In Washington, Congress passes and the president signs a vast expansion of federal power over a large and critical industry.
In corporate boardrooms, business executives believe that law usurps their rights. In state capitals, attorneys general believe it infringes on states’ sovereignty and puts them at great financial risk. The two groups come together and sue to overturn the law.
A recap of the Obamacare lawsuit decided by the U.S. Supreme Court last summer? Yes, but it’s also the lead-up to another legal battle stemming from Democrats’ dominance of Washington in 2009 and 2010.
Last month, Georgia joined a lawsuit seeking to overturn major portions of the Dodd-Frank financial reform law of 2010. The law’s stated intent was to avoid failures of “too big to fail” banks and subsequent market panics, of the kind we saw in autumn 2008.
There are good arguments that the law’s authors got the policy wrong, and enshrined “too big to fail” in federal law rather than preventing it. But this lawsuit is not about policy preferences, state Attorney General Sam Olens said in a recent interview.
“We do not disagree that the consumer needs to be protected,” he said. “We feel the laws and regulations must be consistent with the Constitution.”
Among other things, the suit contends the law robs financial firms — including, critically, ones in which Georgia’s pension funds have investments — of due process and allows federal regulators to “treat similarly situated creditors differently” as part of its Orderly Liquidation Authority.
The problem would begin, Olens said, when federal regulators decide a financial firm is in danger of failing and should be liquidated:
“Upon which [regulators] give notice to the institution and you have 24 hours to have a federal judge issue a ruling. If the judge does not issue a ruling within 24 hours, [their] action is affirmed.
“The ruling and the proceeding are closed to the public. The filings are closed to the public. And you are limited to an ‘arbitrary and capricious’ standard to thereafter appeal the decision, which is also closed to the public.”
Worse, Olens continued, even a successful appeal could be too late, because the law blocks courts from delaying the firm’s liquidation. “So it violates numerous separation of powers issues in our Constitution,” he said.
As a firm was liquidated, the law could result in Georgia and other creditors losing their priority over others — as when Chrysler made some bondholders, including Indiana’s pension fund, secondary to labor-union pension funds and other unsecured creditors during its 2009 bankruptcy proceeding. That, Olens said, would violate Georgia’s property rights.
If it seems like Olens and other state attorneys general are more active in opposing federal actions than their predecessors did, from EPA rules to presidential recess appointments, “that’s because you’re seeing a lot more out of Washington, D.C., than you ever have before,” said Alan Wilson, attorney general for South Carolina, which is also a party to the Dodd-Frank lawsuit. (The other nine state plaintiffs include Alabama, Michigan, Ohio and Texas; there are also three private-sector plaintiffs.)
“I do believe it’s our role to challenge [the federal government] when it does overstep,” Wilson argued during a joint press conference with Olens last week, “and that’s what we’ll continue to do.”
– By Kyle Wingfield