Corporate Accountability

Bernanke, Volcker, Dodd, Frank Join MetLife Regulation Fight

Former Fed chairmen, lawmakers urge appeals court to let regulators boost oversight of insurance giant.

By Gabriel T. Rubin

WASHINGTON—An all-star roster of financial-crisis heavyweights jumped into the legal battle between the federal government and MetLife Inc., urging an appeals court to allow regulators to boost oversight of the insurance giant.

In separate briefs filed Thursday, former Federal Reserve Chairmen Ben Bernanke and Paul Volcker, as well as former lawmakers Chris Dodd and Barney Frank—co-authors of the landmark Dodd-Frank financial overhaul legislation—backed a government appeal of a March ruling by a federal judge nullifying strict new federal regulation of MetLife.

All four men played leading roles in creating the regulatory regime created after the 2008 financial crisis, including rules that extended banklike oversight to large nonbanks deemed “systemically important financial institutions,” or SIFI.

“The district court’s decision, if upheld, would fundamentally undermine” Dodd-Frank, Mr. Frank, a Democrat and former member of the House of Representatives for Massachusetts, said in a call with reporters.

The fight revolves around the 2014 decision by the Financial Stability Oversight Council—a committee of major federal financial regulators created under the 2010 law—to designate MetLife a SIFI, a decision that subjected the firm to more oversight and federal capital requirements. MetLife took the decision to court, and on March 30, U.S. District Judge Rosemary Collyer blocked the FSOC move, calling it an “unreasonable” decision that didn’t consider potential costs, and relied on a process that was “fatally flawed.”

The Obama administration appealed the ruling, and submitted its own brief last week. No date has been set yet for oral arguments in the case.

Messrs. Bernanke and Volcker said in their brief that Judge Collyer’s ruling “defies the compelling logic behind the designation process contemplated by Congress when it established FSOC.”

One brief supporting FSOC was filed Thursday by 20 current and former Democratic members of Congress, including Mr. Dodd, who was a Connecticut senator, and Mr. Frank. Another brief was filed jointly by Messrs. Bernanke and Volcker, who both played major roles in the response to the financial crisis—Mr. Bernanke as Fed chairman, and Mr. Volcker as a senior economic adviser to President Barack Obama.

They argued that if the courts let the MetLife victory stand, it could have significant repercussions for regulators seeking to designate other firms as systemically important, and could encourage other firms to appeal their designations. In addition to MetLife, FSOC also designated as SIFIs two other insurers, American International Group Inc. and Prudential Financial Inc.

“We are concerned about the implications of the District Court decision,” Messrs. Bernanke and Volcker wrote. “There can be no question that MetLife…could, under stress, affect the stability of financial markets more generally.”

A MetLife spokesman said the insurance company will file its own brief by Aug. 15 and supporting amicus briefs by the following week.

Mr. Frank’s brief, drafted by the liberal Constitutional Accountability Center, takes issue with two major parts of the Judge Collyer’s ruling, which calls on FSOC to use cost-benefit analysis in its designation process and to factor in the likelihood that a firm will experience financial distress. FSOC is responsible for designating large bank and nonbank firms, like MetLife, as SIFIs if it believes their failure would pose a threat to financial stability.

Mr. Frank rejected both of those criteria as over-readings of Dodd-Frank, which doesn’t require cost-benefit analysis of a possible designation and doesn’t require FSOC to determine a firm’s vulnerability to failure.

He particularly criticized the notion that regulators should be required to consider the future costs of regulation when designating a firm, saying it would be impossible to do so accurately.

“People are for cost-benefit analysis for things they’re not in favor of,” Mr. Frank said. “It would clearly have the effect of essentially debilitating the statute.”

Messrs. Bernanke and Volcker also took issue with the notion that FSOC must predetermine the likelihood of an institution experiencing financial distress before designating it as systemically important. To wait until that determination can be made, they wrote, “would be contrary to the basic purposes for which the FSOC was created—to avoid financial excesses that could in fact lead to or aggravate a financial crisis.”

A spokesman for the Treasury Department, which chairs FSOC, said the supporting briefs showed the strength of the council’s case. “The broad array of legislators, policy officials, economists, insurance experts and other scholars who filed in support of FSOC makes clear that FSOC’s designation of MetLife fully complied with the law and applied the lessons of the financial crisis,” he said.