June 03, 2011
Judicial Review in Financial Crises
Posted by Peter Conti-Brown

To those readers, apparently like many law review editors, who are experiencing "crisis fatigue," please feel free to skip this post. It's about the financial crisis. Or better, about future financial crises, and how we might get the judiciary back into the business of overseeing executive during financial crises.

Eric Posner and Adrian Vermeule have done some interesting work analyzing executive muscle flexing in both financial and national security crises. One of their general conclusions is that, during crises, the separation of powers in American government is dead. I'll leave national security questions to national security experts, but the argument has legs from the perspective of financial crises. The executive branch—led by the White House, Treasury, and the independent Federal Reserve—made Congress only a reluctant, infrequent imprimatur to its dramatic 2008 market interventions. And to the extent that the judiciary was involved at all, it largely punted on the arguably most illegal actions during the crisis (think Bear Stearns  and the GM and especially Chrysler bankruptcies).

Critics aren't impressed, and think that such interference spells the death knell for the rule of law, and perhaps even the Republic itself (see Skeel for the first and Ackerman for the second), and recommend some significant reforms to check the executive's power. To these reforms, Posner and Vermeule effectively yawn. "We believe that the diagnoses . . . are so convincing that the prescriptions for revival [of the Madisonian system] are futile." (page 213).

Not to provoke more yawning from Posner and Vermeule, but here's another prescription for returning some balance to executive dominance during crisis: why not embrace the fact that the executive is unbound during crises and let future Paulson-Geithner-Bernanke teams triage their way through the heat of crisis, including by stepping on toes and trampling all kinds of creditor, shareholder, and corporate rights in general. Then, after a dust-settling period, re-insert judicial oversight by converting the private property rights that had been allegedly trampled (like the Bear Stearns' dissenting shareholders seeking to enjoin the acquisition, or the Indiana pensioners getting ignored all the way up to SCOTUS in the Chrysler bankruptcy) into liability rights well after the fact. It's not exactly win-win for those thrown under the bus during the crisis itself, but it's better than the present.

And it might work, from a judicial perspective. It's not that the judiciary is terrible at adjudicating these issues writ large. Judge Rakoff, after the dust had settled, partially, had no problem turning down the SEC's settlement with BoA, for example, regarding the crisis acquisition of Merrill Lynch. It's that the judiciary isn't particularly adept at adjudicating injunctions in the middle of the crisis. A la Calabresi and Melamed, acknowledge that some rights are best protected by injunctions, others best protected by damages, and that crises make it desirable to "demote" one set of rights to another. 

Plenty that's problematic here - sovereign immunity problems, for example, and the incentive effects on government decision making during the crisis that are suboptimal, to say the least. But if you take the claim seriously that the executive is unbound during financial crises, and don't see that as an unmitigated good, you could do worse than litigate that governmental action a couple of years after the fact. Besides, this kind of litigation may also be the answer to the problem that plagued the FCIC: invite interested parties to litigate in court against the government, and suddenly we would have an inquiry commission of a whole different--and arguably, more effective--sort.

I'm playing with this idea a bit this summer, and would be interested to hear thoughts and reactions, either in email or the comments.

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