Main Street Challenges Dodd-Frank’s Chipping Away at the Constitution

"Wall Street Chips Away at Dodd-Frank,” blared a recent front-page headline in the New York Times about bipartisan measures that have passed the U.S. House of Representatives and/or been signed into law that ever-so-slightly lighten the burden of the so-called financial reform rammed through Congress in 2010. “GOP Pushes More Perks For Wall Street…” reads the home page of the Huffington Post under the picture of establishment pillar Jamie Dimon, CEO of JP Morgan Chase.

Yet, what these articles don’t say is that the firms putting their resources on the line to challenge Dodd-Frank in court are the furthest thing from Wall Street high rollers. They are decades-old firms selling stable, time-tested financial products to everyday consumers.

At first glance, the national insurance firm MetLife and the Texas community bank State National Bank of Big Spring might seem to have little in common. But they both are solid financial firms that never took a bailout and never had their hand in the toxic mortgages—spurred on by the government-sponsored enterprises Fannie Mae and Freddie Mac and mandates of the Community Reinvestment Act—that caused the financial crisis.

And now, the firms are both doing their customers and all Americans a favor by bringing suit against Dodd-Frank’s Financial Stability Oversight Council (FSOC), one of the many opaque entities in Dodd-Frank that lack accountability to Congress and the public.

In its lawsuit filed January 13 of this year, MetLife raised many of the same constitutional issues as did State National Bank in its pending legal challenge brought in 2012 in collaboration with the Competitive Enterprise Institute, at which I work. CEI and the conservative seniors group 60 Plus Association are co-plaintiffs with the bank, and CEI attorneys are working with the esteemed C. Boyden Gray—the former White House Counsel—in providing representation to the parties.

In an open letter to its customers that ran in full-page ads in the New York Times, Washington Post, and Wall Street Journal, MetLife CEO Steven Kandarian explained his objections to the firm being designated as a “systemically important financial institution,” or SIFI, by FSOC. “We do not believe MetLife poses systemic risk, and we are concerned that our designation will harm competition among life insurers and lead to higher prices and less choice for consumers.” In that sense, a court victory for MetLife would greatly benefit the public as well.

To its credit, MetLife is rejecting not only the burdens of being designated a SIFI but also the benefits—benefits that seem to be eagerly embraced by both MetLife’s competitors (such as the infamous AIG) as well as the biggest banks. Being designated a SIFI means the federal government considers MetLife to be “too big to fail,” making it subject to the same Dodd-Frank bailout regime set up for big Wall Street banks like Goldman Sachs and JPMorgan Chase.

As CEI, 60 Plus Association, and the State National Bank argue in our legal challenge to the Dodd-Frank Act, the SIFI designation confers on a firm a strong competitive advantage, as investors and creditors know the government won’t let it fail.

We argue that the tiny State National Bank “is injured by the FSOC’s official designation of systemically important nonbank financial companies, because each additional designation will require the Bank to compete with yet another financial company—i.e., a newly designated nonbank financial company—that is able to attract scarce, fungible investment capital at artificially low cost.”

But MetLife recognized that these privileges of being a SIFI also come at a cost of overhauling its successful business model due to heavy-handed regulation. And unlike its competitors, it decided that this cost wasn’t worth the benefits of being “systemically important.”

Fred Smith, CEI’s founder and director of our Center for Advancing Capitalism, says of the decision to challenge Dodd-Frank by both MetLife and the State National Bank, “We should all be grateful that capitalists both small and large have decided they would rather be free than wards of the state, and have become aware that protection from failure comes at the cost of preventing success.”

As I have written in the Hill, the Federal Reserve has interpreted other provisions of Dodd-Frank as imposing on insurance companies with a small thrift operation—or even those, like MetLife, without any banking component but deemed a SIFI by the FSOC—the same capital standards as banks. This includes the controversial international Basel III capital rules, which are costly and counterproductive for banks, but absolutely absurd—according to nearly all recognized experts—for insurance companies.

Imposing Basel and other bank-like capital standards on insurers would raise costs for life-insurance consumers by $5 billion to $8 billion, according to the economic consulting firm Oliver Wyman. These costs could hit policyholders through both higher premiums and reduced benefits. And some policies simply could become unavailable as insurers “exit certain product lines,” the Oliver Wyman study found.

MetLife, other insurers, and their policyholders may get some relief now that during the lame duck session Congress passed a law — the Insurance Capital Standards Clarification Act — making it clear that the Fed has the authority to not impose bank capital regulations on insurers. But it’s unclear whether the Fed, some of whose officials are members of the FSOC, will use its new discretion to grant insurers this relief.

In the meantime, FSOC exercises its power secretively and without accountability. This is by Dodd-Frank’s design as the law specifically exempted FSOC from open meetings laws and gave it lots of escape clauses from the Freedom of Information Act (FOIA). And this lack of transparency is becoming contagious among agencies enforcing Dodd-Frank.

MetLife notes in its court filing that after sending ten FOIA requests about the designation to FSOC, the Federal Reserve Board, the Federal Insurance Office, and the Federal Housing Finance Agency, “FSOC and FIO did not produce a single document; FHFA produced a single, heavily redacted document; and [the Fed] produced 241 pages of documents that were already publicly available.”

MetLife argues that this opacity constitutes part of a blatant denial of its constitutional due process “right to be heard and respond fully and meaningfully to the flaws in FSOC’s designation determination.” The firm further argues, as CEI and the State National Bank do, that the structure of FSOC’s violates the “separation of powers” by combining executive, legislative, and judicial functions with limited input from Congress and very limited judicial review.

Rather than the headline reading “Wall Street Chips Away at Dodd-Frank,” the real headline should read “Main Street Fights Dodd-Frank’s Chipping Away at the Constitution.” And the fight for financial freedom has only just begun.