Three state attorneys generals have joined a lawsuit against the Dodd-Frank Act, arguing that provisions that grant federal regulators the ability to seize and wind down troubled banking companies are unconstitutional.
The state attorneys general for Oklahoma, South Carolina and Michigan joined a suit by a Texas banker and two nonprofits that challenged the constitutionality of the financial reform law.
The AGs' complaint, filed Thursday at the U.S. District Court for the District of Columbia, is focused primarily on powers granted to the Federal Deposit Insurance Corp. and the Treasury Department.
"The new regulations do not stabilize our economy, they create greater uncertainty. As a result, states cannot allow our taxpayers, our investments or the Constitution to be subject to such financial risk," said South Carolina Attorney General Alan Wilson, in a press release. "Dodd Frank replaces the rule of law with the rule of politics."
The State National Bank of Big Spring in Texas originally filed suit against Dodd-Frank in June, claiming that the Consumer Financial Protection Bureau was unconstitutional and that Director Richard Cordray was illegally appointed by the president. But the suit also named every other financial regulatory agency and their directors, including the Treasury and members of the Financial Stability Oversight Council.
In their complaint, the AGs argue that Dodd-Frank improperly empowers the Treasury Secretary to liquidate a financial company "with little or no advance warning, under cover of mandatory secrecy" and without "meaningful legislative, executive, or judicial oversight."
The complaint also states the FDIC can "chose favorites" among creditors when liquidating a financial institution. The AGs are mostly worried about how their own state pension funds would be treated as creditors should a financial company be liquidated.
"Michigan's public-employee pension funds hold substantial fixed-income investments in large financial institutions," said Michigan Attorney General Bill Schuette, in the release. "This lawsuit is necessary to safeguard Michigan's pension funds and protect current and future retirees."
The AGs' move may bolster the Texas banker's complaint, which was filed along with The 60 Plus Association and The Competitive Enterprise Institute.
Observers initially questioned the ability of the banker to file suit since his institution is below $10 billion of assets, and is not directly regulated by the CFPB. But the $286 million-asset bank claimed the CFPB's remittance rule — and others coming down the pike -were discouraging it from pursuing certain products, damaging the bank's profitability.
"Indeed, statements of CFPB Director Cordray and other officials connected to the CFPB heighten the likelihood that the bank's mortgage products could be deemed unlawful, after the fact," the complaint states.
A conference call with the AGs and the plaintiffs' attorneys is scheduled Friday afternoon.