Thought Piece by Stephen Heins
[Gasp, Wash DC regulators finally admit they can’t predict the future?
Has a baseball bard, Casey Stengel, finally been heard? “Never make predictions, especially about the future.”
Designing plans and defenses around black swan events is micromanagement gone horribly wrong, especially when we don’t know which black swan event is in the unknowable future. The marketplace, while imperfect, is predicated on humility and flexibility. Steve]
Wall Street Journal Editorial Nov. 8, 2016 6:57 p.m. ET
Washington’s Not So Big Short In the MetLife case, regulators admit they can’t predict the future.
The U.S. government has finally admitted in court what everyone else has known all along: Washington is not going to spot the next financial disaster before it occurs. In appealing their legal defeat to MetLife , the feds have been forced to acknowledge the false premise at the heart of the 2010 Dodd-Frank Act.
Dodd-Frank created the Financial Stability Oversight Council, which is supposed to determine which firms are most likely to trigger a future crisis. In 2014 the council declared that MetLife was one of these “systemically important” firms. But in March federal Judge Rosemary Collyer found that, among other procedural failings, the government never did an assessment of MetLife’s risk of failure.
At the U.S. Court of Appeals for the District of Columbia Circuit, the government’s lawyer, Mark Stern, recently said that there’s no way regulators could be expected to perform such an analysis. He told the judges, “If you would have had to scroll back to 2005 and predict whether it was likely that AIG was going to experience material financial distress, probably the only people who would have said that were the guys in ‘The Big Short’ who sort of were out ahead of everybody.”
He’s referring to the investors featured in the book and movie who foresaw the mortgage crisis. Mr. Stern is right that financial regulators cannot be relied on to make such calls. The government’s legal problem is that in 2012 these same regulators published their method for evaluating a company like MetLife. The council clearly stated it would consider several criteria that “seek to assess the vulnerability of a nonbank financial company to financial distress.”
Regulators skipped that step when they deemed MetLife systemically important. The feds also neglected to perform a cost-benefit analysis, rejected advice from the council’s independent insurance experts, and refused to use the standard stress-test methodology applied to other financial institutions. All of these procedural errors mean that MetLife has by far the better legal argument, but two of the three judges hearing the appeal were appointed by President Obama, who signed Dodd-Frank.
At least this view into the Beltway financial bureaucracy—and Mr. Stern’s admission—allow voters to understand the arbitrary and capricious nature of Obama-era regulation, and decide whether they want more of the same.
