Is MetLife Too Big To Be Allowed To Fail?

In their op-ed this morning the editors of the Wall Street Journal rail against the Financial Stability Oversight Council empowered by Dodd-Frank:

odd-Frank empowered the Financial Stability Oversight Council (FSOC), which is comprised of 10 regulatory heads, with deciding whether nonbanks are “systemically important financial institutions.” The Sifi label imposes bank-style liquidity and capital requirements, among other compliance burdens, in return for an implicit taxpayer guarantee.

While the law outlined myriad criteria that FSOC could consider, Dodd-Frank left enormous discretion to regulators to write and enforce the rules. After a formal rule-making, FSOC in 2012 identified six factors it would use to assess a nonbank’s vulnerability to financial distress and how its potential instability could affect the broader financial system.

Yet in its analysis of MetLife, an insurance company that isn’t a bank, FSOC considered only the risks to the financial system. It failed to weigh MetLife’s liquidity risk or leverage, both of which showed financial strength. The council provided no explanation for why it departed from its guidance, nor did FSOC calculate the costs of its designation.

Metlife sued, and last year federal Judge Rosemary Collyer issued a scathing rebuke of the council’s “arbitrary and capricious” designation. In addition to rapping FSOC for not evaluating MetLife’s vulnerability, Judge Collyer explained that the council “never projected what the losses would be, which financial institutions would have to actively manage their balance sheets, or how the market would destabilize” if MetLife failed.

FSOC “hardly adhered to any standard when it came to assessing MetLife’s threat to U.S. financial stability” and “purposefully” refused to consider the costs of its designation in flagrant violation of administrative law, she wrote. A cost-benefit analysis, she noted, might have shown that the designation could have made MetLife more vulnerable to stress.

Richard Cordray, chief of the Consumer Financial Protection Bureau appointed by President Obama and still holding the job, is a case in point for my objections to technocracy. What qualifies him for the job? He’s a) a lawyer and b) a Democratic Party apparatchik. He’s never run a bank or insurance company or any other “systemically important” enterprise. He’s a consumer but it’s my understanding that there are a lot of those around so that can’t be it.

In theory “technocracy” means “rule by experts”. In practice it means “rule by the connected”, a particularly noxious form of aristocracy.

I don’t object to government regulation. I think it’s a necessity. I do object to ever-increasing government power being handed over to your friends and flunkies. That’s not conducive to good government.

After reading the editorial I still don’t know whether MetLife reasonably falls under the Financial Stability Oversight Council’s authority. I’m less confident in either it or the CFPB than ever. I continue to think that companies that are too big to be allowed to fail are too big to be allowed to exist. IMO the lesson of the last decade is that we should have allowed the big banks to fail and provided aid for the ordinary people hurt by their failure rather than propping up recklessly run and insolvent institutions. We’d probably be better off than we are now and we wouldn’t have a bunchy of big, insolvent banks sitting around.