructed, not you
    personally, but the House and Senate Appropriations Committees
    are actually prohibited from holding hearings on the budget. I
    don't think the Sergeant at Arms is going to come and arrest
    anybody, but that is what the statute says. And then it goes
    on, and this is where, again, separation of powers comes in, it
    instructs the courts to grant deference to the CFPB as though
    it were the only agency in town that had anything to do with
    financial services. That is a very unusual provision as far as
    I am concerned. I will defer to Professor Merrill if he wants
    to comment about such a codification of Chevron. But it is a
    peculiar formulation, and it really does tie the hands of the
    courts incredibly in trying to unravel all of this. And of
    course, as I repeat, you have nothing to say. Now, there is a
    parallel, of course, in the Orderly Liquidation Authority in
    the way the courts are specifically precluded from reviewing
    five of the seven factors, et cetera, given 24 hours, all in
    secret. And again, you are cut out because the funding
    authority is actually a tax, I agree with that, is tucked into
    the bill in the form of an assessment. So you have parallels in
    both.
        Chairman McHenry. The gentleman's time has expired. We will
    now move to Mr. Cleaver, who is batting cleanup today.
        The gentleman is recognized for 5 minutes.
        Mr. Cleaver. Thank you, Mr. Chairman. I apologize for being
    late.
        And I thank the witnesses for being here. I appreciate this
    hearing, because any time we have a distinguished panel, it
    provides us with an opportunity to learn something that we
    didn't know or to consider something that we might not have
    considered. And I have had very positive contact with the
    Consumer Financial Protection Bureau. We had a rule on the
    definition of ``rural'' that a number of people were concerned
    about in the rural areas of Missouri. We communicated with them
    for a long period of time, and then finally they responded in a
    positive and affirmative way.
        But I am somewhat concerned about, and I think with members
    of the judicial intelligentsia here, I can get an answer, but I
    am not sure that our committee is the right jurisdiction to
    handle constitutional deficiencies. I am sitting next to a
    judge, a former judge, and I am not sure, I think the Chair may
    be an attorney as well. So I am probably the only one in here
    who is not. But it would seem to me that this would be a matter
    for the Judiciary Committee. This committee did write the Dodd-
    Frank Act. I was here at all those meetings, but I am
    struggling with how we fit in. Can somebody help me?
        Mr. Gray. Let me take a quick stab at that. I think the
    constitutional problems that have been identified here are
    problems that must be cured before you can get a cure for the
    substance abuse of this legislation. You don't need the
    constitutional analysis to conclude that this legislation has
    entrenched or perpetuated or aggravated ``too-big-to-fail.''
    And the consequences of that are not necessarily
    constitutional, they are economic, and they are personal, and
    they are community-related. And they deprive families in the
    district of the National Bank of Big Springs, Texas, of access
    to services that the firm is no longer going to be able to
    provide. Those are economic harms that fall directly on real
    people. And that is not a constitutional description; that is a
    description of adversity.
        Mr. Cleaver. I think you are agreeing with me. We have had
    several hearings on ``too-big-to-fail.'' And by the way, I
    happen to agree with you, I am very, very concerned about the
    status of ``too-big-to-fail.'' I think they have gotten bigger.
    And the fallout would be greater if something happened, we had
    another economic crisis. But I am just questioning the
    jurisdiction of the hearing because I don't think--
        Mr. Merrill. If I could respond, Congressman Green made the
    point that on practically any constitutional issue, you can
    find somebody to testify on one side and somebody to testify on
    the other side. And I would agree with you; I don't think it is
    this committee's job to sort of keep score as to whether you
    think this is constitutional or not.
        The problem that I am trying to emphasize is that if and
    when this orderly liquidation process is invoked, there is a
    very substantial risk that significant stakeholders are going
    to raise these constitutional objections, and they are going to
    raise it in a very complicated, difficult, convoluted
    procedural way, which runs the risk that the whole process is
    going to be undermined by having those constitutional questions
    out there.
        So my suggestion would be to fix the statute to the extent
    you can to eliminate those constitutional problems and increase
    the chance of this statute working.
        Mr. McTaggart. Congressman, I would add a few points. I
    guess, obviously, there are policy choices that are embedded
    within the Act. The classic legislative process of two
    differing views synthesizing and becoming law is the classic
    legislative process that the courts recognize and defer to and
    give a huge presumption of constitutionality as a result of the
    deliberative process of the Congress.
        I guess I differ with the professor in a couple of respects
    on the policy. With respect to the Orderly Liquidation
    Authority, from an advocacy standpoint, I would rather have the
    opportunity to make my case at that point within the judicial
    process as contrasted to the point that was made under the FDIC
    resolution authority, which is 10 days after the receivership
    has been appointed and within 30 days and so forth. That is
    like trying to unscramble the eggs after the fact. And very few
    of those lead to any kind of meaningful review, in my opinion.
    So I think actually the OLA is a better option in terms of if
    there is a real challenge available from an advocacy
    standpoint, that is when you want to make it in terms of the
    timing.
        Chairman McHenry. The gentleman's time has expired.
        Mr. Cleaver. Thank you, Mr. Chairman.
        Chairman McHenry. Thank you.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        I would like to thank our distinguished panel for being
    here today to discuss the constitutional deficiencies and legal
    uncertainties in the Dodd-Frank Act. You certainly have helped
    illuminate this debate. And we thank you for that.
        And without objection, the hearing is adjourned.
        [Whereupon, at 3:27 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                  July 9, 2013

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