As the joint conference committee of the House and Senate begins the reconciliation process to produce a final version of financial reform legislation, Congress needs to pay attention to one of the most critical issues involved in responding to future fiscal crises: how to properly constrain the treasury secretary’s determination that, because of the national interest, a financial company should be terminated. Both the House and Senate bills grant the secretary the authority to initiate a Federal Deposit Insurance Corp. (FDIC)-supervised liquidation of a financial company whose failure poses systemic risk (so-called “resolution authority”) and would subject that determination to judicial review. Although including a judicial review procedure is imperative, its mere provision is insufficient. A properly designed procedure must be sufficiently robust so as to ensure the legitimacy of government intervention. Improperly exercised resolution authority would bring the demise of a financial company that otherwise could have sought renewed life through, for example, bankruptcy reorganization. Worse yet, an expansive assertion of executive power would go unchecked.
The Senate bill does not propose an effective judicial review system and thus does not sufficiently limit executive power. The House version provides a better alternative, although it too could be improved. If the committee follows through on Sen. Christopher Dodd (D-Conn.)’s call “to take the best parts of both bills and marry them together,” the resulting judicial review provision will adequately restrain resolution authority, yet still allow for an effective governmental response. Three questions are at the core of this issue: What aspects of the secretary’s determination are subject to review? Who reviews the determination? When does the review occur?
