The Long National Nightmare of Dodd-Frank Is Almost Over

One of the prime reasons for the continuing economic uncertainty that bedevils so many ordinary Americans is the presence in law of the Dodd-Frank Act of 2010, which was meant to solve the problems of the financial crisis. In fact, by giving unelected bureaucrats Czar-like power over the financial system, it has caused the stagnation of that system, reducing the free flow of money through the economy and stopping businesses and citizens getting access to the credit that they desperately need.

On November 19, however, a three-judge panel of the D.C. Circuit will hear arguments in a case brought by CEI and others challenging the constitutionality of this new bureaucracy. If the judges rule in our favor, Main Street and Wall Street should both breathe a sigh of relief.

The grounds for our case are simple. CEI and our co-plaintiffs believe that the Consumer Financial Protection Board (CFPB) and the Financial Stability Oversight Council (FSOC) violate the Constitution in a number of ways. Most importantly, the CFPB has no checks or balances to its power, making it unaccountable to Congress, the Administration, the courts, or the people in general:

  • Congress exercises no “power of the purse” over the CFPB, because the agency’s budget – administered essentially by one person – comes from the Federal Reserve, amounting to approximately $400 million that Congress cannot touch or regulate.
  • The President cannot carry out his constitutional obligation to “take care that the laws be faithfully executed,” because the President cannot remove the CFPB Director except under limited circumstances. It is probable that neither the current President nor his successor will be able to remove Director Cordray until his term ends in 2018. Dodd-Frank goes beyond the "for cause" standard for removal from most independent agencies, and says the president may only remove the director "for inefficiency, neglect of duty, or malfeasance in office."
  • Judicial review of the CFPB’s actions is limited, because Dodd-Frank requires the courts to give extra deference to the CFPB’s legal interpretations.

Our basic claim is that Dodd-Frank gives an agency of unelected government bureaucrats unrestrained power. We argue this unaccountable power over the daily lives of the American people results in a lack of public accountability, creating a power grab over every U.S. citizen.

These problems are repeated in our claims against FSOC. The Dodd-Frank Act gives this body, headed by the Treasury Secretary, unprecedented power to liquidate private companies. As Attorney-General Pruitt of Oklahoma, one of our co-plaintiffs, noted when announcing his decision to join the case:

Title II eliminates all meaningful judicial review and due process. Once the Treasury secretary orders the liquidation of a financial company, the company has only 24 hours to convince a federal court to overturn that order. Unless the court somehow manages to decide the entire case in the company's favor before the clock expires, the government wins by default and can begin to liquidate the company even as appeals are pending. Dodd-Frank further limits the authority of the courts by prohibiting them from reviewing whether the Treasury secretary's decision was constitutional, or whether the liquidation is actually necessary to protect financial stability.

The Treasury secretary's largely unaccountable decisions in these cases will put investments at risk, and creditors won't know until it is too late. Dodd-Frank prohibits the company from disclosing the liquidation threat before the district court decides the case. Once the liquidation goes forward, the creditors' only recourse will be to plead their case before the FDIC, with minimal judicial review—meaning that creditors' recoveries are "likely to be close to zero," as bankruptcy scholars Douglas Baird and Edward Morrison have put it.

Even more disturbing is the possibility that a company might agree to be "liquidated" and rebuilt under a new banner—like "New Chrysler" replacing "Old Chrysler"—leaving its creditors no right to block the reorganization. Instead, creditors not favored by federal bureaucrats will have little choice but to accept the deal offered to them by the government in a black-box process.

This abuse of judicial review and due process clearly violates the Constitution’s separation of powers. Moreover, we are already seeing that FSOC is quite happy to extend its powers beyond the large banks that were the focus of Dodd-Frank, having decided to designate large insurance companies with no diversified banking arms like Metlife as within its purview. That is the way of things with unaccountable bureaucracies.

That nation as a whole needs injunctive relief from these provisions of Dodd-Frank. According to the Financial Services Roundtable, Dodd-Frank:

  • Reduces pretax earnings up to $34 billion annually for the eight large banks
  • Decreases free checking accounts by 40%
  • Requires nearly 26,000 full-time employees to file compliance paperwork annually
  • Lowers the return on equity of community banks with less than $500M in assets to between 6-8%

These numbers are likely underestimates. For more discussion, see CEI’s Tip of the Costberg report (pdf). What is certain is that Dodd-Frank needs to be halted now. While Republican legislators have already indicated that reform to Dodd-Frank is one of their priorities for the new Congress, the best hope for the immediate relief the nation needs lies in the hands of the D.C. Circuit.