Parts of the Dodd-Frank financial reform law violate the U.S. Constitution by allowing the government to take individuals’ property without going through an appropriate appeals process, experts told Congress Tuesday afternoon.
Three financial system experts testified before a subcommittee of the House Financial Services Committee about the constitutionality of the first two titles of the Dodd-Frank law, passed in 2010.
"What you end up with is a system of crony capitalism with no rule of law and greatly diminished opportunities for the little guy," said C. Boyden Gray, an attorney at Boyden Gray and Associates.
Gray represents several plaintiffs in a lawsuit challenging the constitutionality of several parts of Dodd-Frank.
The hearing focused on the second part of the Act, which creates an "Orderly Liquidation Authority" that allows the Treasury Department to break up struggling financial institutions before they can hurt the rest of the financial system.
The law only allows 24 hours for a firm to challenge the Treasury secretary’s decision to liquidate it. This is not sufficient time for either the firm to mount a strong argument against the secretary’s order or a court to make an informed decision about it, said Thomas Merrill, a professor at Columbia Law School.
Employees of the firm and shareholders, including pension funds, are not notified of the secretary’s decision to liquidate the firm, Merrill told the committee.
"It’s sort of like a super due process violation when your rights are vaporized and you have actually no way of getting a notice or opportunity to have a hearing before this takes place," Merrill said, referring to the Fifth Amendment’s prohibition against depriving citizens of their property without "due process of law."
Merrill also noted that the law prohibits employees of firms that are about to be liquidated from leaking information about the impending breakup, or else face five years in prison.
Subcommittee on Oversight and Investigations ranking member Al Green (D., Texas) and other Democrats argued that the law gives the government a useful tool to help prevent another financial collapse like the 2008 crisis.
"I believe Dodd-Frank can be mended … but I don’t think we should end it," Green said.
Subcommittee Chairman Patrick McHenry (R., N.C.) argued after the hearing that these parts of the Dodd-Frank bill strike at American’s fundamental rights.
"If they have a pension plan that invests in these institutions, their property rights may be taken from them without them even having any due process or right to their money back under this authority," McHenry said. "I think it’s important for people to understand. It’s complex, of course, but it is taking from the public, and that is of deep concern."