Why the MetLife Case Bears Watching Well Beyond Wall Street




By Peter J. Wallison.


Judge Rosemary Collyer


A ruling against federal regulators could mean a brake on the wild growth of the administrative state.

Federal district Judge Rosemary Collyer sent a shock through the financial community on March 30 by striking down the designation of MetLife as a systemically important financial institution (SIFI). Her opinion, released to the public last week, is more than a challenge to the authority of the Financial Stability Oversight Council. It is a challenge to the power of the entire federal bureaucracy.

The Treasury Department intends to appeal her ruling, and whatever happens at the next step of litigation, the case is likely to reach the Supreme Court. MetLife v. Financial Stability Oversight Council bears watching far beyond Wall Street: Ultimately, this case could determine whether the administrative state will be contained within judicially and statutorily created boundaries, or continue its unrestrained growth.

The Financial Stability Oversight Council, a creature of the Dodd-Frank Act, is a 15-person board composed largely of the heads of the federal agencies that regulate financial services. It can designate any nonbank financial firm as a SIFI, singling it out for stringent oversight by the Federal Reserve, if the council believes that the “material financial distress” of the firm “could pose a threat to the financial stability of the United States.” The council can also determine whether “the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities” of any financial company could pose a similar threat.

Judge Collyer’s decision challenges whether the council—or, for that matter, any other federal administrative body—can base its decisions on nothing more than a prediction about the future that is unsupported by evidence. The council’s designation of MetLife as a SIFI was clearly that. The financial conditions that might exist in the future, when MetLife might suffer “material financial distress,” are unknown and indeed unknowable.

The Justice Department, representing the council, told Judge Collyer that because of the council’s expertise in financial regulation, its opinion about this matter must be given deference by the court.

MetLife’s counsel argued instead that the council’s decision to label the company a SIFI, with no evidentiary foundation of any kind, was ipse dixit (a Latin phrase that means, essentially, “because I said so”). Judge Collyer agreed. An agency, she said, must engage in “reasoned decisionmaking” or its action will be deemed arbitrary and capricious. But the council’s analysis of MetLife “never projected what the losses would be . . . or how the market would destabilize as a result.” She concluded that a “predictive judgment must be based on reasoned predictions,” and “a summary of the company’s assets and financial exposures is not a prediction.”

In other words, Judge Collyer found that the discretion provided to the council by Dodd-Frank violated the underlying policies of the Administrative Procedure Act, which authorizes courts to dismiss federal agency decisions that are not based on evidence. For this reason, the ruling has far-reaching ramifications.

It is difficult to see how the council, or any other federal agency, can meet Judge Collyer’s standard, except where there is clear supporting evidence for a prediction—for example, where the weight of scientific evidence supports its view that a certain action will cause a predicted result.

Other cases are not so easy. In February 2014, the Federal Reserve adopted enhanced prudential standards such as stricter liquidity requirements for bank holding companies, with the proviso that the standards will get “more stringent” as these firms become more “systemically important.” Systemic importance is clearly a prediction about the future effect of a firm’s “material financial distress” for which an administrative agency must have supporting evidence. Judge Collyer’s ruling thus calls into question whether any firm can be considered “systemically important” unless an agency, like the council or the Fed, can produce such evidence.

The MetLife case is not about statutory authority. Dodd-Frank unambiguously grants the council discretion to designate financial firms as SIFIs on whatever grounds it chooses. The issue raised by Judge Collyer is whether—no matter what Congress says—this or any other agency can base a decision on nothing more than an opinion about what may happen in the future.

Federal courts used to rein in the discretionary authority of administrative agencies by ruling that Congress had unconstitutionally delegated its exclusive authority to make the laws. But this practice has fallen into disuse. Instead, federal courts now often validate agency discretion, holding that these bodies, staffed by alleged experts, deserve “deference” when they fill in the blanks left open in laws that Congress has enacted.

At the Supreme Court, this validation has often satisfied both sides: conservative justices, who believe in judicial restraint, and liberal justices, who generally support administrative power. Lately, however, Chief Justice John Roberts, and Justices Clarence Thomas and Samuel Alito, have begun to question this course.

The deference idea encourages Congress to dodge tough decisions by giving administrative bodies, whose members don’t run for re-election, broad mandates over controversial issues. As a result, these agencies have grown into what is essentially a fourth branch of government, what many call an administrative state. The MetLife case could test whether Congress, in Dodd-Frank, finally went too far.



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