[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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