Photographer: John Taggart/Bloomberg

Wall Street's Big, Bad Post-Crisis Regulator Is Cautious

  • MetLife ruling threatened powers FSOC has been loathe to use
  • Few firms labeled systemically important since 2010 creation

A court ruling that erased MetLife Inc.’s too-big-to fail label has been depicted as a referendum on the future of the Dodd-Frank Act’s super regulator. But the key power that the Financial Stability Oversight Council wields -- designating firms as being so big and interconnected that their failure could threaten the financial system -- was already gathering cobwebs.

While U.S. District Judge Rosemary M. Collyer slammed FSOC for the way it went about labeling MetLife, she made clear that she believes the council was acting within its authority, meaning the ability to designate other companies isn’t really in doubt. Even so, the council has been slow to go after anybody else, and indications that it was looking at companies such as Berkshire Hathaway Inc. and Nomura Holdings Inc. haven’t gone anywhere.

“FSOC itself has decided that, regardless of this litigation, designation is a less effective approach to systemic regulation,” said Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics. “FSOC does not appear to be contemplating any other near-term designations.”

Receiving the systemically important financial institution label can bring significant consequences, which is why insurer MetLife sued the government. Companies can face stringent capital and liquidity requirements and aggressive monitoring by the Federal Reserve. While any bank with more than $50 billion of assets automatically got rolled in under Dodd-Frank, FSOC has designated exchanges, clearinghouses and four companies: American International Group Inc., General Electric Capital Corp. Inc., Prudential Financial Inc. and MetLife.

Impair Oversight

Even with FSOC’s designation powers intact, Treasury Secretary Jacob J. Lew found much to criticize about Collyer’s decision, which was unsealed Thursday. The ruling could “impair the council’s ability to address the risks of a future financial crisis that could severely damage the financial system and the U.S. economy,” Lew, who leads FSOC, said in a statement. The government told the judge Friday that it will ask an appeals court to reverse her ruling.

Besides the legal scuffle with MetLife, the main visible efforts of FSOC since its 2010 creation have been defending the financial system from potential risks posed by giant asset managers. But instead of designating individual companies such as BlackRock Inc. and Fidelity Investments, FSOC decided to focus on risky products and activities in the face of aggressive industry lobbying.

Dodd-Frank established FSOC, whose members include the heads of Treasury, the Fed, the Securities and Exchange Commission and other agencies, to stamp out threats before they cause the level of carnage experienced during the 2008 financial crisis. The group has been shrouded in controversy, with Republican lawmakers rarely missing the chance to argue the panel lacks transparency and enshrines the existence of too-big-to fail companies.

The MetLife ruling will probably give ammunition to some of those complaints, as Collyer accused the panel of “fundamental violations of established administrative law.” And while she didn’t question the FSOC’s power to label the insurer systemically important, her ruling could set a high bar for future designations. She particularly beat the council up for not adequately considering the costs imposed on MetLife of being a systemically important firm.

‘Impossible Standard’

The MetLife ruling “incorporates onerous new burdens on agencies that will cripple financial reform,” said Better Markets President Dennis Kelleher, whose group advocates for stricter financial regulations. “In second-guessing years of investigation and analysis by dozens of financial experts, this court seeks to hold FSOC to an impossible standard.”

Under constant attack from Republicans, the loss of the MetLife litigation and a potentially tougher threshold for making any future designations stick might make FSOC even more gun-shy that it already was.

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