WASHINGTON — The judge’s decision barring federal regulators from overseeing MetLife imposed “novel requirements” on federal regulatory agencies that Congress never enacted, according to a brief submitted to an appeals court reviewing the decision by two former Federal Reserve Board chairmen.
Indeed, the judge “substituted” her judgment “for that of the U.S. financial regulatory agency heads specifically designated by Congress to make such judgments,” said Ben S. Bernanke and Paul A. Volcker in their brief to the Appeals Court reviewing the decision.
Moreover, the former chairmen said, in practice the decision “undermine both the letter of the relevant authorizing documents and the intent of the designation process embodied “in the Dodd-Frank Act (DFA).”
See also: MetLife defends its SIFI challenge
They said they wrote their brief because “we are concerned about the implications of the District Court decision with respect to the designation of MetLife by FSOC as subject to Federal Reserve oversight. “In sum, it is unfortunate that the District Count ruling fails to recognize the compelling logic of the FSOC designation process,” the brief added.
The brief was prepared by Michael Bradfield, who served as general counsel to the Fed under Volcker in the 1980s. He also recently served as general counsel of the Federal Deposit Insurance Corp.
The brief was submitted U.S. Court of Appeals for the D.C. Circuit. The brief was filed in MetLife v. Financial Stability Oversight Council (FSOC).
The April 30 decision by Judge Rosemary Collyer declared that the FSOC’s designation of MetLife as a systemically important financial (SIFI) was arbitrary and capricious.
The FSOC filed its first brief in the case June 16 through the Department of Justice on behalf of the Federal Financial Oversight Council.
MetLife must file its reply brief by Aug. 15. The government is pushing for oral arguments in the case in September.
The brief follows submission of the FSOC’s original brief to the Appeals Court June 16. It was the opening step in the government’s appeal of the March 30 decision of Collyer to declare that the FSOC’s designation of MetLife as a systemically important financial (SIFI) was arbitrary and capricious.
In a reaction to the brief, Joseph M. Belth, former publisher of the Insurance Forum, said that, “If the appellate court affirms the district court ruling, it would be frightening to contemplate the future of our financial system. I think it is imperative that the appellate court reverse the district court ruling.” Belth wrote the Insurance Forum for 40 years before ceasing publication in 2013. He is professor emeritus of insurance in the Kelley School of Business at Indiana University, Bloomington.
In their brief, Bernanke and Volcker said Collyer’s decision rests on three grounds. First, the court held that FSOC was required to assess the likelihood of Metlife’s distress before determining whether its distress could threaten financial stability, the Bernanke/Volcker brief said.
Second, the court held that FSOC was obligated to project estimated losses of counterparties and other market participants in the event of Metlife’s distress, the brief said. Third, the court held that FSOC was required to conduct a cost-benefit analysis, taking into account the costs of enhanced prudential standards on Metlife, the brief said.
In their brief, Bernanke/Volcker said, “Strikingly, not a single one of these purported requirements is enshrined in the DFA, or anywhere else in statute; each is inconsistent with FSOC’s interpretations of its own rules and guidance; and each defies the compelling logic behind the designation process contemplated by Congress when it established FSOC.”
The brief also said that, “There can be no question that Metlife, by its size, by its range of financial activities, and by its intertwined relationships with other parts of the nation’s financial system could, under stress, affect the stability of financial markets more generally.”
The brief also lashed out at Collyer’s argument that as part of the designation process the FSOC do an analysis of the cost/benefit ratio of designation.
The brief said “it should not be necessary” as a prerequisite to a designation decision, as required by the District Court, for the FSOC to quantify precisely the adverse financial consequences for affected market participants.
“We also know that, as for banks and other federally supervised institutions, oversight and regulation may have operational costs and inhibit financial activity that carries risk,” the brief said. “But the Dodd-Frank Act does not, and reasonably cannot, call for a cost/benefit analysis with respect to designation,” the brief said. “That is the practice with respect to other financial supervisory and regulatory responsibilities.”
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