WASHINGTON — Twenty current and former Democratic members of Congress sided with the Financial Stability Oversight Council in a legal brief filed Thursday, arguing that its designation of MetLife as a systemically important financial institution should not have been struck down in federal court.
The ruling is "inconsistent with Dodd-Frank's text and fundamentally misunderstands its structure and operational design," said the brief, whose signatories included Christopher Dodd and Barney Frank, the two former lawmakers who sponsored the 2010 law that created the FSOC.
The decision misunderstands "the role that FSOC is empowered to play, in conjunction with the Fed, in preventing another calamitous financial meltdown like the one the nation just experienced," they said.
In a call with reporters, Frank added that MetLife's argument that it was harmed by the designation was baseless.
"This was not a case where MetLife was being penalized in any serious way," he said. "These other institutions that have been subject to FSOC supervision, they haven't gone out of business, they haven't lost money."
Frank added that the ruling could prompt others to challenge FSOC designations. "This is an invitation for people to re-litigate," he said, adding that "some are going to have a hard time showing damage."
In the 46-page amicus curiae brief, the lawmakers appealed to their own expertise on Dodd-Frank, which allowed FSOC to designate nonbank financial institutions as "systemically important" and thus place them under stricter oversight by the Federal Reserve Board. They also echoed arguments the FSOC made in its appeal of the March ruling from U.S. District Judge Rosemary Collyer.
The oversight council should not be held responsible for calculating the cost of the designation on the firm, because it is not its role to impose additional regulatory scrutiny, they said. "FSOC cannot know at the time it designates an institution what prudential standards the Fed will impose," the letter reads.
They also charged that Collyer misconstrued the sense of a "systemically important" designation, which they said should not take into account the company's probability of failure.
Dodd-Frank "does not require FSOC to consider whether the institution is likely to experience material financial distress," they wrote. "Rather, it asks FSOC to assume that the institution is experiencing material financial distress and then determine whether the existence of that distress could threaten the broader national economy."
Forcing it to calculate the probability of financial distress would be too costly for FSOC to make, they added. It would "hamstring FSOC's ability to play its part in the overall statutory scheme."
The letter calls more broadly on the courts to trust the council and the designation process. "Congress deliberately limited judicial review to ensure that courts would not second-guess FSOC's expert determinations," the lawmakers said. "That is exactly what the district court did here when it required FSOC to engage in analyses not required by the statute."
If the decision were ultimately upheld by the Supreme Court, Frank said, "those of us who believe in the regulation would want to see a statutory amendment" to the law.
Former Fed Chairmen Paul Volcker and Ben Bernanke made similar points in an amicus brief filed separately on Thursday. They argued that FSOC should not be required to calculate the risk of failure before designating a nonbank financial institution, or to evaluate how much the determination would cost the company.
Instead, FSOC is just required to determine whether an institution could create a systemic risk if it were to fail.
"There can be no question that MetLife, by its size, by its range of financial activities, and by its intertwined relationships with other parts of the nation's financial system could, under stress, affect the stability of financial markets more generally," they said.
"The intent of the law is clear," the Fed veterans added. "In view of such potential, FSOC could reasonably conclude that MetLife, like the other very large financial institutions with similar risks, should be brought under the purview of federal financial regulation."
The letter — filed by the Constitutional Accountability Center and signed by Sen. Elizabeth Warren, D-Mass., and House Minority Leader Nancy Pelosi, D-Calif., among others — was accompanied by an amicus brief signed by four New York University economists backing the oversight council.