Will Dodd-Frank Implode? Let’s Hope So

4/20/16
 
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By Pam Villarreal,

from NCPA,
4/14/16:

There have been a few interesting developments lately regarding legal interpretations of Dodd-Frank. Unfortunately, media outlets are too busy covering trivial matters such as bathroom bills to focus on the impacts of this poorly-conceived legislation that has been in place since 2010. However, the Wall Street Journal has not disappointed, covering some major developments in federal courts.

The most notable case challenges the Financial Stability Oversight Council that was created under Dodd-Frank. As noted in our NCPA publication, the FSOC has broad powers to impose additional reporting requirements and to audit firms they deem a threat to financial stability. Firms designated as Systemically Important Financial Institutions (simply put, “too big to fail”) may not even necessarily be considered financial institutions as the public sees them. Consider insurer MetLife, which the FSOC determined could pose a threat to the financial stability of the country. MetLife sued the FSOC over their eligibility for this designation and the failure of the FSOC to explain the criteria for the designation. U.S. District Judge Rosemary Collyer ruled that MetLife was a financial institution (as the firm indicated in its own filings) and thus was indeed eligible for SIFI designation. However, she also issued a scathing opinion that the FSOC violated its own rules by designating MetLife as a threat to financial stability without undertaking an analysis to determine the likelihood of this occurring and how it would occur. Furthermore, she ruled that the FSCO did not do a cost/benefit analysis. Instead the FSOC focused on the benefits of said SIFI designation without regard to the new capital costs imposed on MetLife. (Full opinion here.)

There are many other problems with the FSOC. It is supposedly an “independent” 15-member committee, but eight out of its ten voting members are heads of government agencies, such as the Consumer Financial Protection Bureau and the Federal Housing Finance Agency. Only one person on the board is directly appointed by the president and must have insurance expertise and the other is the Chairman of the Federal Reserve.

Additonally, several Congress members have complained of the FSOC’s closed-door meetings with no published transcripts. In 2014, the Government Accountability Office even released a report with recommendations to increase the FSOC’s transparency and accountability. But there are more reasons to just skip this step and scrap the FSOC altogether.

The ruling undercuts the foundation of the Obama administration’s plan to more heavily regulate four non-bank businesses that were determined to have the potential to destabilize the American financial system. MetLife had called the designation arbitrary and unjustified. Chief Executive Officer Steve Kandarian said earlier this year that his New York-based company will shed much of its domestic retail business because SIFI put it at a “significant competitive disadvantage.”

MetLife jumped 5 percent to $44.58 at 1:38 p.m. in New York trading. Prudential Financial Inc., which is the second-largest U.S. life insurer and was also named a non-bank SIFI, advanced 1.6 percent to $72.61.

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