Banking and Finance Law Daily Dodd, Frank, Bernanke, and Volcker take sides in MetLife appeal
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Friday, June 24, 2016

Dodd, Frank, Bernanke, and Volcker take sides in MetLife appeal

By John M. Pachkowski, J.D.

Following the June 16, 2016, filing of a brief by the Financial Stability Oversight Council in its appeal to reverse a federal district court’s decision that revoked FSOC’s designation of MetLife, Inc., as a non-bank systemically important financial institution (SIFI), three amicus curiae briefs have been filed on behalf of FSOC’s appeal.

One amicus brief was filed by a group of 20 current and former members of Congress, led by former U.S. Representative Barney Frank and former Senator Christopher J. Dodd. The second brief was filed by former Federal Reserve Board Chairmen Ben S. Bernanke and Paul A. Volcker. The final amicus brief was filed by the non-profit, non-partisan, and independent organization Better Markets.

It should be noted that general media reports have indicated that MetLife, Inc. will file its appellate brief in August.

FSOC is seeking to reverse a ruling by U.S. District Court Judge Rosemary Collyer that found the SIFI designation to be arbitrary and capricious and that FSOC acted contrary to its published guidance without explaining, or even acknowledging, the deviation. Judge Collyer also ruled that FSOC refused to consider the costs that the SIFI designation imposed on MetLife. The district court relied on the 2015 U.S. Supreme Court case Michigan v. EPA, which held that the Environmental Protection Agency unreasonably interpreted provisions of the Clean Air Act when it deemed cost irrelevant to the decision to regulate power plants.

FSOC’s appeal. In its appellate brief to the U.S. Court of Appeals for the District of Columbia, FSOC argued that the lower court "read into the guidance an obligation to assess the likelihood that MetLife would experience financial distress and a requirement to identify with precision the impact that distress would have on the broader financial system during a hypothetical future crisis" (see Banking and Finance Law DailyJune 17, 2016).

Highly deferential review. The brief filed by Frank and Dodd recited the rationale for establishing FSOC and the factors that must be considered for it to designate a nonbank financial institution as SIFI. They added that when Congress created the statutory framework, it determined FSOC to be "an expert body, broadly representative of the financial regulatory community and thus uniquely well-equipped to make the highly complex determinations with which Congress entrusted it." The congressional members further argued that "Congress also provided that FSOC’s determinations should be subject to highly deferential ‘arbitrary and capricious’ review in court."

Fundamentally misunderstand. The congressional members also contended that the district court’s conclusions were "inconsistent with Dodd-Frank’s text and fundamentally misunderstand its structure and design—in particular, the role that FSOC is empowered to play, in conjunction with the Fed, in preventing another calamitous financial meltdown like the one the nation just experienced." They continued that if the district court’s decision is upheld it would "fundamentally undermine the program that Congress put in place when it enacted Dodd-Frank to try to prevent such financial crises from occurring in the future."

Addressing the portion of the district court’s ruling that imposed a requirement that FSOC consider the costs that the SIFI designation imposed on MetLife, the congressional members stated that requirements were not "warranted" by the Dodd-Frank Act and would "meaningfully hamstring FSOC’s ability to play the critical role Congress assigned it." They added that of all the factors that FSOC was required to consider in making a SIFI designation, "[n]one suggested, let alone required, that FSOC consider costs to the designated entity," and that "[t]his was no oversight."

Essentially impossible. The congressional members also noted the consideration of costs to the designated entity is "essentially impossible given that it is the Fed, not FSOC, which Dodd-Frank charges with designing and implementing the specific regulatory requirements appropriate for each designated SIFI," adding "FSOC cannot know at the time it designates an institution what prudential standards the Fed will impose."

Defies the compelling logic. The brief filed by Bernanke and Volcker stated that each of the district court’s findings is not "enshrined in the Dodd-Frank Act, or anywhere else in statute;" inconsistent with FSOC's interpretations of its own rules and guidance; and "defies the compelling logic behind the designation process contemplated by Congress when it established FSOC."

Addressing the district court’s finding that a company is likely to experience financial distress, the Bernanke-Volcker brief noted, "To await a designation until an institution is likely to suffer material financial distress … would be contrary to the basic purposes for which the FSOC process was created—to avoid financial excesses that could in fact lead to or aggravate a financial crisis."

Bernanke and Volcker further argued that FSOC should not have to precisely quantify the adverse effects of material financial distress since "financial instability in fact can and will spread among large, heavily interconnected financial institutions thought to be in relatively strong positions" resulting in "devastating" repercussions.

Finally, the former Fed chairs disagreed that FSOC was require to perform a cost-benefit analysis. They argued "the Dodd-Frank Act does not, and reasonably cannot, call for a cost/benefit analysis with respect to designation." Bernanke and Volcker concluded, "The accepted approach, based upon experience over the years, is that the adverse implications of a financial crisis for the American economy far outweighs the costs of regulation, tangible and intangible, of reasonably focused regulation and supervision."

Crippling FSOC’s ability. The brief filed by Better Markets contended that the district court erred in three ways. According to a Better Markets press release, "First, the court misread the FSOC’s own guidance and failed to defer to the FSOC’s understanding of what it wrote. Second, the court second-guessed the thoughtful mix of quantitative and qualitative factors that the FSOC used in evaluating MetLife, insisting, contrary to experts’ judgment, that more quantification was required. And finally, the court created a cost-benefit-analysis requirement out of thin air despite Congress’s express decision not to include one in the statute."

Attorneys: Dennis M. Kelleher, Stephen W. Hall, Austin W. King, for Better Markets, Inc.; Michael Bradfield for Ben S. Bernanke and Paul A. Volcker; Elizabeth B. Wydra, Brianne J. Gorod, Simon Lazarus, Elisabeth M. Stein, Constitutional Accountability Center for Current and Former Members of Congress.

Companies: Better Markets; Constitutional Accountability Center; MetLife, Inc.

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