The Corner

Economy & Business

‘Too Big to Fail’ Club Loses a Member

It’s a good day for taxpayers and corporate responsibility when the Federal Reserve, and hence the federal government, looses its near de facto management authority over one entity previous labeled as a “systemically important financial institution” (SIFI) or what some of us call “too big to fail”. As the Wall Street Journal explains:

The Dodd-Frank Act of 2010 has become a license for regulators to control the U.S. financial system, and on Wednesday the insurance company that dared to resist won a legal reprieve. Federal Judge Rosemary Collyer rescinded the federal government’s designation of MetLife as a “systemically important” institution.

Thanks to Judge Collyer, taxpayers are now standing behind one fewer financial giant. And thanks to MetLife’s Steve Kandarian, the one CEO with the gumption to challenge the Financial Stability Oversight Council, even federal regulators must now recognize at least some limits on their power. 

Too big to fail or its Dodd-Frank almost equivalent, SIFI, implicitly put taxpayers on the hook for bailing out companies while at the same time giving these companies incentives to take more risks by enjoying the tremendous advantages such as the ability to borrow artificially cheaply thanks to the implicit federal guarantee. It also creates a sense that shareholders are protected from downside risk should the company get in trouble.

In spite of the very large compliance costs that comes with the protection, most companies enjoy the benefits. But not all. In this case, insurance company MetLife wanted out. Interestingly, Eugene Scalia, the son of the late Justice Antonin Scalia, crafted the MetLife challenge. As a result, a reader is calling him to replace his father on the Court.

Whats next? The Journal notes:

The feds may appeal their MetLife loss, especially given the liberals President Obama and Harry Reid added to the D.C. Circuit Court of Appeals after trashing the Senate’s filibuster rule. But the feds may want to think twice. Judge Collyer, a respected centrist among Republican appointees, presided over a legal debate that was not partisan or ideological. In its first legal test, the stability council looked like a rookie and was exposed for sloppy mistakes of administrative procedure. It made claims about a company that it did not have evidence to support.

Moreover, Judge Collyer didn’t decide for MetLife based on its legitimate constitutional claims related to due process and separation of powers. An appeal would open the way to a much larger challenge to the legal foundations of this new regulator. While we would welcome such a challenge, there’s also a question of how long taxpayers should have to underwrite an effort to defend the indefensible work of Mr. Lew and his council.

For those of you interested, here is an EconTalk podcast between economist Russ Roberts and Richard Fisher, president of the Federal Reserve Bank of Dallas, where they go into detail about the problems with “too big to fail.”

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