Key Senators Support Trump In Fight Against Too Big To Fail

By Norbert Michel, Heritage Foundation financial regulations expert

The Trump Department of Justice recently decided to oppose the Consumer Financial Protection Bureau (CFPB) in court, thus joining a legal effort to have the structure of the Obama-era agency declared unconstitutional.

But since Congress gave the CFPB independent litigation authority, the Bureau still gets its day in court, regardless of what the Trump administration wants.  So little has changed in this case.

Still, it was the right decision to oppose the CFPB. And seeing two different arms of the executive branch fighting each other makes an interesting spectacle.

But even more interesting is the Trump administration’s decision to stay silent (so far) in the case of MetLife, where a similar move to reverse Obama-era policy could have a big impact.

The MetLife case dates to September 2014, when the Financial Stability Oversight Council (FSOC), a sort of super-regulatory agency created by the 2010 Dodd–Frank Act, labeled the life insurance company a systemically important financial institution (SIFI). The SIFI designation may sound like an honor, but what it really meant was that MetLife was officially designated for special regulation by the Federal Reserve.

In January 2015, MetLife announced they would fight the designation in federal court.

On March 30, the U.S. District Court in D.C. rescinded the FSOC’s MetLife designation. Within days, then-U.S. Treasury Secretary Jack Lew announced the FSOC would appeal.

The appeal could be decided any day now, but given the administration’s recent executive order, it would make sense for Justice to drop this case.

That executive order made it the official policy of the Trump administration to regulate the United States financial system in a manner consistent with seven core principles, one of which was to prevent taxpayer-funded bailouts.

While dropping the MetLife case won’t, by itself, prevent taxpayer funded bailouts, the SIFI designation is inconsistent with ending bailouts.

If the federal government will no longer bail out large financial firms, what’s the sense in asking federal regulators to identify the firms that they think are too big to fail?  The administration should just stop the process—period.

The Treasury Secretary chairs the FSOC and effectively can veto its decisions. So the administration could, for example, announce that the FSOC will no longer make any systemic designations – under either Title I or Title VIII of Dodd-Frank – while Treasury reviews the best way to dismantle Dodd-Frank.

Of course, that policy decision would not help MetLife.

But if Justice drops the MetLife appeal, unlike in the CFPB case, the litigation would be over.  Thus, a decision to drop the appeal would effectively rescind MetLife’s designation, consistent with the District Court’s ruling.

For an administration that wants to end bailouts and “rationalize the federal financial regulatory framework,” there’s no doubt dropping the litigation is the right move.

And now the President has even more support.

A group of 10 U.S. Senators, led by Tom Cotton (R-Ark), is calling on Treasury Secretary Steven Mnuchin to drop the government’s appeal. The group sent Mnuchin a letter on Tuesday “in strong support of President Trump’s Executive Order setting core principles for regulating the United States financial system.”

The letter also asks Treasury to review the policies and procedures the FSOC uses to designate nonbank financial companies for heightened regulations, and points out several problems with the current process.  It correctly criticizes the designation process for lacking transparency and accountability, insufficient use of data to support its conclusions, and the absence of a consistent methodology.

Combined with the fact that the first two titles (among others) of Dodd-Frank all but enshrine future bailout policies, any fan of limited government should be on board with getting rid of the designation process altogether.

As Sen. Cotton and his colleagues noted, “These designations offer large firms implicit taxpayer backing for future bailouts and result in massive new regulatory costs.”

[Also on the letter are Cotton’s Senate Banking Committee colleagues Pat Toomey (R-Penn.), Richard Shelby (R-Ala.), Mike Crapo (R-Idaho), Mike Rounds (R-S.D.), John Kennedy (R-La.), Ben Sasse (R-Neb.), David Perdue (R-Ga.), Thom Tillis (R-N.C.), and Tim Scott (R-S.C.).]

The House Financial Services Committee has already drafted a bill to stop designations and replace large chunks of Dodd-Frank. This letter is one of the most positive signs to come out of the Senate so far.

Let us hope that many more will be forthcoming.

*Originally published in Forbes, click here.

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