Brief of 15 Professors of Law and Finance in MetLife v. FSOC

Last week, along with our co-authors Kate Andrias and Michael Barr of the University of Michigan Law School, we filed an amicus brief on behalf of fifteen professors of law and finance in MetLife v. Financial Stability Oversight Council. MetLife has challenged the FSOC’s determination that the company’s distress could threaten U.S. financial stability—and, thus, that MetLife should be subject to Federal Reserve supervision. The case, which is currently before the federal trial court in Washington D.C., represents the first major challenge to an FSOC designation. Our brief explains why the court should reject this challenge.

Our brief reflects the views of a wide range of scholars with expertise in financial regulation and administrative law, including faculty at eight top universities: Columbia, Cornell, Harvard, Michigan, Stanford, Vermont, the University of Pennsylvania, and Yale. The signers of our brief, which included our Columbia Law School colleagues John C. Coffee, Ronald Gilson, Jeffrey N. Gordon, and Kathryn Judge, are listed below.

The brief begins by noting that the financial crisis in 2008, and the deep and long recession that it spawned, were the most serious economic calamities to befall the United States since the Great Depression. Congress responded with the Dodd-Frank Act, which recognized that the failure to effectively regulate nonbank financial firms was a key contributor to the crisis. The Nation’s financial regulators, we show, had failed to foresee and address systemic risks, in part due to regulatory gaps that prevented consolidated supervision of major nonbank financial firms like Lehman Brothers and AIG. To protect the country against future crises, Congress created the FSOC and gave it the power to designate nonbank financial firms as systemically important financial institutions (“SIFIs”) subject to supervision by the Federal Reserve.

Congress carefully designed the FSOC’s structure and procedures, we show, to ensure that SIFI designations were the product of expert, informed, and deliberate judgments, placing the heads of the Nation’s leading financial regulators on the Council. Congress imposed a supermajority voting requirement on all SIFI designations along with numerous other internal procedural checks to ensure that the designation power was used sparingly. At the same time, Congress understood that the FSOC’s SIFI designations would necessarily be predictive in nature: The FSOC’s role, Congress directed, would be to determine whether material financial distress at a nonbank firm “could” pose a threat to the financial stability of the United States, not whether it “would” pose such a threat. That is because the very purpose of designation is to subject the firm to consolidated supervision by the Federal Reserve, so that regulators can prevent the firm from undermining the Nation’s economic stability in the future.

We also show that, anticipating that the Council’s work would demand deep expertise and probabilistic judgments, Congress expressly limited judicial review of FSOC designations to the highly deferential arbitrary and capricious standard—and that FSOC’s designation of MetLife easily meets that standard. FSOC’s designation was based on two projected threats to financial stability arising from the company’s distress: losses caused by financial-market particiapnts’ exposure to MetLife and market disruptions arising from the asset sales that could accompany MetLife’s distress. Far from being arbitrary or capricious, we show, both projections were carefully reasoned.

In the end, MetLife’s challenge amounts to an effort to have the federal courts impose procedural and evidentiary hurdles to FSOC designations that are nowhere to be found in Dodd-Frank. But those policy choices are for Congress, not the courts, we argue, and the district judge currently considering MetLife’s challenge should reject the company’s claims.

Our brief was filed alongside three other amicus briefs supporting the FSOC’s position in the case. Those filings, including amicus briefs from a group of scholars of insurance regulators (available here), the nonprofit organization Better Markets (available here), and four NYU professors of economics who study the problem of systemic risk (available here) also provide important reasons why the court should reject MetLife’s claims.

We hope that our brief will provide a helpful framework for the court’s consideration of this critical case. The full brief is available here.

 SIGNERS OF AMICUS ON BEHALF OF 15 PROFESSORS OF LAW AND FINANCE

METLIFE v. FSOC

Kate Andrias
Assistant Professor of Law
Michigan Law School

Michael S. Barr
Roy F. and Jean Humphrey Proffitt Professor of Law
Michigan Law School

John C. Coffee, Jr.
Adolf A. Berle Professor of Law
Columbia Law School

Darrell Duffie
Dean Witter Distinguished Professor of Finance and Shanahan Faculty Fellow
Graduate School of Business
Stanford University

Ronald J. Gilson
Charles J. Meyers Professor of Law and Business, Emeritus, Stanford Law School, Marc and Eva Stern Professor of Law and Business, Columbia Law School

Jeffrey N. Gordon
Richard Paul Richman Professor of Law and Co-Director, Richman Center for Business, Law & Public Policy
Columbia Law School

Robert J. Jackson, Jr.
Professor of Law and Co-Director Ira M. Millstein Center
Columbia Law School

Kathryn Judge
Associate Professor of Law and Milton Handler Fellow
Columbia Law School

Andrew Metrick
Deputy Dean & Michael H. Jordan Professor of Finance and Management
Yale School of Management

Gillian Metzger
Stanley H. Fuld Professor of Law
Columbia Law School

Saule T. Omarova
Professor of Law
Cornell University

Amiyatosh Purnanandam
Associate Professor of Finance and Michael R. and Mary Kay Hallman Fellow
University of Michigan Ross School of Business

Jennifer Taub
Professor of Law
Vermont Law School

Adrian Vermeule
John H. Watson, Jr. Professor of Law
Harvard Law School

David Zaring
Associate Professor
The Wharton School
University of Pennsylvania

1 Comment

  1. Simon Hu

    Designation of insurance SIFIs such as MetLife and AIG will require a new resolution regime for economic insolvency, which would be distinctly different from bankruptcy resolution. In the absolute absence of any bargaining power of insurance policyholders in a pre-bankruptcy insolvency resolution or going concern recovery of the holding company, economic interests of policyholders would be at great risks for stakeholder conflicts, such as shareholder expropriations or counterparty flights.

    While I fully support MetLife’s SIFI designation, I also fully believe that the MetLife case should be allowed to proceed so as to expose the urgent needs for protection of policyholder economic interests in zone of insolvency.

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