By Michael S. Barr & Kate Andrias
Last week we filed an amicus brief in MetLife v. Financial Stability Oversight Council on behalf of fifteen professors of law and finance with our co-authors, Professors Robert Jackson and Gillian Metzger of Columbia Law School.
Metife is challenging the Financial Stability Oversight Council’s (“FSOC”) designation of the firm for supervision by the Federal Reserve. While AIG, GE Capital, Prudential, and MetLife have all thus far been designated for supervision by the Federal Reserve (alongside large bank holding companies such as JP Morgan Chase and Goldman Sachs), MetLife is the first firm to sue the government over an FSOC designation. MetLife is challenging FSOC’s finding that the firm could pose systemic threats to the U.S. economy. With the support of expert scholars in financial regulation, administrative law, and systemic risk, our brief argues that the U.S. District Court for the District of Columbia should not substitute its own judgment for the FSOC’s finding that MetLife is a systemically important financial institution.
The brief begins by highlighting how regulatory gaps helped contribute to the financial crisis of 2008, the most significant financial crisis since the Great Depression. We show that the pre-crisis regulatory structure enabled many nonbank financial firms, such as AIG and Lehman Brothers, to avoid meaningful prudential supervision even though they performed many of the same functions as banks and, as the crisis revealed, posed significant risks to the U.S. economy.
Recognizing that dispersed and uncoordinated regulators failed to address systemic risk, Congress empowered the FSOC to designate nonbanks as systemically important and subject them to consolidated supervision by the Federal Reserve. Congress made it clear that the mere legal form of a firm does not dictate whether it can be systemically important. It instead recognized that the FSOC would make a case-by-case, predictive finding of whether a firm could pose systemic risks to the U.S. economy.
We next show that Congress carefully designed the FSOC’s structure and procedure to ensure that its supervisory designations come from expert, informed, and deliberate judgments. Congress placed on the FSOC the heads of all the nation’s leading financial regulators in order to ensure expertise and a range of perspectives. A supermajority-voting requirement and other internal checks similarly enable a deliberate and balanced decision-making process.
We then focus on the tremendous deference Congress dictated that courts should accord FSOC designations. While recognizing that FSOC must make ex ante judgments about whether a firm could pose systemic risks – necessarily probabilistic decisions that demand deep expertise – Congress expressly limited judicial review to the highly deferential “arbitrary and capricious standard.”
We show that the FSOC’s designation of MetLife easily meets this arbitrary and capricious standard. The brief focuses on the risks surrounding MetLife’s significant short-term funding exposures and off-balance sheet activities. The brief explains that in a crisis, MetLife could face significant pressures. Its extensive short-term debt obligations to institutional investors, including money-market mutual funds, suggest that in a credit crunch its lenders may refuse to roll-over lending, making it difficult for MetLife to fund its daily operations.
Short-term liquidity demands could force MetLife into quickly selling its long-term assets, leading to a fire sale. Because MetLife’s long-term assets are largely illiquid, pressure to sell them in the short-term could cause the firm to sell the assets at a deep discount. These and other pressures during a financial crisis could ultimately render MetLife insolvent. Because MetLife’s failure could threaten other systemically important firms, as well as its policyholders and investors that are very much a part of the real economy, MetLife’s failure could reverberate throughout the U.S. economy and pose real risks to Main Street and the broader financial system.
None of this is to say that MetLife today is anything but a healthy firm. That is not the point of designation. Rather, designation subjects MetLife to Federal Reserve supervision to reduce the risks of a devastating financial crisis in the future.
We conclude that FSOC’s reasons for designating MetLife were reasonable and easily meet Congress’s standard that the action not be “arbitrary and capricious.” The District Court should thus reject MetLife’s invitation to substitute its own judgment for the congressionally mandated determination by the FSOC, and instead should accord FSOC the deference it deserves.
Supporting our brief were professors from Columbia University, Cornell University, Harvard University, Stanford University, the University of Pennsylvania, the University of Vermont, and Yale University.
We filed our brief alongside three other amicus briefs supporting the FSOC’s finding that MetLife could pose systemic risks to the U.S. economy. Those amicus briefs come from a group of law professors with substantial expertise in insurance regulation (available here), the nonprofit organization Better Markets, Inc., which promotes the public interest in the financial markets (available here), and professors of economics who study issues of systemic risk (available here).
We hope that our brief will give the Court additional insights and perspectives in reaching its decision in this important case.