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Eight state attorneys general join suit challenging constitutionality of Dodd-Frank

180px-National_Bank_OamaruAttorneys general across eight states have joined a lawsuit that challenges the constitutionality of Dodd-Frank’s order liquidation authority, which allows regulators to use taxpayer funds to pay off creditors and counterparties if a bank should fail.

The attorneys general, all of whom are Republicans, are from Alabama, Georgia, Kansas, Montana, Nebraska, Ohio, Texas and West Virginia. Plaintiffs in the suit maintain that the law gives too much power to “unelected” officials and violates the rights of bank creditors during the liquidation process, MarketWatch reports.

“The state of Texas is challenging Dodd-Frank because it gives too much power to the federal government—and puts taxpayer dollars at risk,” Texas Attorney General Greg Abbott said, according to American Banker. “Under this law, unelected federal bureaucrats are empowered to unilaterally liquidate financial institutions in which the state invests taxpayer dollars. This unprecedented regime deprives the State of Texas of basic due process rights and places taxpayers’ resources at risk.”

The suit challenges several aspects of Dodd-Frank, including the leadership structure of the CFPB under a single director, the president’s authority in using the power of recess appointments to install the head of the CFPB and the oversight abilities of the Financial Stability Oversight Council. The eight AGs, however, are only targeting the Orderly Liquidation Authority mandated under Title II of Dodd-Frank.

Under the authority, the U.S. Treasury secretary is able to liquidate a failing financial institution without warning, and the AGs would be forced to compete with other creditors to recoup any losses, which may affect their pensions. The states said in the filing that they are creditors, either directly or through their states’ pension funds, of many of the firms that could be subject to the resolution authority, MarketWatch reports.

Supporters of the resolution system, however, maintain that taxpayer dollars will only be used to keep the institution operational until the government determines the amount of losses long-term bondholders should take, adding that taxpayer funds will be recouped through fees imposed on large banks.

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