There are many bad things contained in Chris Dodd’s Restoring American Financial Stability Act,” the financial regulatory “reform” bill that after filibustering for three days — with the assistance of Nebraska Democrat Ben Nelson — Republicans agreed to let come to the floor for amendment and debate.
Among its horrors are a massive new consumer agency with the power to track virtually every financial transaction to share with other big agencies like the IRS, onerous new restrictions on angel investors and venture capital that greatly delay funding promising startup firms, proxy access provisions that would federalize state incorporation laws and empower unions and other progressive shareholders to wage director campaigns at the company and other shareholders’ expense, and no attempted reform of the government-sponsored enterprises Fannie Mae and Freddie Mac at the center of the financial mess.
But the most destructive portions of the bill — the one that would in my judgment go beyond even Obamacare in making the American free enterprise system unrecognizable — has been little discussed even by critics of this bill. To put it bluntly but absolutely accurately, this bill sets up a mechanism for the Treasury Secretary, the Federal Reserve, and the Federal Deposit Insurance Corporation to nationalize virtually any business they deem to be a threat to American “financial stability.”
I include myself among these critics not focusing on this issue and I apologize for not informing readers sooner, but I wanted to be sure the bill would do what I suspected it would do. Many of the bill provisions are interconnected, and what can seem like a mild measure by itself becomes lethal when combined with another sections. As Financial Times columnist Gillian Tett recently wrote: “Buried in [the bill’s] pages are numerous clauses and sub-clauses, many of which have been largely ignored until now (partly because they strike most non-financiers as pretty dull). Yet, the fine print could turn out to be crucial in the coming years.”
And after reading and rereading the “fine print” of this 1336-page piece of legislation (which will grow by hundreds more pages when amendments are added), it is clear that the bill’s “orderly liquidation authority” would facilitate outright government seizure of a wide variety of firms with very limited judicial review.
The first clue of what the bill would do in this regard comes from one of the bill’s architects. House Financial Services Committee Chairman Barney Frank, author of the similar financial bill that passed the House in December, has freely used the term “death panels” to describe the new powers the bills give the government over firms. In response to charges of “death panels” in the health care bill, Frank responded that the panels were in the wrong bill. “Yes, we have death panels, but they got the death panels in the wrong bill,” Frank said on the House floor. “The death panels are in this bill.”
Defending against charges that the bills’ new mechanism to wind down firm will lead to taxpayer bailouts, Frankwrote in the Huffington Post that under this authority, “Shareholders are wiped out, unsecured creditors are out of luck, management and every employee that is not required to shut down the company is fired.” What Frank and other of the bills’ architects don’t say — not even in liberal venues like the Huffington Post — is that the bills also give the government these same powers to take over firms not seeking any kind of government aid.
Section 203 of Title II of the bill empowers the Secretary of Treasury, with a two-thirds vote from the Federal Reserve and the Federal Deposit Insurance Corporation, to take into government “receivership” any “financial company” whose failure he determines “would have serious adverse effects on financial stability in the United States. ”
Once the Treasury Secretary puts the company into “receivership” of the FDIC, the government may — under Section 210 — “take over the assets of and operate the covered financial company with all of the powers of the members or shareholders, the directors, and the officers of the covered financial company, and conduct all business of the covered financial company,” “perform all functions of the covered financial company, in the name of the covered financial company,” and ” provide for the exercise of any function by any member or stockholder, director, or officer of any covered financial com1pany for which the Corporation has been appointed as receiver under this title.”
The ostensible “purpose” of this “orderly liquidation authority,” as stated in Section 204, is to “provide the necessary authority to liquidate failing financial companies that pose a significant risk to the financial stability of the United States.” Yet the funny (or not-so-funny) thing is that firms don’t really have to be “failing” to be taken over.
The Treasury Secretary can seize, under Section 203, any firm “in default” or “in danger of default.” And it’s clear that this “danger of default” does not need to be an immediate danger. The word “likely” appears many times in this section’s listing the criteria of a firm that can be taken over. A company can be in danger of default if “the assets of the financial company are, or are likely to be, less than its obligations to creditors and others; or the financial company is, or is likely to be, unable to pay its obligations [emphasis added].” The word “likely” itself is never defined, so up to the Treasury Secretary and Federal Reserve to make that determination.
Pretty dramatic new powers, huh? But, of course, most businesses won’t have to worry because this just affects “financial companies” like investment banks, right? Not exactly. “Financial company” is defined very broadly in Title II, as in other sections of the bill.
Recall that for purposes of Federal Reserve regulation and paying assessments for bailout of failed firms (though now after the failure, rather than through the $50 billion bailout fund that Dodd agreed to get rid of after to GOP mini-filibuster, a slight improvement), a “nonblank financial company” is defined as a firm “substantially engaged in activities in the United States that are financial in nature.” (See my previous piece, “The Obama-Dodd-Frank-Everything’s-A-Bank-Bill.”)
Also, last week orthodontists visited Capitol Hill because they were concerned that they would be subject to the new Bureau of Consumer Financial Protection if they offer installment plans for their patients to pay for braces. Dodd denied this, but a Bloomberg story pointed that the bill’s language grants jurisdiction to the bureau over any business that is “engaged significantly in offering or providing consumer financial products or services,” and the term “significantly” isn’t defined.
Similarly, under the definitions Title II, a “nonbank financial company” supervised by the Federal Reserve would be subject to the “orderly liquidation authority.” So if the Treasury Secretary and the Federal Reserve decide that a manufacturer, retailer, or even an orthodontics practice “would have serious adverse effects on financial stability in the United States,” they have the authority to send it to what Frank calls the “death panel.”
The authors of this bill still, however, are still left with one pesky problem: the courts. There’s always the possibility that some “backward” judges might actually take the Constitution seriously and see such a government seizure as a violation of the Takings Clause of the Fifth Amendment, the Due Process Clause of the 14th Amendment, the limitation of the federal government’s power in the 10th Amendment, or numerous other constitutional provisions that protect contracts and property rights and separate America from Argentina and Venezuela.
To try to prevent constitutional and other challenges , Section 202 of the bill creates a three-judge “orderly liquidation authority panel” in the federal bankruptcy courts to rubber-stamp the government’s actions. This court would have just 24 hours to review a government seizure and could only stop it if it found “substantial evidence” the seizure was justified. As Heritage Foundation regulatory scholar James Gattuso recently put it, this means “that the seizure must be upheld if the government produces any evidence in favor of its action.”
The bill even sharply curtails Supreme Court review to attempt to block constitutional challenges. “Review by the Supreme Court under this subparagraph, shall be limited to whether the determination of the Secretary that the covered financial company is in default or in danger of default is supported by substantial evidence,” says the bill on page 117.
Sen. Mark Warner, who was substantially involved in drafting the bill, said during a speech that “resolution should only be used as a last resort.” For those interested in freedom and true financial stability, stopping this bill’s creation of a resolution/nationalization authority — a power that should not to be given to the Obama administration or any administration regardless of party — should be the first resort.