Alison Frankel

SCOTUS: What Congress can’t regulate, it can tax

Alison Frankel
Jun 29, 2012 14:06 UTC

In March, at the end of his much-maligned oral argument on the constitutionality of the so-called individual mandate of the Affordable Care Act, Solicitor General Donald Verrilli threw a Hail Mary.

Verrilli had taken a beating on his argument that the mandate didn’t violate the Commerce Clause because Congress was only regulating an existing market, not forcing people who don’t want health insurance into the market for healthcare. Chief Justice John Roberts and justices Antonin ScaliaSamuel Alito and Anthony Kennedy pounded the solicitor general on whether his reading of the Commerce Clause would permit Congress to do pretty much whatever it wanted in the guise of regulating interstate commerce. In the midst of discussing broccoli, health clubs and auto emission regulation, Verrilli and his opponents spent very little time presenting arguments and answering questions on the government’s backup argument for the mandate’s constitutionality: that the penalty imposed on those who do not buy health insurance is actually a tax that Congress is empowered to impose. (Paul Clement of Bancroft argued on behalf of 26 states opposed to the Affordable Care Act, and Michael Carvin of Jones Day on behalf of the National Federation of Independent Businesses.)

Nevertheless, Verrilli devoted his very last moments before the justices to the tax issue. “If there is any doubt about [the mandate's constitutionality] under the Commerce Clause,” he said, “then I urge this court to uphold the minimum coverage provision as an exercise of the taxing power.”

On Thursday, that’s exactly what the Supreme Court did, in a shrewd ruling that solved the chief justice’s dilemma of how to simultaneously leash Congress and acknowledge that everyone eventually needs healthcare. Roberts joined the conservative wing of his party to conclude that the individual mandate is unconstitutional under the Commerce Clause because it would “fundamentally [change] the relation between the citizen and the federal government,” by giving Congress “the vast power … to regulate what we do not do.” But Roberts switched sides and joined justices Stephen Breyer, Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan in holding that the mandate is, in fact, a tax that falls within Congress’s broad power to impose. In the court’s 82- page opinion, the majority said it’s not significant that Congress didn’t refer to the penalty imposed on people who refuse to buy health insurance as a tax, nor is it unprecedented for the Supreme Court to find that Congress’s power to tax extends beyond the Commerce Clause. “The breadth of Congress’s power to tax is greater than its power to regulate commerce,” the majority said.

That could be a very important sentence for any future Congress. Whatever hypothetical power Congress may have lost in the court’s holding on the Commerce Clause, it gained in the majority’s explicit recognition of the breadth of its taxation power, said Andrew Pincus of Mayer Brown, the author of a prescient amicus brief for a group of constitutional lawyers who highlighted the tax issue more prominently than anyone else in the healthcare case. The court’s ruling that the federal government may impose taxes on what it cannot otherwise regulate is not a new holding, Pincus said, but it’s never before been so black-and-white. “Since the chief justice specifically and explicitly said Congress’s taxing power is not limited to its powers under the Commerce Clause, that puts two independent arrows in Congress’s quiver,” Pincus told me.

Expectations for the new mortgage-backed securities task force

Alison Frankel
Jan 30, 2012 14:53 UTC

I follow mortgage-backed securities litigation closely enough to be disgusted at the greed that fueled the securitization of insufficiently underwritten mortgages issued to homeowners who had no hope of paying them off. Sure, MBS investors and the bond insurers that backed MBS trusts were sophisticated and, to some extent, forewarned about the timebombs lurking in those mortgage pools. But you can’t read the voluminous MBS filings by monolines and investors — including the federal agency that oversees Fannie Mae and Freddie Mac — without wishing that someone be held accountable for sending the housing market on a slide, and dragging down the rest of the economy with it.

To date, accountability has been an elusive goal. I’m not talking about private suits or breach-of-contract put-back claims, in which MBS issuers are beginning to acknowledge billions of dollars of exposure to investors and insurers. But state and federal regulators and prosecutors have lagged behind the private plaintiffs bar (and the Federal Housing Finance Agency). As best I can tell, there have been no criminal prosecutions of people or institutions involved in mortgage-backed securitizations. On the civil side, the U.S. Attorney for the Southern District of New York, Preet Bharara, brought an MBS-based suit against Deutsche Bank last May. This summer, the New York Attorney General, Eric Schneiderman, filed Martin Act claims against Bank of New York Mellon for its conduct as Countrywide MBS securitization trustee. In October, the Delaware AG, Joseph Biden III, filed a civil suit against the Mortgage Electronic Registry System that accuses the banks that established MERS of using it as a vehicle to bundle mortgages they didn’t actually own. And last week, the Illinois AG, Lisa Madigan, sued Standard & Poor‘s for giving undeserved AAA ratings to overly risky mortgage-backed notes.

Those, however, are the only major government cases stemming from mortgage-backed securitizations that I’m aware of. For well over a year, the MBS industry has been under intense scrutiny by government investigators, from (among others) Congress, the Justice Department, the Securities and Exchange Commission, and the N.Y., Delaware, and Massachusetts AGs’ offices. So far, we haven’t seen a lot of tangible results from those investigations.