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Three GOP Attorneys General Sue To Protect Bank Bailouts

The Wall Street bailouts happened in no small part because the big investment banks had America over a barrel in 2008. The banks could grow larger and larger, taking riskier and riskier investments, knowing full well that the world could ill afford to allow them to fail and send shockwaves throughout the economy. Indeed, the collapse of Lehman Brothers only proved this point, as it dealt such a severe blow to the economy that American lawmakers were not willing to allow another blow to happen again. The $700 billion Troubled Assets Relief Program followed shortly after Lehman fell apart.

These events happened because the government had precious few options in 2008. It could allow more banks to collapse and usher in a second Great Depression, or it could bail out the very same Wall Street firms that caused the crisis in the first place. Worse, so long as these were the only options on the table, Wall Street would go on taking the same risky investments that tanked the economy — knowing full well they could extort a new bailout from Congress if they had to.

One of the most important provisions of the Dodd-Frank financial reform law — one that even top Bush Administration officials such as former Treasury Secretary Hank Paulson has praised — is its “orderly resolution authority” provision, which creates a third option for financial regulators. Under this provision, regulators can gradually wind down a toxic bank, minimizing the impact of the bank’s collapse on the world economy while simultaneously ensuring that the bank largely goes out of business and its executives have to suffer the consequences of their reckless risk taking. At its heart, orderly resolution authority is about eliminating Wall Street’s ability to extort hundreds of billions of dollars from the American taxpayer.

Last week, three Republican Attorneys General joined a lawsuit brought by several conservative groups seeking to eliminate this authority and return to the days when Goldman Sachs could demand bailouts like a mafia don seeking protection money. Fortunately, their lawsuit is unlikely to prevail.

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Boston College Law Professor Kent Greenfield does an excellent job of explaining why the AG’s leading legal theory is wobbly at this link, but their lawsuit is so fundamentally flawed that it is unlikely a court will even reach the merits of their attack on the resolution authority in the first place. Their core claim relies on speculation piled on conjecture mixed with uncertainty:

Section 210(b)(4) of the Act abrogates the rights under the U.S. Bankruptcy Code of creditors of institutions that could be liquidated, destroying a valuable property right held by creditors — including the State Plaintiffs — under bankruptcy law, contract law, and other laws, prior to the Dodd-Frank Act. Section 210(b)(4) exposes those creditors to the risk that their credit holdings could be arbitrarily and discriminatorily extinguished in a Title II liquidation, and without notice or input. Title II’s destruction of a property right held by each of the State Plaintiffs harms each State, and is itself a significant, judicially cognizable injury that would be remedied by a judicial order declaring Title II unconstitutional. . . . In addition to destroying the State Plaintiffs’ valuable property rights, Title II exposes the State Plaintiffs to a present and ongoing substantial risk of direct economic harm, in the event of the Treasury Secretary’s and FDIC’s liquidation of a financial company for which a State Plaintiff is a creditor.

This is pretty thick stuff, but the important part is this: the AG’s are saying that they are invested in institutions that “could be” liquidated under the resolution authority, and if this happens there is a “risk” that their investments could lose their value. The plaintiffs are suing over something that hasn’t happened yet, may never happen, and if it does happen may or may not actually cost them money.

Simply put, this is not allowed. As the Supreme Court explained in Lujan v. Defenders of Wildlife, a plaintiff cannot bring a lawsuit based on “conjectural” or “hypothetical” injuries. If the judge hearing this case follows well-established law — something which, admittedly, does not always happen when conservative judges consider laws that were signed by President Obama — they will dismiss this attack on the resolution authority swiftly.