[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.]










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