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OpEdNews Op Eds    H3'ed 4/20/16

Too Big to Fail From the Eyes of a Specialist

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Sorkin does not understand the legal system and its treatment of large firms.

About two years ago, I was speaking with an executive at MetLife who floated the idea that the company should sue the government to overturn its designation as a firm that was too big to fail. The company believed that it was being unfairly labeled, and that the regulations that came with the designation were hindering its business.

My initial reaction, I distinctly remember, was to say: "That's a terribly risky idea. The government always wins."

Boy was I wrong.

"The government always wins?" What world does Sorkin inhabit? In the real world, we went through an enormous legislative battle precisely because that is not true. Any federal rule can be challenged in the District of Columbia, so virtually any federal rule can be blocked by the D.C. Circuit. A majority of the Court had been appointed by Republican presidents and many of them were exceptionally hostile to government programs and frequently declared new rules invalid.

Republicans viewed this judicial hostility in the D.C. Circuit to be of such extraordinary value to their Party and its corporate donors that Republican Senators refused to allow President Obama to fill vacancies in the U.S. Court of Appeals for the District of Columbia. This was outrageous, and the Democrats (to their shame) put up with it for years before adopting a version of the so-called "nuclear option" to allow a Senate majority to approve the appointment of members of the judiciary.

Why the District Court's MetLife Decision is in Error and Dangerous

Sorkin shows that he does not understand the statute or the concept of what the statute provides as to when the Financial Stability Oversight Council (FSOC) designates an institution as systemically dangerous. (In a telling euphemism, they are actually designated "systemically important.")

I have no idea if MetLife is too big to fail. I've read hundreds of pages of legal briefs from both sides, and talked to company and government officials and outside experts, and I'm still not sure. I've tried to make sense of it, but it is a highly complicated puzzle and to make such a determination with any degree of certainty requires mathematically projecting how money will flow between hundreds of institutions around the globe.

Well, no. The first and last sentence quoted above make no sense. Let us begin with reality. MetLife reported that at yearend 2015 it had total assets of $878 billion. That means that it poses a massive risk to the global system should it fail. Maybe, if it had $500 billion less in reported assets it might be worthy of debate. It has over $200 billion more in reported assets that Lehman claimed when it failed -- and Lehman triggered a global crisis.

The last sentence demonstrates Sorkin's failure to understand the legal test and the concept of posing a systemic risk. Sorkin thinks the regulators must "make such a determination" with "certainty" through "mathematically projecting how much money will flow between hundreds of institutions around the globe." The statute does not require any of that. No one can predict, perhaps a decade in advance, any of these elements. Indeed, the impossibility of knowing any of these things is one of the reasons why it is essential to get rid of the systemically dangerous financial institutions. What one can determine is that the financial institution is so massive and so interconnected with the global financial system that its failure would create a substantial risk of causing substantial disruption. The regulators amply demonstrated that point.

The judge's opinion is premised on a very different statute, the one MetLife's lobbyists wished Congress had enacted.

Judge Collyer's decision may well be entirely valid, but at least in certain places she appears off base. For example, she said the government "never projected what the losses would be, which financial institutions would have to actively manage their balance sheets or how the market would destabilize as a result."

Well, the government appears to have done much of that in its report, but you'd need a pretty sophisticated understanding of finance to understand exactly how their numbers were calculated.

Judge Collyer either decided to ignore those numbers or decided they were chosen arbitrarily.

The conundrum in the case of the oversight council is that determining which companies pose a systemic risk can't be done with a straight formula. The nature of financial crises means that, as a regulator, you're playing against a 100-year storm that you can't fully foresee.

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William K Black , J.D., Ph.D. is Associate Professor of Law and Economics at the University of Missouri-Kansas City. Bill Black has testified before the Senate Agricultural Committee on the regulation of financial derivatives and House (more...)
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