Three states join suit against key part of financial reform law

WASHINGTON — Three states have joined a lawsuit challenging a key provision of the Dodd-Frank financial reform law enacted in 2010.

The attorneys general of Michigan, Oklahoma and South Carolina argued that the government's new power to liquidate large, nonbank financial companies that are on the brink of failure is unconstitutional. "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," said Michigan Attorney General Bill Schuette. "This lawsuit is necessary to safeguard Michigan's pension funds and protect current and future retirees."

The three attorneys general all are Republicans. The financial reform law is one of President Barack Obama's signature accomplishments and was passed over nearly unanimous Republican opposition.

The law's supporters said the orderly liquidation authority was designed to give the government better options to deal with a repeat of the Lehman Bros. collapse in the fall of 2008, which triggered the financial crisis. Federal officials said they had no ability to step in and shut down an investment bank such as Lehman Bros. in an orderly way, as they can do with traditional, deposit-taking banks.

The orderly liquidation authority gives the Federal Deposit Insurance Corp. the ability to seize and liquidate large, systemically important financial firms. The power kicks in with a determination by the treasury secretary, in consultation with the president, that a traditional bankruptcy for a large firm in danger of default "would have serious adverse effects on financial stability in the United States."

South Carolina Attorney General Alan Wilson said the liquidation power is unconstitutional and means that states would have little ability to recover assets of their citizens.

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