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Sunday, August 19, 2012

McCulloch and Banking Preemption: A Case Study in the Tenacity of Bad Precedents

For the last year, a big fight has been brewing over whether the Office of the Comptroller of the Currency ("OCC") will be able to get away with its its attempt to preempt vast swathes of state banking laws. The OCC issued rules last summer to implement the Dodd-Frank Act's elaborate rules for preempting state "consumer financial law," but, to the irritation of the Department of the Treasury, the OCC's rules essentially re-stated their old 2004 rules essentially preempting all state laws directly focused on deposit-taking or lending. This is a bizarre result, because section 1044(a) of Dodd-Frank contains elaborate restrictions on preemption -- for instance, requiring "case by case" evaluation of a the "impact" on national banks of "particular state consumer financial law," supporting the evaluation with "substantial evidence on the record."

Is OCC just thumbing its nose at Congress? I think that the problem is less the OCC's intransigence than the tenacity of very bad, very old precedent -- the venerable McCulloch v. Maryland. McCulloch's second holding conferred blanket immunity from state laws on nationally chartered banks' banking operations, allowing only state taxation that did not single out such operations. The justification for this immunity, as every student in Intro to Constitutional Law knows, is federal supremacy: John Marshall treated the Second Bank of the United States as a federal agency ("instrumentality") that had to be utterly independent of state control. McCulloch's sweeping immunity for national banks was transmitted into our modern banking law via the National Bank Act of 1864, which was construed by the SCOTUS to incorporate McCulloch's sweeping view of national banks' immunity, and OCC has been harping on this immunity ever since.

As I argue in this ssrn draft, the problem with McCulloch is that, although it made a certain hotly controverted sense back in 1819, McCulloch's second holding makes zero sense today. Nicholas Biddle's Second BUS might (barely) qualify (to Old Hickory's outrage) as a federal agency, having an exclusive right to act as a depository for federal revenue. But Jamie Dimon and several thousand other officers of thousands of federally chartered banks? Give me a break: The idea is ludicrous that these guys are somehow the moral equivalent of U.S. Attorneys and federal postmasters, entitled to make policy for the federal government free from state oversight even when no bona fide federal agency is checking their work. Those banks are just private enterprises, acting out of banking self-interest, which, as Richard Posner notes, is frequently inconsistent with the public interest.

Don't get me wrong: I am all in favor of uniform national law to control national banking, for which there are plainly big scale economies in regulation. But neither the National Bank Act nor the OCC have supplied such rules in many cases. Where federal law is silent on some problem -- say, marketing of credit cards to college students -- then the states ought to be able to fill the gap, however imperfectly, until the real federal agencies (i.e., Federal Reserve, OCC, CFPB, FDIC, etc) get around to addressing the issue. Indeed, even an imperfect state law is a spur to getting Jamie Dimon and Co. to lobby the feds for a rule where they'd otherwise be inclined to sit on their hands, glorying in their status as a "federal instrumentality," entitled to make whatever policy they please.

Despite the illogic of making national banks to be a law unto themselves, lower courts (including, to my disappointment, one recent California supreme court decision authored by Goodwin Liu) continue to impose field preemption on state law without looking to see if federal law actually addresses the banking risk that the state are regulating.

Why? So far as I can tell, sheer legal atavism: McCulloch and its progeny are stuck in our legal code like a self-replicating computer virus: Once cited, the preemption language gets re-cited and re-re-cited until, like the Bellman's cry ("Just the Place for a Snark!"), it becomes true through sheer repetition. Congress, in its ham-handed way, tried to put the kibosh on this nonsense, but courts return to their precedents like a dog to its vomit, even when admonished not to do so by a statute.

Or so, at least, I argue in my paper. Maybe I am too blinded but my notorious desire to preserve a maximum amount of state law in the teeth of our centripetal jurisprudence to see the merits of preempting state law on issues that the feds have ignored. I'll be much obliged for your critical comments on my paper, off- or on-line, to help correct my pro-decentralization bias. Until you do, I will continue to think that no errors are so stubborn as judicial ones.

Posted by Rick Hills on August 19, 2012 at 02:55 PM | Permalink


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