 A dangerous court decision to deregulate the shadow banking system’s systemically significant nonbanks like AIG and MetLife: The 2008 financial crash was caused by supposedly highly regulated systemically significant banks like Citigroup and Bank of America as well as mostly unregulated systemically significant nonbanks like AIG, Lehman Brothers and money market funds. Those nonbanks are the financial firms that make up the so-called “shadow banking system,” which has lots of bank-like activities but little if any of the regulation and supervision of banks. The Dodd-Frank financial reform law passed in 2010 was carefully crafted to make sure that all systemically significant firms regardless of form (i.e., whether they were banks or nonbanks) would be properly regulated to prevent another crash, more taxpayer bailouts and an economic catastrophe like 2008.That law created the Financial Stability Oversight Council (FSOC) as the only entity with the authority, duty and responsibility for identifying, investigating and designating systemically significant nonbanks. The Council is comprised of all the country’s top financial regulators and it has a substantial expert staff to assist it in fulfilling its crucial mission. Remember, if systemically significant nonbanks are not properly regulated by FSOC, but banks are, then finance’s highest risk activities will shift from regulated banks to unregulated nonbanks. Like before 2008, those risks will then dramatically increase unseen in the unregulated underworld of the shadow banking system until they explode into view when they blow up the financial system and our economy.
 That’s why FSOC was created and what it was designed to prevent. Of course, unregulated systemically significant firms prefer to remain unregulated. That way, they get to take big risks and, if they fail, they get to be bailed out by taxpayers. Great deal for them, but very bad for the rest of us: they get the upside, taxpayers get the downside. That’s why systemically significant nonbanks like the MetLife insurance company, which is a huge global financial conglomerate, don’t want FSOC to designate them, but that is also why taxpayers and the country desperately need FSOC to do its job.That’s also why, after years of investigation and diligence, FSOC designated MetLife as a systemically significant nonbank and why MetLife sued to overturn FSOC’s decision. As we made clear in an amicus brief we filed in court, FSOC made the right decision, as it outlined in a 341 page decision, which was supported by a huge record evidencing enormous effort and diligence by its experts in coming to its conclusion. (If you want to know the details of why FSOC is right and MetLife is systemically significant, read this discussion.)
Nevertheless, a Federal District Court judge last week issued an order directingFSOC to rescind its designation of MetLife as a systemically significant nonbank, a very dangerous conclusion. (The Court did not publicly disclose its decision or reasoning, only its order. Like more than two-thirds of the case, the decision is for now under seal, inexcusably in our view – more about that below.)
This order appears to give global financial conglomerates like MetLife a license to be a too-big-to-fail systemic threat without any increased supervision to protect the country. That will re-create the pre-2008 financial system where mega-banks are closely regulated but mega-non-banks are not, which will incentivize systemic risk to migrate to the mega-non-banks populating the shadow banking system. That is a direct threat to the economic security, opportunity and prosperity of the American people and must be overturned on appeal. As a New York Times editorial made clear, “The Dodd-Frank reforms need defending and strengthening, not weakening.”
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 On such incredibly consequential matters, the American people have a right to know: Better Markets has been a leading voice for the public interest in transparency. The American people have a right to know what their government and Wall Street are doing, engage in effective oversight and hold elected official, regulators and others accountable. We have done that at the regulatory agencies, in Congress and the Executive Branch and also in the court system, most recently in the lawsuit MetLife filed against FSOC. More than two-thirds of the parties’ filings in that case – the basis for the court’s decision — were filed under seal so no one but the court and the parties have any idea what’s really going on in this momentous case which has far-reaching implications for every American. That’s wrong.So, in November 2015, we moved to intervene in the case for the limited purpose of seeking to unseal the evidentiary record and briefing so that the American people can evaluate what FSOC did, what MetLife claims and the basis for the court’s decision. The judge has yet to rule on our motion to intervene and our request that the redactions to the record be as minimal as possible. The 2008 crash is going to cost the US more than $20 trillion dollars; the next one will almost assuredly cost more. When a court proceeding like the MetLife case could directly impact the likelihood of the next crash occurring or not, the American people should get the maximum amount of information and there should be a very high burden for anyone trying to keep information from the public.
That’s why it was also very disappointing that court itself issued its opinion under seal, at least temporally so that the parties could propose redactions to it. The day after the decision was filed under seal, Better Markets updated its requestwith the court so that any redactions to the opinion proposed by the parties would be subject to the same rigorous scrutiny that we have proposed for the existing redactions in the record and briefing. We will update you on developments as they happen.
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 #EndingTBTF Symposium roundup: Even though many believe that the Dodd-Frank Act gave financial regulators the tools they need to make the financial system safer, there are still many influential voices who think that some financial institutions remain so enormous that their failure would jeopardize the entire financial system or that they would be bailed out. Among those who believe that too-big-to-fail institutions remain a threat to the financial system is Neel Kashkari, the new President of the Federal Reserve Bank of Minneapolis. In a recent speech, Mr. Kashkari said that big banks still pose an unacceptable risk to the economy, and that policymakers should consider further “transformational changes”: forcing big banks to raise their capital levels to the point where they could not fail or breaking them up into smaller, less connected entities so that their failure would not pose a threat to the financial system. Mr. Kashkari pledged that the Minneapolis Fed would hold a series of#EndingTBTF Symposiumsto explore these and other alternatives to dealing with the “Too Big to Fail” problem. On Monday, April 4, the Federal Reserve Bank of Minneapolis held the first symposium of the series with an all-star line up to debate the issues. The agenda, participants and many of the papers can be found on the Minneapolis Fed’s website. The first panel explored the role that capital requirements could play in ending too-big-to-fail institutions. Stanford Business School Professor Anat Admati forcefully made the case for forcing large banks to raise their capital standards to the point where they could sustain significant losses without either failing and imposing significant damage on the economy or requiring the government to bail them out to avoid catastrophe. The second panel explored the possibility of changing the organizational structure of large financial institutions in order to take the “big” out of too-big-to-fail. MIT Professor Simon Johnson laid out the argument for capping the size of the nation’s largest banks at 2% of U.S. Gross Domestic Product.
The Minneapolis Fed has promised to publish a series of policy briefs summarizing the key take-aways from the Symposium. Better Markets applauds Mr. Kashkari and the Minneapolis Fed for pointing out that even though significant progress has been made in making the financial system safer and more resilient, too-big-to-fail banks continue to threaten the stability of the financial system and that policymakers need to consider even more fundamental reforms to end this threat once and for all. Stay tuned for a series of published policy briefs summarizing the key take-aways from the Symposium.
Better Markets in the News: Wall Street Reform Group Seeks to Unseal MetLife Ruling: American Banker by John Heltman 3/31/2016 MetLife ruling vindicates lonely decision to fight: Financial Times by Barney Jopson and Alistair Gray 3/31/2016 MetLife Wins Battle to Remove ‘Too Big to Fail’ Label: The New York Times by Victoria Finkle 3/30/16 Sunlight is the Best Disinfectant — Better Markets Renews Call for MetLife Transparency: Corporate Crime Reporter by Editor 3/31/2016 |
