By Peter J. Wallison.
Treasury Secretary Jack Lew took to the Wall Street Journal’s digital commentary page on Tuesday night to take issue with “Opponents of financial reform [who] are cheering a court decision to rescind the Financial Stability Oversight Council’s designation of MetLife for heightened regulatory supervision.” “Leaving aside whether the decision will be overruled on appeal,” he wrote, “efforts to depict the court’s decision as a positive for our financial system are mistaken and dangerously ignore the lessons of the financial crisis.”
The secretary’s article breaks no new ground, nor does it explain why the court may have gotten it wrong. Instead, he used this opportunity to explain why the council — which has the ability to look “over the horizon, to where future risks may develop” — is closely examining the asset management industry.
I don’t mean to be disrespectful, but the article reminds me of the hilarious scene in a Monty Python film, where a knight is gradually dismembered by an opponent, but keeps issuing more and more over-the-top threats as he gradually loses his arms and legs. Eventually, he’s just a trunk, but is still issuing threats.
Figure: Monty Python in “Monty Python and the Holy Grail.”
This isn’t to say that the FSOC is doomed by a single decision of a district court, but the scope of the decision raises questions about whether the FSOC will ever be able to take any action against the asset management industry unless it can overcome the court’s simple requirement that it have evidence for its predictive rulings.
The Dodd-Frank Act certainly gives FSOC the authority to declare that a particular “activity” of an asset manager—or the industry as a whole—could be subject to censure and restriction if FSOC can establish that the activity “could pose a threat to the financial stability of the United States.”
That’s the rub. In the MetLife case, where MetLife challenged its designation by FSOC as a systemically important financial institution (SIFI), the court insisted that the FSOC make a “reasoned prediction”—i.e., provide evidence—that MetLife’s “material financial distress” could cause instability in the US.
Under the MetLife decision, to attack an “activity” by an asset manager, or by the industry as a whole, the FSOC will have to show — with evidence — that the particular activity, in the future, could create something as serious as instability in the US financial system.
Unless the appellate court, or the Supreme Court, relieves this burden, it will be extremely difficult for the FSOC to produce evidence that will validate and support such a prediction.
