About two years ago, I was speaking with an executive at MetLife who floated the idea that the company should sue the government to overturn its designation as a firm that was too big to fail. The company believed that it was being unfairly labelled, and that the regulations that came with the designation were hindering its business.
My initial reaction, I distinctly remember, was to say: "That's a terribly risky idea. The government always wins." Boy was I wrong.
As we all know, MetLife won its case against the government last week, and its position has been vindicated, at least until the decision is appealed. A judge determined that the government's process for designating MetLife a systemically important institution was not just "fatally flawed," but seemingly purposely so. "Every possible effect of MetLife's imminent insolvency was summarily deemed grave enough to damage the economy," Judge Rosemary M. Collyer wrote in her opinion.
Not surprisingly, Jacob J Lew, the Treasury secretary, took great umbrage. "In overturning the conclusions of experienced financial regulators, the court imposed new requirements that Congress never enacted, and contradicted key policy lessons from the financial crisis," he said.
I have no idea if MetLife is too big to fail. I've read hundreds of pages of legal briefs from both sides, and talked to company and government officials and outside experts, and I'm still not sure. I've tried to make sense of it, but it is a highly complicated puzzle and to make such a determination with any degree of certainty requires mathematically projecting how money will flow between hundreds of institutions around the globe.
Which raises this question: How can any judge with anything short of a doctorate in statistics and economic modelling be tasked with effectively overseeing the decisions of a group like the Financial Stability Oversight Council, which includes the leaders of the Treasury, the Federal Reserve, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, and the list goes on.
Judge Collyer smartly chose not to comment on whether MetLife was actually too big to fail, and she left open the possibility that the company could someday merit that designation. In her opinion, she said more narrowly that the process of determining that status in the case of MetLife was problematic.
The judge has a long history as a thoughtful lawyer and jurist. She's also a member of the United States Foreign Intelligence Surveillance Court and once worked as the general counsel of the National Labor Relations Board. In other words, she's a legal rock star.
But her job in the case was, in effect, to approve or reject the approach the oversight council took in its analysis.
Judges, of course, are often asked to weigh in on complicated matters that are beyond their area of expertise. The judge in the case of the FBI's effort to unlock an Apple phone was not an engineer or a computer scientist. And our legal system regularly asks jurors with no background in a particular subject to decide difficult cases.
But in certain instances, like the case involving MetLife and the oversight council, should there be a special court, perhaps with an area of expertise? Many of the lawyers I spoke with scoffed at the idea of a specialised tribunal to deal with issues related to the oversight council, saying that it is a judge's job to determine whether government agencies provide appropriate regulation.
Still, Joshua D Wright, a former commissioner of the Federal Trade Commission, co-wrote a 2011 study that determined in antitrust cases, a judge's expertise had a significant impact on the validity of the ruling. "Decisions of judges trained in basic economics are significantly less likely to be appealed than are decisions by their untrained counterparts," the study says. "Our analysis supports the hypothesis that some antitrust cases are too complicated for generalist judges."
Now, with the ruling by Judge Collyer in the MetLife case, many analysts are expecting that other companies, including potentially General Electric and Prudential, will sue to have their designation lifted too. That puts the decision not to a committee of ostensibly qualified experts, but to a panel of judges with limited experience.
Judge Collyer's decision may well be entirely valid, but at least in certain places she appears off base. For example, she said the government "never projected what the losses would be, which financial institutions would have to actively manage their balance sheets or how the market would destabilise as a result."
Well, the government appears to have done much of that in its report, but you'd need a pretty sophisticated understanding of finance to understand exactly how their numbers were calculated. Judge Collyer either decided to ignore those numbers or decided they were chosen arbitrarily.
The conundrum in the case of the oversight council is that determining which companies pose a systemic risk can't be done with a straight formula. The nature of financial crises means that, as a regulator, you're playing against a 100-year storm that you can't fully foresee.
That's not to say the government didn't mess up in its process of designating MetLife. It now seems as if the government, in some instances, didn't even follow its own guidelines. It may get another shot, though, with the chance to go back and remake its case that MetLife should be designated too big to fail.
For now, we are left with a ruling that has damaged the government's ability to regulate an institution that at least some pretty smart people who study these things thought required an extra level of scrutiny. They may or may not have been right, but ultimately it should be left to experts to decide.
©2016 The New York Times News Services
