Who Died and Made Dodd-Frank Regulators Gods?
Meet the new deities. They apparently sit on the Financial Stability Oversight Council and other regulatory agencies, especially those created by the Dodd-Frank banking “reform” act.
Obama administration officials and Dodd-Frank cheerleaders have been simply apoplectic in their reactions to U.S. District Judge Rosemary Collyer’s carefully reasoned March 30 decision reversing FSOC’s designation of the MetLife insurance company as “systemically important,” or too-big-to-fail. Expect similar reactions to a bill, H.R. 3340, likely to be voted out of the House this week that makes FSOC more accountable to Congress by placing its budget under the appropriations process. Similarly, the House Financial Services Committee approved a bill today, H.R. 1486, that would put Dodd-Frank’s Consumer Financial Protection Bureau spending on budget as well.
The FSOC, a secretive council of federal and some state regulators, was created by Dodd-Frank to designate firms as “systemically important financial institutions” or SIFIs. With the SIFI designation the comes the benefit of being officially tagged by the government as too-big-to-fail and having creditors more likely to be bailed out, which can be a competitive advantage and lower borrowing costs. But it can also mean much more red tape and bank-centric regulations that are inappropriate for non-bank firms.
MetLife decided the burdens outweighed the benefits of being a SIFI. It sued in court, and Collyer agreed in her ruling that the government’s actions in designating the company a SIFI were “arbitrary and capricious.”
As I wrote in Forbes, this ruling limiting the FSOC’s powers bodes well for a host of nonbank innovators in the new Fintech sector who are creating new avenues of prosperity for consumers, investors and entrepreneurs, but could be halted by regulatory overreach. “The ruling limits the government using its power arbitrarily to fit non-bank financial firms into the banking regulation hole,” I concluded.
Yet apparently, when it comes to FSOC and Dodd-Frank, there is a new doctrine of regulatory infallibility. Treasury Secretary Jack Lew did not just express disagreement with the ruling, but in the words of The Wall Street Journal editorial page, treated Collyer’s “reasoned analysis as a judicial micro-aggression.” In his statement, Lew slammed the judge for “overturning the conclusions of experienced financial regulators.”
An echo chamber repeated the chorus and asked how dare a judge presume herself smart enough to rule against a body of so-called experts. Scoffed Andrew Ross Sorkin of The New York Times, “How can any judge with anything short of a doctorate in statistics and economic modeling be tasked with effectively overseeing the decisions of a group like the Financial Stability Oversight Council?”
But it is not the job of judges to prove that they are smarter than the government bureaucrats they are overseeing. Their job is to ensure that in the implementation and enforcement of rules, bureaucrats themselves play by the rules of administrative procedure and the Constitution. And Collyer found multiple violations by FSOC of the rules Congress set out for regulatory agencies in the Administrative Procedure Act.
In the ruling, Collyer called FSOC’s reasoning for MetLife’s designation “fatally flawed.” She noted how FSOC departed from its own procedures and “abandoned the guidance and refused to evaluate MetLife’s vulnerability to material financial distress.”
Collyer didn’t reach the constitutional aspects of the case, but the appeals court might weigh in on this, since the Obama administration has decided to appeal. In CEI’s litigation against Dodd-Frank’s creation of FSOC and the CFPB, we note multiple violations of the Constitution’s rules for separation of powers to ensure government accountability. And the Constitution also contains no exemptions from these rules for bureaucratic “experts.”