posted on 21 April 2016
from William K. Black, New Economic Perspectives
Andrew Ross Sorkin has written a column lamenting that "For a Generalist, 'Too Big to Fail' May Be Too Tricky to Judge" about the district court opinion finding in favor of MetLife on the question of whether it would pose a system risk were it to fail.
Sorkin runs the NYT's "Deal Book," which is supposed to represent the paper's specialized expertise with regard to Wall Street. His column demonstrates that one of the areas of expertise required to understand Wall Street is legal, and that it is beyond his understanding despite having "read hundreds of pages of legal briefs from both sides, and talked to company and government officials and outside experts...."
I will start with his description of the judge, Rosemary M. Collyer, which ignores vital information and misinterprets other information.
Well, no. It does mean her specialty is employment law. Her appointment to the FISC by Chief Justice Roberts means (1) she was appointed to the federal judiciary by a Republican president (Roberts appointed only Republicans to the FISC, which is outrageous) and (2) Roberts thinks she is disposed to vote to allow the mass surveillance of Americans by the NSA. Republican appointees to the judiciary are materially more hostile to government actions - except in the case of supposed national security.
Similarly, Sorkin gives a naïve description of a scholar who claims that specialized economic courts are desirable.
Perhaps, but a reader should be informed that Wright is a professor at the ultra-right wing George Mason University School of Law. More importantly, a judge who has been "trained in basic economics" is likely to have been trained that market power is of trivial importance. This point should be particularly clear to Wright because George Mason University (GMU) ran the leading propaganda program for the federal judiciary in economics, which focused on hostility to government regulation and antitrust enforcement by purporting to teach "basic economics". Wright and his co-author not only admit this point - they cite the hostility of the modern judiciary to antitrust actions as evidence of the wondrous role that economics has played in changing the law and allowing the modern economy in which market power is celebrated.
The domination of the judiciary, particularly in the appellate courts, means that the district courts who rule against antitrust cases are more likely to be upheld on appeal. Appeals are expensive, so plaintiffs and the government are less likely to appeal such cases, which makes Wright's empirical study circular (and demonstrates how poor empirical work is passed off as science).. Even Wright admits that GMU's programs are "controvers[ial]".
The largest financial sponsor of judicial propaganda programs is the Koch brothers, and the other major sponsors are also ultra-right wing entities dedicated to their hostility to government regulation and effective antitrust law. Note that in the quoted passage Wright and his co-author inadvertently admit the key problem with their empirical study.
Another reason for a district court to both take the GMU propaganda course and rule in accordance with its ideology is not to "improve" their decisions, but to "conform" their decisions to the dominant beliefs of the appellate judges - "thereby reducing appeals, reversals, or other [results] that could damage their reputations". That is outrageous - and specialized economic courts would make it even worse, but Sorkin spots none of the empirical errors, biases, or dangers with Wright's proposals.
The greatest problem with the GMU propaganda, however, is that it has long been falsified by reality. That, however, never penetrates the ideological barriers. Naturally, the firms with massive market power love the results of the ideology.
Sorkin does not understand the legal system and its treatment of large firms.
"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".)
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.
Sorkin's discussion of Judge Colyer's decision shows that she and he do not understand the statute or the concept of systemic risk. It is, of course, impossible for FSOC to "project" (a) the losses that MetLife will sustain over the next decade or (b) the losses that MetLife's failure would impose on other entities during some year over say the next decade. How can the FSOC know the counterparties that MetLife will have three weeks from now, much less a decade from now? Only a fool would believe that they could predict the mechanism three or ten years from now by which MetLife's failure would destabilize a particular market, particularly because MetLife may be a critical counterparty to an entity three years from now that does not even now. I am a strong critic of Dodd-Frank, but that does not mean that every (or even most) provisions of the Act were drafted by fools to be absurd. The Act does not require the impossibility that Judge Colyer demanded - that FSOC quantify "the actual loss" that would result from MetLife's failure.
But Sorkin and the judge are also wrong (as are the FSOC officials who make the systemic risk determinations) in their reliance on statistics and probabilities - and in the absurd belief that we ran, randomly into the equivalent of "a 100-year storm". The probability of a global crisis is increased enormously if (a) we continue to create and make worse the criminogenic environments that produce the increasingly severe fraud epidemics that drive our financial crises and (b) if we continue to allow systemically dangerous institutions to exist rather than shrinking them. The econometric techniques being relied on by FSOC (and demanded by judges) are based on statistically invalid assumptions of a fixed distribution of risk. When we create perverse financial incentives to engage in widespread fraud we create a vastly increased risk of systemic failure.
Sorkin and other readers should read Better Markets' analysis of the district court opinion. It would have allowed him to understand the issues and the district court's two other major errors in addition to its inventing a requirement that FSOC divine the future and quantify the "actual loss".
First, the court erroneously held that FSOC had to prove that MetLife was "vulnerable" to failure. The statute has no such requirement for a logical reason. If you could not designate a financial entity as systemically dangerous until it had a demonstrated, major problem that could lead to its failure it would be far too late to do the things that the statute is designed to do to reduce the risk of failure and the severity of the failure. The statute asks: if the entity fails "could" that failure pose a material risk of disrupting the economy?
Second, the court invented a requirement for a cost-benefit study. The statute has no such requirement, because doing so would require a farcical exercise.
The three central errors that the court made have nothing to do with her lacking specialized finance training. They are all easily understood errors of law and they all arise from extreme ideological hostility on the part of the judge against government regulation of the systemically dangerous financial institutions that will again blow up the global economy unless we shrink them to the point that they no longer create that danger. The issue is when the next systemically dangerous entity will fail - not "if".
One of the reasons we, the Bank Whistleblowers United, proposed getting rid of the systemically dangerous institutions through the use of banking regulators' powers to set individual minimum capital requirements is that it allows vastly quicker remedial action than the cumbersome FSOC procedure that took over two years to designate MetLife as posing a systemic risk.
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