An article in MarketWatch by Ronald Orol had us scratching our heads. The headline reads “Eight states join lawsuit challenging Dodd-Frank Lawsuit: System to dismantle a big failing bank is unconstitutional”. This is about the Orderly Liquidation Authority (OLA).
The lawsuit, started by State National Bank of Big Spring, Texas and two conservative action groups, contends that OLA “..seeks to allow regulators to use taxpayer dollars to make payments to creditors and counterparties of a failing big bank so they don’t fail as well. (Those taxpayer dollars would later be recouped in fees on big banks)…” and “… the ‘unconstitutional’ system allows a big bank to be dismantled ‘without meaningful judicial review’ and that it ‘unilaterally’ chooses favorites among ‘similarly situated’ creditors….”. OK, fair enough. Due process may not at the top of the regulators list when faced with an impending financial crisis.
We have written before that dismantling big complex plans based on a living will is not going to work too well. In a post on October 4, 2012, we channeled Mike Tyson on the topic of OLA. We thought Tyson’s quote “Everyone has a plan ’till they get punched in the mouth” was spot when describing the chaos that would ensue with a rapid dismantling of a large complex bank. But even so….
The eight states joining the lawsuit are Alabama, Georgia, Kansas, Montana, Nebraska, Ohio, Texas and West Virginia. The Attorney Generals of those states are all Republican, notes the article.
The article went on to say, “…The states said in the filing that they are creditors (either directly or through the state’s pension fund) of most big financial companies that are subject to the resolution system. Big bank creditors of a failing financial institution may be more likely to be bailed out than a less systemic state creditor, in the event of another major 2008-type financial crisis…”. We ask: why?
“…Texas Attorney General Greg Abbott said in a statement that the provision allows ‘unelected federal bureaucrats’ to dismantle financial institutions in which the state invests taxpayer dollars…” Are they referring to the FDIC, who has been dismantling failed banks for years? Which elected figure would the Texas Attorney General prefer? The other real option is dismantling large banks into bite size pieces. An earlier article in Bloomberg published on June 21, 2012 and written before the 8 states joined the legal action quoted Deepak Gupta, a Washington-based appellate lawyer and former CFPB official, who called the lawsuit “more a political stunt than a serious legal challenge” to Dodd-Frank.
We are looking forward to reading the comments on the MarketWatch story. So far no one has raised their hand but that will change soon enough.
A link to the MarketWatch article is here.
A link to the Bloomberg article from June 21, 2012 is here.
A link to the SFM post on October 4, 2012 is here.