The US - and later global – credit crunch of 2008 may seem like a nasty war that’s been and gone and read about in schoolchildren’s history lessons on modern USA, but on Wednesday there was a wake-up call that the ghosts of the crisis are still here to haunt us.
The Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law six years ago last month, and a plethora of other regulation has blighted profit margins of traders of all manner of assets, as well as clipped budgets for various critical and non-critical operations of banks since then.
Banks have been given health checks and now are pretty much back to normal, including a spate of welcome quarterly earnings results from the likes of JP Morgan Chase (NYSE:JPM). Citigroup (NYSE:C) and Bank of America Corp (NYSE:BAC) in the past month.
Even American International Group, seen as a “tipping point” firm in the crisis on a par with now-defunct Lehman Brothers has had a major rehabilitation. It’s stock jumped 7% in early August after the insurer beat Wall Street estimates for quarterly profit and added $3bn to its stock buyback programme.
But one institution isn’t best pleased about being cocooned by regulation and a “special status”. No institution wants to say it is vulnerable to failure. But then, none wants to admit it is too big to fail. For the meaning of that post-crisis is one that attracts a lot of extra regulation, and costs.
The insurer MetLife (NYSE:MET) outlined its plan to fight its designation as a systemically important financial institution, as it goes to court to fight the so-called "SIFI" designation that mandates more extensive oversight. SIFI was a product of the Dodd-Frank law.
The insurer's plan is laid out in a court filing on Monday, and contends that regulators used a flawed process to conclude that Metlife could damage the US financial system in a distress situation.
On March 30, US District Judge Rosemary Collyer rescinded the “systemically important financial institution” designation of MetLife made by the Financial Stability Oversight Council, which consists of the heads of all financial regulatory agencies.
The federal government appealed in the U.S. District Court of Washington, D.C., filing its brief in June.
MetLife accuses regulator FSOC of flaws and even says that it thinks the designation was “preordained from the outset.”
But it also brought up its past requests “that, as an alternative to costly company-specific designations of insurers, FSOC consider an activities-based approach that would subject any systemically risky activities undertaken by insurers to regulation on an industry-wide basis.”
FSOC had said that it could not use an activities-based designation method under statute. In April, however, the council announced it will use an activities-based approach for regulating risk in asset managers and mutual funds, leaving MetLife to call its fairness into question.
What the legal challenge to the regulator has thrown up is that for all the regulation thrown at banking and insurance in the past few years, it is company-specific rather than industry-wide activities-specific.
The statute may well prevent it. But it only demonstrates why US regulation fails to recognise and counter the ever-present risks that most financial instability to markets is not caused by a rogue trader or unscrupulous desk or company. It is caused by similarly odious practices across an industry.
Would the FSOC’s approach have prevented the 2007 subprime mortgage scandal that led to the credit crisis? Would putting pressure on one mortgage broker at the time have helped?
Almost certainly the answer would be no. The AAA ratings that were awarded to subprime assets and led mortgage sales desks to push product was not the result of one isolated issue. Would everyone therefore have been too big to fail?