Scholars show support for Dodd-Frank’s too-big-to-fail authority

by Deepak Gupta

One of the most important but under-appreciated features of the Dodd-Frank Act was its establishment of the Financial Stability Oversight Council—a new entity with a clear statutory mandate to identify and respond to systemic risks to the entire U.S. economy. The authority was inspired by the failures of entities like the insurance giant AIG, which had to be rescued by taxpayers to prevent catastrophic effects on the U.S. (and world) economy.

But when FSOC designated MetLife as a systemic risk (in common parlance, "too big to fail"), MetLife fired back with a lawsuit challenging FSOC’s authority, among other things, to designate a nonbank insurance company in this manner. MetLife is represented by Gene Scalia—a Washington lawyer who's made a cottage industry of challenging financial-reform regulation. Earlier this month, FSOC moved to dismiss the case (or in the alternative, for summary judgment). On the eve of the Memorial Day holiday weekend, several groups of distinguished scholars filed amicus briefs in support of FSOC. 

  • Our firm serves as counsel to a group of prominent insurance-regulation scholars, led by Daniel Schwarcz of the University of Minnesota Law School, who filed a brief arguing that the patchwork of state-insurance regulations—on which MetLife urges the court to rely—is insufficient to regulate the systemic risk posed by massive financial conglomerates such as MetLife.
  • A distinguished group of scholars of financial regulation and administrative law, led by Robert Jackson and Gillian Metzger of Columbia and Kate Andrias and Michael Barr of the University of Michigan, filed a brief arguing that Congress had intended to give FSOC broad powers to regulate nonbank financial firms, subject only to limited judicial review.
  • Viral Acharya and a group of other distinguished NYU economists filed a brief arguing that, as a matter of economic reality (drawing on the group's considerable research in this area), insurance companies such as MetLife can pose systemic risk to the entire economy. 
  • Finally, Better Markets, a non-profit organization focusing on financial regulation, submitted a brief arguing that Congress gave FSOC wide latitude to designate risky financial firms and that Congress chose not to require a “cost-benefit analysis” before any designation.

The case is now before U.S. District Judge Rosemary Collyer, who's expected to hold argument on the motion to dismiss. But it's unlikely that the district court will have the last word; the case has clearly been set up as a test case of Dodd-Frank's systemic-risk authority over nonbanks. No matter what happens, it's safe to say that the case is headed upstairs.

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