Apr 26, 2016 - 11:30am

Hamilton and Systemic Risk

Executive Vice President, U.S. Chamber Center for Capital Markets Competitiveness
Senior Advisor to the Senior Executive Vice President


A statue of Alexander Hamilton, the first U.S. Treasury secretary, stands guard at the U.S. Treasury building in Washington, D.C. Photo credit: Andrew Harrer/Bloomberg

Leave a note for your next of kin.

Tell’em where you been. Pray that hell or heaven lets you in. ...

Confess your sins. Ready for the moment of adrenaline when you finally face your opponent. ...

Your last chance to negotiate send in your seconds, see if they can set the record straight.

That quote, from the musical "Hamilton," is from a song the "Ten Duel Commandments." But it could describe a scene playing out in modern day Washington, D.C., over systemic risk.

Alexander Hamilton recognized that the survival of the United States rested in its ability to have a healthy, growing and prosperous economy. While Hamilton viewed the business community as being in the vanguard of that effort, he also held strong views that businesses must live under appropriate laws and regulations, while government must operate within defined boundaries through checks and balances.

In other words, if a business breaks the law, or if government doesn’t follow due process, there is a price to be paid.

Certainty of rules and process allow both sides to know what to do, when to do it and provide a situation where outcomes can be rational and reasonable.

Under the Dodd-Frank Act, the Financial Stability Oversight Council (FSOC) can designate a firm for enhanced regulation; after scrutinizing a business through a three stage process, it is determined whether the collapse of the firm would pose a systemic threat to the financial stability of the United States economy.

In December 2014, FSOC designated MetLife as a systemically important financial institution. MetLife disagreed with this designation and sued FSOC claiming that the council had ignored key information and didn’t follow basic procedures in its decision making process. In full disclosure, the Chamber filed a brief supporting MetLife.

In late March, a federal judge sided with MetLife and invalidated the FSOC decision. Judge Rosemary Collyer ruled on narrow administrative procedure on three grounds:

  1. FSOC changed the rules for systemic risk designation during the MetLife review without allowing public comment on those changes.
  2. FSOC ignored its own process and didn’t examine all of the factors it said it would.
  3. FSOC failed to conduct an economic analysis of designating MetLife.

Judge Collyer has been criticized by many who should know better, claiming that the judge is no expert on financial regulation and therefore should not have decided the case.  Of course she is not an expert financial regulator.  But she did not second-guess the financial expertise of FSOC.  She held that FSOC had violated the Administrative Procedure Act, which is the “bill of rights” for the modern regulatory state. As a nation that lives under the rule of law, the notion that a federal judge should abdicate her duty and yield to an alleged imperative of bureaucratic expertise would have the founding fathers rolling over in their graves.

First, under that logic, judges wouldn’t be allowed to decide any matter involving technical or specialized expertise — patent disputes, medical malpractice cases or espionage cases.  

But more importantly, Judge Collyer didn’t decide issues of systemic risk or financial regulation. Rather, Judge Collyer decided that FSOC failed to follow the process established by Congress, the courts and FSOC itself.

We not only agree with Judge Collyer but that FSOC must have an open transparent process — one where all stakeholders know the rules of the road. We proposed those reforms a few years ago, but that is a job for the next Congress and the next administration.

It is a basic American notion that we are a nation of laws and not men, and the principle that the government must abide the rule of law is hardwired into our country’s DNA by leaders such as Alexander Hamilton. Disagreeing with the government shouldn’t feel like a duel — it’s why we have courts and judges decide disputes. Duels were outlawed for a reason; let this case play out under the process developed by the founding fathers.  

A strong economy is as important to the United States as it was in the time of Washington, Jefferson, Burr and Hamilton. Let’s get back to basics and put America back on the road to prosperity.

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About the Author

About the Author

Tom Quaadman headshot
Executive Vice President, U.S. Chamber Center for Capital Markets Competitiveness
Senior Advisor to the Senior Executive Vice President

Tom Quaadman develops and executes strategic policies to implement a global corporate financial reporting system, address ongoing attempts of minority shareholder abuse of the proxy system, communicate the benefits of efficient American capital markets, and promote an innovation economy and the long-term interests of all investors.