Much has been written in recent months about the causes of the U.S. financial crisis, the potential legal liabilities of various financial market participants such as credit ratings agencies,2 and the role that federal preemption of state law arguably played in fomenting the crisis.3 Recent court decisions and recently passed and pending legislation in Congress are redefining the law of the U.S. financial system in large part because existing laws and policies failed to prevent what some commentators have called "The Great Recession."4 Over the past several months, the courts have taken and Congress has seriously considered several responsive measures. The U.S. Supreme Court issued a landmark decision limiting the scope of the National Bank Act's federal preemption of state financial services laws5 and the influential District Court for the Southern District of New York issued a decision6 limiting the near-blanket immunity of credit rating organizations7 —such as Moody's Investor Services, Standard and Poor's, and Fitch8—for their ratings of debt instruments. In addition, Congress passed the Credit Card Accountability, Responsibility, and Disclosure Act (CARD)9 and is considering several other bills that would significantly alter the U.S. financial regulatory system. In short, the U.S. financial regulatory system is undergoing judicial and legislative changes that may be the most stringent reforms since the passage of the Financial Institutions Reform Recovery and Enforcement Act of 198910 during the height of the Savings and Loan Crisis.11
This article addresses some of the measures taken by the courts and considered by Congress in response to the financial crisis. Specifically, Part I of this article addresses the U.S. Supreme Court's recent decision on federal preemption of state laws by the National Bank Act in Cuomo v. Clearing House Ass'n;12 Part II addresses the Southern District of New York's recent decision on NRSRO liability in Abu Dhabi Commercial Bank v. Morgan Stanley & Co., Inc.;13 and Part III addresses the CARD Act and pending federal financial reform legislation.
The financial crisis was caused by a combination of factors, including lax loan underwriting standards, lax or non-existent regulation of certain sections of the financial system such as non-depository mortgage companies and mortgage-backed security issuers, poor liquidity planning by some banks, and to some extent, government initiatives intended to make housing more affordable.14 The market failure in the U.S. financial system beginning in the second half of 2007 led to an unprecedented federal intervention in the financial system through the Troubled Asset Relief Program (TARP) and other federal government initiatives.15 Most observers should not be surprised that the courts and Congress are questioning the wisdom of such legal precedents as NRSRO immunity from investor lawsuits and national bank immunity from lawsuits brought by state attorneys general because many commentators hold lax and non-regulation of certain parts of the financial system to blame for the financial crisis.16
Federal preemption of conflicting state banking laws by federally-chartered depository institutions is essential to the United States' so-called "dual-chartering" system for banks and credit unions.17 The U.S. Supreme Court's recent decision in Cuomo v. Clearing House Ass'n
The importance of federal preemption to the U.S. financial system cannot be fully appreciated without understanding the structure and history of the dual-chartering system for banks and credit unions. Under the United States' dual-chartering system, a bank or credit union can obtain its organizational charter from either the federal government or a state government, and can switch from a federal to a state charter or vice-versa.20 One attractive feature of choosing the federal charter over a state charter is that it entitles the entity to federal preemption of non-crim-Page 28inal state laws which conflict with the applicable federal bank or credit union laws and regulations.21 Preemption, which is derived from the Supremacy Clause,22 permits national banks,23 federal savings associations (also known as federal "thrifts," a term which also includes savings and loan associations, savings banks, and other types of savings institutions),24 and federal credit unions25 to operate across state lines under a single set of federal rules for safety, soundness, and consumer protection instead of potentially-conflicting sets of state regulations on these same subjects.26
Today, most large banks and many small banks, thrifts, and credit unions in the United State have opted for the national bank charter because it allows the bank to operate across state lines under a single set of federal rules.27 Federal preemption plays a central role because it allows federal regulations to preempt state laws without regard to the state laws that conflict with federal banking statutes or regulations.28 As a result of the financial crisis, the Zeitgeist of both Congress and the Supreme Court appear to favor limiting federal preemption of state consumer protection laws, even though federal preemption's role in fomenting the financial crisis is the subject of debate.29
Most, but not all, state-chartered banks and credit unions have federal deposit insurance,30 and although they must adhere to state banking or credit union laws, these state laws can be preempted by the regulations of the Federal Deposit Insurance Corporation (FDIC)31 or the National Credit Union Administration (NCUA)32 when a state law conflicts with the applicable federal regulations or underlying deposit insurance statute in some areas of regulation.33 FDIC insures bank and thrift deposit accounts and NCUA provides deposit insurance through the National Credit Union Share Insurance Fund for credit unions deposit accounts (typically called "share," "share draft," or "share certificate" accounts); both agencies provide deposit insurance of up to $250,000 per account per depositor that is backed by the full faith and credit of the U.S. government.34 State-chartered institutions' corporate powers are generally determined by state law but may be preempted by federal law if they do not meet minimum federal standards on safety and soundness requirements such as minimum capital requirements known as "Prompt Corrective Action."35
The state of the dual banking system today is the result of a long history of congressional reaction to historical events that necessitated federal expansion into financial regulation. Congress established the dual-chartering system during the Civil War with passage of the National Bank Act (NBA).36 The NBA was passed largely to devalue bank notes issued by state-chartered banks that were used as paper money by the Confederacy.37 During the Great Depression, Congress created two other types of federal depository institution charter by passing the Home Owners Loan Act in 1933 to create the federal savings association charter38 in order to help promote mortgage lending and home ownership.39 In 1934, Congress passed the Federal Credit Union Act to create the not-for-profit, cooperative federal credit union charter, in large part so that not-for-profit credit unions could exist and serve their members as sources of cooperative credit and savings in states that had not adopted a law authorizing state credit union charters.40
While history reveals a gradual creep in the scope of federal preemption, two recent Supreme Court decisions illustrate both the high-water mark of the Court's federal preemption jurisprudence—i.e. 2007's Watters v. Wachovia Bank, N.A,—and the beginning of a push back with 2009's Cuomo v. Cleaning House Assn. Both Cuomo and Watters involved state authorities' challenges to regulations or opinions issued by the Office of the Comptroller of the Currency (OCC), the regulator of national banks. In both of these cases, the OCC interpreted provisions of the NBA as effectively preempting state consumer protection laws, but did so in very different manners. In Watters, the issue was whether state laws were preempted because their substance conflicted with the substance of the NBA and OCC regulations.41 In Cuomo, the issue was whether the OCC could prohibit state authorities from taking enforcement action against a national bank over violations of state laws that do not conflict with federal law, and therefore are not preempted, based on anPage 29arcane provision of the NBA giving OCC exclusive "visitorial powers."42
The 2007 Walters decision involved a state-chartered mortgage company owned by the national bank Wachovia.43 OCC regulations stated that subsidiaries of national banks enjoyed preemption of conflicting state laws under the NBA to the same degree as their federally-chartered national bank parents.44 The Supreme Court upheld the OCC preemption rule as a reasonable interpretation of the National Bank Act under the Chevron doctrine, in part because the Court believed that the OCC interpretation that state law applied to national bank's subsidiaries only to the limited extent that state law applied to the national bank itself was reasonable in light of the treatment of operating subsidiaries in the NBA and the NBA "visitorial powers" provision.45
Cuomo, in contrast, dealt with whether a state attorney general had the right to enforce state laws that were not preempted by federal law...