Before MetLife Inc.’s court victory in late March fades from memory, it’s important to grasp the significance of what just happened: A US district judge relied on a Supreme Court opinion written last term by deceased Supreme Court Justice Antonin Scalia and raised by MetLife’s chief outside counsel Eugene Scalia — Antonin’s son — to ward off a “systemic risk” designation by the Obama administration’s Financial Stability Oversight Council.
The victory by MetLife — the nation’s largest life insurer — opens the door to similar challenges from AIG, GE Capital and Prudential, which were all previously designated as “systemically important financial institutions,” or SIFIs, by the oversight council. The 2010 Dodd-Frank Act authorized the council to supervise such companies if they “could pose a threat to the financial stability of the United States.”
According to a ruling by US District Judge Rosemary M. Collyer, the oversight council — 15 top officials who include the US secretary of treasury, the chairman of the Federal Reserve, the comptroller of the currency and the chairs of the Securities and Exchange Commission and the Federal Deposit Insurance Company — doesn’t have a clue about assessing future financial crises.
Father and Son
In Eugene Scalia’s words, the council’s MetLife designation was “predicated on unbounded speculation, ahistorical analysis, shifting standards, and undisclosed evidentiary material.” Anticipating a potential constitutional appeal, the younger Scalia also noted in his motion for summary judgment that oversight council members exercise legislative, investigative, prosecutorial and adjudicative functions within the executive branch.
In colloquial terms, MetLife’s lawyer told the Obama administration to take a hike — and got away with it. Scalia, a partner at the Washington, DC, office of Gibson, Dunn & Crutcher, argued that the council’s designation was “arbitrary and capricious” under the Administrative Procedures Act, lacked evidentiary support or an estimate of MetLife’s compliance costs, and invoked Antonin Scalia’s analysis in a reply brief he filed two weeks after the Supreme Court ruling.
Writing for a 5-4 majority in the 2015 case of Michigan v. Environmental Protection Agency (EPA), Justice Scalia held that the EPA had acted illegally when it refused to consider costs in its initial decision to regulate emissions of hazardous air pollutants from coal-fired power plants.
“The Agency must consider cost — including, most importantly, cost of compliance — before deciding whether regulation is appropriate and necessary,” Scalia wrote.
In dissent, Justice Elena Kagan protested that the court’s majority had looked at the EPA’s initial determination with blinders, ignoring a subsequent cost-benefit analysis it conducted that found the measurable benefits of regulation would total between $37 billion and $90 billion, compared to yearly costs of under $10 billion.
No matter. Last month, Judge Collyer in MetLife found that the oversight council “assumed the upside benefits of designation … but not the downside costs of its decision.” That, Collyer ruled, is arbitrary and capricious — citing the Michigan v. EPA decision.
Collyer ripped the council, charging that it had “never projected what the losses would be, which financial institutions would have to actively manage their balance sheets, or how the market would destabilize as a result.” She added, “Predictive judgment must be based on reasoned predictions; a summary of exposures and assets is not a prediction.”
High Fives From Capital
Reaction to the ruling was swift: Treasury Secretary Jacob Lew quickly filed a notice of appeal; MetLife’s stock bounced upward, and GE Capital filed a request to repeal its earlier SIFI designation.
The business press was ecstatic. In successive editorials, The Wall Street Journal termed the opinion “a big win for taxpayers,” a “tantrum” by Lew and “Dodd-Frank in retreat.” The Journal added an op-ed piece by Peter J. Wallison, a conservative ideologue at the American Enterprise Institute, who predicted the collapse of “the administrative state” if MetLife pursued a constitutional challenge on appeal.
Wallison rooted his speculation in Michigan v. EPA — this time, a concurring opinion written by Justice Clarence Thomas that questioned the constitutionality of permitting executive branch agencies to interpret ambiguous federal statutes, a practice known as “Chevron deference” after a decades-old, and widely accepted Supreme Court ruling. “Chevron deference raises serious separation-of-powers questions,” Thomas wrote, asserting that it “wrests from Courts the ultimate interpretive authority to ‘say what the law is.'”
Liberal Tears and Fears
OK, predictable enough. But the more interesting reactions to Judge Collyer’s ruling came from the liberal press. The New York Times was in full hand-wringing mode, from its summary of Collyer’s opinion to its op-ed pieces. DealBook analyst Andrew Ross Sorkin sympathized with the oversight council’s difficulty in determining which institutions are systemically important, admitting that making such a call “with any degree of certainty requires mathematically projecting how money will flow between hundreds of institutions around the globe.” But all Sorkin could suggest was appointing more judges trained in economics to handle the complex financial determinations in specialized courts.
Princeton economist and New York Times columnist Paul Krugman added his own concerns, referencing the role that Lehman Brothers, The Reserve money-market fund and AIG insurance — none of them regulated entities — had played in the 2008 financial crash. Krugman anticipated that Collyer’s ruling would encourage other non-banks to challenge Dodd-Frank reforms, which “may be setting us up for future disaster.” Krugman’s solution: elect a Democrat to the White House in November.
Saving Capital From Itself
Pretty weak, considering that 15 top Obama administration officials based their MetLife designation, in Eugene Scalia’s words, “on a chain of events it claimed might materialize, with no attempt to assess their likelihood or the magnitude of their consequences.”
Scalia and Collyer got the better of these exchanges. Collyer, for instance, accused the oversight council of conflating one group of analysis (size, substitutability and interconnectedness) with a second group (leverage, liquidity risk and maturity mismatch) in its final determination — and then denying it had done so.
She also said the oversight council had never responded to Scalia’s allegation that imposing billions of dollars in compliance costs under the auspices of safeguarding MetLife could actually weaken it, forcing the insurer to raise prices and withdraw from certain markets.
Scalia had a point. MetLife’s resistance is solidly grounded in the rules of capital accumulation — marketplace competition, risk-taking and the tacit acceptance of recurring economic crises as a cost of doing business. For capital, the crash of 2008 was deeper and scarier than anyone anticipated. But it also produced investment opportunities and a stock market recovery now in its seventh year. Collateral damage to anyone off the company balance sheet, in economic terms, is deemed an “externality.”
If the MetLife ruling and the convoluted “systemic risk” provisions of Dodd-Frank reveal anything, it’s that attempts to save capital from itself aren’t appreciated — and are nearly impossible to achieve. Would-be regulators of capital’s crises would be better off focusing on a better economic system.