Michigan’s attorney general and two of his colleagues from other states have joined a lawsuit challenging the constitutionality of a provision in the Dodd-Frank Act.
The attorneys general are concerned that Title II of Dodd-Frank, which gives U.S. Treasury Secretary Geithner the ability to liquidate financial companies with only 24 hours’ notice, poses a threat to state pension funds.
“Michigan’s public-employee pension funds hold substantial fixed-income investments in large financial institutions,” said Michigan Attorney General Bill Schuette, according to AdvisorOne, a news website for financial advisors. “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. This lawsuit is necessary to safeguard Michigan’s pension funds and protect current and future retirees.”
In the complaint, Schuette says the state has an obligation to protect the state’s pension interests.
“The state of Michigan is ultimately liable for the payment of pensions that have been promised to State employees, and thus any loss of property rights or investment value suffered by the state’s pension funds directly harms the State of Michigan.
Schuette was joined by Oklahoma Attorney General Scott Pruitt and South Carolina Attorney General Alan Wilson in the suit.
CU Times reported that although protection of state pension funds is their top priority, the attorneys general are concerned about the competitive advantage the so-called “too big to fail” designation gives big banks over community banks and small institutions that Oklahoma Attorney General Scott Pruitt called the cornerstone of his state’s economy. Rather than helping to avoid too big to fail, Pruitt said Dodd-Frank “enshrines” it.
The suit was originally filed in June by State National Bank of Big Spring, Texas, the 60 Plus Association and the Competitive Enterprise Institute.
NCUA Chair Debbie Matz is named as a defendant in the suit in both her official capacity as chair of the NCUA, and as member of the Federal Stability Oversight Council.
Other defendants include Treasury Secretary Timothy Geithner, Acting FDIC Chairman Martin Gruenberg, Consumer Financial Protection Bureau Director Richard Cordray, Federal Reserve Chairman Ben Bernanke, all members of the Fed’s Board of Governors, and other regulators.
The plaintiffs are challenging Title II of Dodd-Frank, which gives Geithner the ability to liquidate financial companies with only 24 hours’ notice. South Carolina Attorney General Alan Wilson said the law makes states what he called “second class creditors” when they invest millions or billions of dollars into institutions that could be seized by the federal government.
“Dodd-Frank favors the big national banks and I believe because of their access to attorneys and lobbyists in D.C., it puts community banks at a disadvantage,” Pruitt said.
Plaintiff attorney Gregory Jacob of the Washington-based law firm O’Melveny & Myers said the federal government has until Oct. 26 to respond to the complaint. Currently there are no hearing dates scheduled. Jacob said if Congress were to repeal Dodd-Frank, the lawsuit would be dropped.