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Banking and Finance

Financial Institutions: How Dodd-Frank's Orderly Liquidation Authority for Financial Companies Violates Article III of the United States Constitution

36 Iowa J. Corp. L. 869, Summer 2011

Author: Brent J. Horton


I. Introduction
In 2008 the housing bubble burst, and those financial companies that invested in mortgage-backed securities (MBS) faced insolvency as their MBS became worthless. Secretary of the Treasury Henry Paulson recalls:
Credit markets froze, and banks substantially reduced interbank lending. Confidence was seriously compromised throughout our financial system. Our system was on the verge of collapse, a collapse that would have significantly worsened and prolonged the economic downturn that was already underway. That was the background against which Chairman Ben Bernanke and I met with the congressional bipartisan leadership to request emergency legislation. We needed the financial rescue package so we could intervene, stabilize our financial system, and minimize further damage to our economy.
As reflected in his remarks, 2008 marked a decision point for Paulson. Should he bail out America's financial institutions, or allow them to go bankrupt? He decided to bail them out, and Congress acquiesced, passing the Emergency Economic Stabilization Act (EESA) and the component Troubled Asset Relief Program (TARP). Pursuant to TARP, some financial companies received a direct federal cash infusion from the Treasury to increase liquidity, including Goldman Sachs, Morgan Stanley, and Wells Fargo. Others received an indirect bailout, such as when the Treasury arranged for the purchase of Merrill Lynch by Bank of America. [footnotes omitted]

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