WASHINGTON — The DC District Court on Wednesday ruled against the Financial Stability Oversight Council's designation of the insurance giant MetLife as a systemically risky nonbank, though the opinion behind the order was sealed and the reasoning behind the decision remains unclear.
In a surprisingly swift decision — oral arguments on the case were held Feb. 10 — Judge Rosemary Collyer ordered that the FSOC's 2014 designation be rescinded, awarding in favor of plaintiff MetLife. The government can appeal the decision, a move that appears likely given what is at stake for the council. A key reason the Dodd-Frank Act created the council was to allow it to designate nonbanks as a threat to the economy.
In its case, MetLife argued that the council had violated administrative law and due process by designating MetLife as a systemically important financial institution. The court found in favor of MetLife on two counts and partially in favor on an additional count, but the complaint that it references is also under court seal. Neither MetLife nor the FSOC immediately responded to requests for comment Wednesday morning.
During oral arguments in February, Collyer seemed to save much of her criticism for the FSOC, saying that the crux of the argument is whether the interagency council had an obligation to determine the probability of the insurance company's failure before it examined whether the fallout from such a failure would pose risk to the broader financial system.
"It seems to me that when you start with a proposition that the world is falling apart … the answer is as obvious as the nose on your face," Collyer said. "I'm trying to decide whether that's a reasonable place to start."
MetLife recently announced that it would be splitting off parts of its business, comprising roughly $260 billion in assets, into either a new company or as a sale to another firm back in January. But despite reports that it was a response to the FSOC's designation, the company did not specifically cite its SIFI label as a motivator for that move.
Dodd-Frank endowed FSOC with the power to designate nonbank entities — which may not be subject to traditional prudential or supervisory standards — as SIFIs.
Such entities are then subject to enhanced regulatory oversight by the Federal Reserve Board, though the agency has not yet completed rules outlining what those standards would be.
To date only four nonbanks have been designated as SIFIs: American International Group, Prudential, GE Capital and MetLife. MetLife alone has challenged its designation in court.
The judge's order found in favor of counts four and seven in the sealed motion for summary judgement and found in favor of count six in part. All remaining counts in MetLife's motion were denied and FSOC's motion to dismiss was denied.
While the motion specifically referenced by the order is under seal, those counts in the original complaint from January 2015 correspond to MetLife's charges that FSOC violated the Administrative Procedure Act, Dodd-Frank and due process by failing to "assess MetLife's vulnerability to material financial distress" (count four) and failed to consider the "economic effects of designation on MetLife" (count seven).
Count six in the original complaint is a long and sinewy series of charges regarding the factual basis for FSOC's designation, which MetLife considered to be "unsubstantiated, indefinite" and amounting to "speculation." MetLife argued that FSOC's assumptions about the firm's material distress ran afoul of most industry standards for risk assessment, assumed stress scenarios far in excess of even the most extreme scenarios considered in similar settings, exaggerated counterparties' exposures to the firm and did not take into account the existing state-level regulatory scrutiny that MetLife faces.