Dodd-Frank's Title II Authority: A Disorderly Liquidation of Experience, Logic, and Due Process
Welch, Chadwick, The William and Mary Bill of Rights Journal
The Panic of 2008, as it is sometimes called,1 included the bankruptcy of Lehman Brothers, the infamous bailout of AIG, and the fire sale of Bear Stearns, all of which were punctuated with an overall economic slowdown and decline in the housing market.2 Net worth in the United States fell by fourteen trillion dollars.3 Many blamed the greed or negligence (or both) of corporate executives.4 Other causes were less tangible but equally apparent. For instance, financial markets had become global and interconnected, and financial products had become increasingly complex.5 These realizations, and the attendant erosion of confidence, prompted outcries for regulatory reforms.6
In response, President Barack Obama signed the Dodd Frank Wall Street Reform and Consumer Protection Act7 (Dodd-Frank) into law on July 2 1 , 20 1 0.8 Broadly speaking, Dodd-Frank's objectives were twofold: to regulate the shadow banking system, thereby reducing the risks inherent in contemporary finance, and to mitigate the effects caused by a failure of a large financial institution.9 Some market observers have noted that Dodd-Frank represents the most significant piece of financial regulation since the Great Depression.10
Dodd-Frank gives regulatory bodies sweeping new authority and directs the implementation of significant substantive reforms to the financial services industry.11 In particular, Dodd-Frank' s Title II, the Orderly Liquidation Authority (OLA) bestows upon the Federal Depositors Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve (Board of Governors) and the Secretary of the Treasury enormous power to place systemically important financial institutions in danger of collapse into receivership.12 This power has enormous implications for the executives and creditors of such institutions. With respect to the former, the OLA coerces corporate executives to submit to receivership rather than defend their corporation's interest in abbreviated, skewed, and secretive hearings.13 The OLA likewise affects creditors who may be caught off guard when one of its corporate debtors is placed into receivership, particularly because it is not entirely clear when the FDIC will subject a corporation to its power.14
To proponents of this sweeping new authority, the premise is simple: regulators must have the authority to take over and liquidate financial institutions when those institutions are so important that a collapse would result in widespread financial calamity.15 In the aftermath of 2008, where it had become apparent that financial institutions were so interconnected that the failure of one could mean the failure of all, this premise seemed justifiable. 16
But perhaps in implementation the OLA will exceed what is necessary and reasonable. The OLA provides alarmingly truncated procedures and constrained judicial review that raise legitimate due process concerns for the financial institution's executives and its creditors.17 Moreover, the regulators can invoke the OLA and place an institution in receivership in total secrecy; the public will not know of the action until liquidation has commenced.18 In practice, the constitutionality of this power is therefore in doubt.
Part I of this Note briefly recounts the events giving rise to Dodd-Frank and the justification for intervening in financial institutions deemed too big to fail. Part ? explains the salient provisions of the OLA. Part III examines the OLA in implementation and posits that, as written, Dodd-Frank raises serious questions of constitutionality under the First and Fifth Amendments. Part IV argues that pre-existing bankruptcy law can adequately deal with the problems the OLA was designed to address but without the attendant constitutional problems. It is important to point out at the outset that this Note purposely avoids delving into macroeconomic theory, and examines the OLA's theoretical effectiveness only when necessary to critique the legal grounds on which it purportedly rests. …