Donald Trump meant many things to many voters, but for some, he was the deregulation candidate. He could validate that reputation if he acts soon on a regulatory dispute involving insurance giant MetLife. But he can’t wait too long.
In 2014, the Obama administration’s Financial Stability Oversight Council branded MetLife a too-big-to-fail enterprise, officially a “systemically important financial institution.” This designation placed the company under the regulatory regime of the 2010 Dodd-Frank Act, whose provisions were primarily aimed at the banking industry in an effort to decrease systemic threats to the financial markets.
MetLife challenged the label in January 2015, filing a lawsuit in the U.S. District Court for the District of Columbia. The company argued the classification was improper for a number of reasons. First, it felt that it was targeted due to its size and not the business activities it was engaged in.
MetLife also said that the label was unnecessary: it had always been financially stable and it remained so throughout the 2008-2009 financial meltdown. It never asked for, nor did it ever receive, federal bailout dollars.
Furthermore, as an insurance company, it is already heavily regulated in the states in which its subsidiaries do business.
The court agreed with MetLife and ruled that the FSOC designation was improper, as the agency didn’t follow its own rules in the process. But the administration appealed, setting off a lengthy legal battle. Now, three years later, a ruling from the appeals court is forthcoming.
The ruling and its possible consequences could be avoided, though, if the Trump administration would, in line with its stated commitment to deregulation, simply drop the appeal. Leaving room for the court to rule in favor of the Obama appeal could produce a couple of outcomes that would be disagreeable to businesses that prefer to operate in a less-regulated environment.
One, non-banks would become subject to the too-big-to-fail rules that are intended to remove the risk that the collapse of a large financial institution would undermine the entire financial system and critically damage the economy unless it took a government bailout. These are the regulations that “burden the banks with literally hundreds of billions of dollars of regulatory costs every year,” National Economic Council Director Gary Cohn said earlier this year in the Wall Street Journal.
Two, challenging federal agencies that fail to take into account the costs of their actions, as the FSOC did with MetLife, would become more difficult. If MetLife loses, others hoping to challenge regulations on cost benefit grounds would be losers as well.
Dropping the appeal could be a signature moment for the Trump administration. Nearly two months have passed since Cohn, recognized to some as the White House’s point man for regulatory reform, said that “We don’t think non-banks should be SIFIs.” Given that statement and other deregulatory signals issued by the Trump White House, non-banking institutions such as MetLife would be justified in asking the administration what it’s waiting on.
Is the failure to act due to the continued presences of a core of Obama holdovers, such as Financial Stability Oversight Council Executive Director Eric Froman, an Obama Treasury Department lawyer? If the appeal isn’t dropped and the court rules for the Obama administration, then Froman and other Obama appointees – from Director of the Federal Housing Finance Agency Mel Watt to Consumer Financial Protection Director Richard Cordray to Federal Reserve Chairman Janet Yellen, all of whom sit on the FSOC board – would effectively gain control over the Trump deregulation effort, which is to say that they would in reality stall it. These political appointees would be significant pieces of the “shadow government” that some have charged Barack Obama with establishing as a means to thwart the Trump agenda that includes some unwinding of the bureaucratic snarl left by Obama.
President Trump himself has called Dodd-Frank a “disaster” and promised to do a “big number” on the law. Less than two weeks into office, on the day he signed an executive order outlining “core principles for regulating the United States financial system," Trump said he expected "to be cutting a lot out of Dodd Frank.”
About the same time, Cohn pulled out the well-used but accurate Washington aphorism that “personnel is policy.” Yet Froman, Cordray and Watt remain, leaving the entities that believe they are overregulated and interested observers to also justifiably ask what the administration is waiting on.
With two of the three judges who heard the appeal being Obama appointees, it would be unwise to bet that the court won’t rule in favor of an administration that is no longer in the White House. Trump could end the possibility though by simply ordering the Justice Department lawyers who are arguing the case on behalf of the FSOC to drop the appeal. It’s his call to make.
Kerry Jackson, a Los Angeles-based fellow with the Pacific Research Institute, was an editorial writer for Investor's Business Daily from 1998-2016.
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