Under Dodd-Frank, the new Financial Stability Oversight Council (FSOC) has the authority to designate companies as “systemically important financial institutions” or “SIFIs.” By identifying and branding these companies as systemically important, we’ve been told, the government will end “too big to fail.” Dodd-Frank’s supporters claim bailouts like the one we saw in 2008 are a thing of the past, in part because of the heightened oversight of SIFIs. Except FSOC hasn’t fully thought through the whole SIFI designation concept. In March, a court found that FSOC’s designation of insurance giant MetLife failed to consider the impact the designation would have on MetLife and the U.S. financial system as a whole and therefore was “arbitrary and capricious,” that is, unlawful.
FSOC was created by Dodd-Frank and, as an agency of the federal government, it exists to “further some public interest or policy which [Congress] has embodied in law.” This interest, Dodd-Frank tells us, is to “promote the financial stability of the United States…to end too big to fail, [and] to protect the American taxpayer by ending bailouts[.]” Whether FSOC is capable of any of these things and whether the legislation that created it will ultimately promote anything like stability is not the point (although our vote on these questions is “no”). The point is that, in exercising this delegated authority, FSOC must always act to forward the goal of promoting the financial stability of the United States.
It is surprising, then, that in determining whether MetLife should be designated as a SIFI, FSOC not only failed but flat out refused to consider whether the cost of compliance with this increased burden might actually weaken the company. If FSOC designates a company as a SIFI it means that FSOC has determined that “material financial distress” at the company “could pose a threat to the financial stability of the United States.” That is, that anything that weakens it would undermine the express goal of Dodd-Frank. It seems clear that FSOC should at least ask the question: would complying with these new rules make the company stronger or weaker?
And yet FSOC claimed that this question, which goes to the very heart of its authorizing statute, is not one it has to ask. Following its loss in the district court, FSOC appealed the case to the D.C. Circuit Court. On Monday, Cato filed an amicus brief arguing that it was unreasonable for FSOC to fail to consider whether its action in designating MetLife as a SIFI promoted or instead frustrated the goal of Dodd-Frank in promoting financial stability in the U.S. Cato also argued that, far from reducing the risk of bailout, designating MetLife as a SIFI could in fact increase the likelihood of taxpayer-funded rescue.
Ultimately the question is whether an agency must grapple with the possible negative effects of its actions, or whether it may simply wave these costs away, saying “that’s not our concern.” We hope the court decides that federal agencies, like everyone else, must consider the costs of their actions.
Co-authored with Ilya Shapiro, senior fellow in constitutional studies at the Cato Institute and editor-in-chief of the Cato Supreme Court Review.