Former Sen. Christopher Dodd (D-Conn.), right, and Rep. Barney Frank (D-Mass.)… (Alex Wong/Getty Images )
WASHINGTON — Three states have joined a lawsuit challenging a key provision of the Dodd-Frank financial reform law enacted in 2010.
The attorneys general of Michigan, Oklahoma and South Carolina argued that the federal government's new power to liquidate large, non-bank financial companies that are on the brink of failure is unconstitutional.
"Dodd-Frank gives the U.S. secretary of the Treasury essentially unlimited power — with no judicial or Congressional oversight — to pick winners and losers among creditors when these large financial institutions go bankrupt," Michigan Atty. Gen. Bill Schuette said. "This lawsuit is necessary to safeguard Michigan's pension funds and protect current and future retirees."
The three attorneys general all are Republicans. The financial reform law is one of President Obama's signature accomplishments and was passed over nearly unanimous Republican opposition.
The law's supporters said the orderly liquidation authority was designed to give the government better options to deal with a repeat of the Lehman Bros. collapse in the fall of 2008, which triggered the financial crisis.
Federal officials said they had no ability to step in and shut down an investment bank such as Lehman Bros. in an orderly way, as they can do with traditional, deposit-taking banks.
The orderly liquidation authority gives the Federal Deposit Insurance Corp. the ability to seize and liquidate large, systemically important financial companies.
The power kicks in with a determination by the Treasury secretary, in consultation with the president, that a traditional bankruptcy for a large firm in danger of default "would have serious adverse effects on financial stability in the United States."
South Carolina Atty. Gen. Alan Wilson said the liquidation power is unconstitutional and means that states would have little ability to recover assets of their citizens, such as state pension fund contributions and tax dollars, held by a large financial firm that is shut down by the FDIC.
The attorneys general are joining one part of a broader suit against the Dodd-Frank law brought by State National Bank of Big Spring, Texas; the 60 Plus Assn., a senior citizen advocacy group; and the Competitive Enterprise Institute, a public policy group.
The suit, filed in U.S. District Court in Washington, D.C., in June, also targets the Consumer Financial Protection Bureau.
The suit alleged that the law granted the agency too much power and that Obama's recess appointment of Richard Cordray as its director was unconstitutional. The suit also says the law's creation of the Financial Stability Oversight Council, a panel of regulators, is unconstitutional.
"This lawsuit just rehashes old arguments of those who oppose Wall Street reform," a Treasury spokeswoman said. "Independent regulatory agencies have long been part of our regulatory framework, and the Supreme Court has concluded that they are constitutional."