WEST VIRGINIA JOINS CONSTITUTIONAL CHALLENGE TO SELECTIVE BAILOUTS
CHARLESTON - West Virginia Attorney General Patrick Morrisey today announced that the State of West Virginia and seven other states moved to join a lawsuit challenging the constitutionality of certain provisions of the Dodd-Frank Act.
West Virginia, Alabama, Georgia, Kansas, Montana, Nebraska, Ohio and Texas are asking the U.S. District Court for the District of Columbia to join a suit originally filed by the states of Oklahoma, South Carolina and Michigan, and three private plaintiffs – the State National Bank of Big Spring, Texas; the 60 Plus Association; and the Competitive Enterprise Institute.
The Dodd-Frank Act, which was signed into law by President Barack Obama in July 2010, implements sweeping reforms of the nation’s financial system. In particular, Title II of the Act gives Orderly Liquidation Authority (OLA) to the Secretary of the Treasury. OLA empowers the federal government to wind down financial companies deemed “too big to fail” and choose which of the companies’ creditors to bail out, with minimal judicial review. The law authorizes the executive branch to spend potentially trillions of dollars in this process.
“By creating the possibility of a federal bailout for investments in financial institutions that are supposedly ‘too-big-to-fail,’ the Orderly Liquidation Authority disadvantages the smaller community banks that compose the overwhelming majority of banks in West Virginia,” noted Attorney General Morrisey. “The survival of those community banks is critical to the ability of West Virginians to borrow money to buy a home, pay for college, or start a business.”
Steve Harrison, Vice President of Poca Valley Bank, expressed concerns regarding the “too-big-to-fail” provisions of Title II. “As a West Virginia-based bank which has been serving our communities for more than a century, we are concerned that an implied ‘too-big-to-fail’ guarantee gives an unfair competitive advantage to Wall Street banks over Main Street banks,” Harrison said.
Attorney General Morrisey further explained, “Yet another problem is that the Orderly Liquidation Authority allows un-elected Washington bureaucrats to pick winners and losers among affected creditors, entirely abandoning the rule of law.”
OLA permits the federal government to determine on its own how much to give investors during the liquidation of a “too-big-to-fail” institution, which means states have no ability to ensure they recoup their investments at a similar level as other investors. Specifically, when the Federal Deposit Insurance Corporation (FDIC) takes over, it not only has the ability to bail out creditors, but also the authority to determine which creditors get payouts and which must absorb losses. In doing so, the FDIC has every incentive to favor creditors that are themselves “too-big-to-fail,” at the expense of states and their taxpayers. Once the process starts, there is virtually no legal recourse available to any affected entity seeking to challenge the FDIC’s decisions in the liquidation process.
The State of West Virginia, both directly and through its pension funds, holds investments in many institutions potentially subject to OLA.
“Title II deprives West Virginia of its rights under federal bankruptcy laws to be treated fairly and equally,” Morrisey continued. “The executive branch, in its discretion, could choose to place the rights of other similarly situated creditors ahead of West Virginia. In addition to directly impacting West Virginia’s legal rights, this potentially jeopardizes millions of dollars in state pension funds and other state investments.”
“West Virginia taxpayers should not be faced with the potential burden of making up for any lost money that was intended to cover retired State employees, nor should our State be expected to unnecessarily risk monies intended to pay for infrastructure and essential government services,” Morrisey stated.
“Because of the significant negative impact that Title II has on our State, I felt compelled to join with the ten other states seeking review of the constitutionality of the Orderly Liquidation Authority,” said Attorney General Morrisey. “As part of my constitutional duty and authority to protect the interests of the State, I am proud to represent West Virginia in this lawsuit and vindicate the rights of our taxpayers.”
The lawsuit challenges the constitutionality of OLA on three grounds:
* The law violates the separation of powers doctrine of the Constitution by delegating extraordinary legislative authority to the executive branch and restricting judicial review;
* The law contravenes the Constitution’s Bankruptcy Clause, which requires Congress to enact “uniform” bankruptcy laws; and,
* The law deprives creditors, such as the State of West Virginia, of their right to due process.