MetLife’s Big Win for Taxpayers – Wall Street Journal

March 30, 2016 7:39 p.m. ET

The Dodd-Frank Act of 2010 has become a license for regulators to control the U.S. financial system, and on Wednesday the insurance company that dared to resist won a legal reprieve. Federal Judge Rosemary Collyer rescinded the federal government's designation of MetLife MET 5.35 % as a "systemically important" institution.

Thanks to Judge Collyer, taxpayers are now standing behind one fewer financial giant. And thanks to MetLife's Steve Kandarian, the one CEO with the gumption to challenge the Financial Stability Oversight Council, even federal regulators must now recognize at least some limits on their power. Kudos as well to Eugene Scalia, the son of the late Justice Antonin Scalia, who crafted the MetLife challenge.

For the next week or so, Judge Collyer's decision will remain sealed while she gives MetLife and the feds an opportunity to propose redactions before public release. But based on the short order released Wednesday and a public hearing in February, it's clear the judge was unwilling to tolerate mere speculation as a basis for federal regulators to remake the financial economy.

The 2010 Dodd-Frank law that created the council handed enormous power to the regulatory agency heads who populate this financial star chamber. Their ability to induct a business into the too-big-to-fail club allows them to bestow both an enormous benefit in the form of an implied federal guarantee as well as a massive burden in additional compliance costs. But by refusing to rush this fraternity, MetLife has shown that even Dodd-Frank has not obliterated basic concepts of administrative law.

The stability council refused to make a fact-based, reasoned case about how the insurance company could threaten the U.S. economy. Along the way to its courtroom defeat, the government failed to conduct a cost-benefit analysis, abandoned its own financial metrics when convenient, changed the criteria on which its decisions were based, and even ignored its own independent insurance experts.

The government pointed with alarm at MetLife's exposures to big banks. But in one especially amusing legal exchange, the company's lawyers showed that the potential losses were smaller than the fines the government itself has extracted from giant banks.

The government nonetheless asked Judge Collyer to trust its "expert judgment." Federal judges typically defer to agencies, but this normally happens when the government gives some factual basis for its predictions, rather than asserting a right to make uneducated guesses. In February's hearing, Judge Collyer was also skeptical of the government's description of its work as "adjudication." Since the same regulators are investigating, prosecuting, judging and then considering a company's appeal of council designations, the judge noted that "there's nobody neutral in this process."

And there's almost nobody who isn't partisan. Congress typically sets up independent regulatory agencies with a governing panel consisting of both Democrats and Republicans to provide political and philosophical balance. But around the table at the stability council there are no seats reserved for dissenters from the party out of power. The council's chairman is Treasury Secretary Jack Lew.

The feds may appeal their MetLife loss, especially given the liberals President Obama and Harry Reid added to the D.C. Circuit Court of Appeals after trashing the Senate's filibuster rule. But the feds may want to think twice. Judge Collyer, a respected centrist among Republican appointees, presided over a legal debate that was not partisan or ideological. In its first legal test, the stability council looked like a rookie and was exposed for sloppy mistakes of administrative procedure. It made claims about a company that it did not have evidence to support.

Moreover, Judge Collyer didn't decide for MetLife based on its legitimate constitutional claims related to due process and separation of powers. An appeal would open the way to a much larger challenge to the legal foundations of this new regulator. While we would welcome such a challenge, there's also a question of how long taxpayers should have to underwrite an effort to defend the indefensible work of Mr. Lew and his council.