Judge Grills Regulators in MetLife SIFI Case
WASHINGTON — The Financial Stability Oversight Council is off to a rocky start in its court battle against MetLife, which sued the interagency council after it was designated as a systemically important company.
While the courts generally accord deference to regulators, Judge Rosemary M. Collyer of the D.C. District Court appeared highly skeptical of the FSOC's case during the first round of oral arguments on Wednesday. She sharply questioned whether the council had the right to designate MetLife as a systemically important financial institution based on the impact of its failure rather than the probability that it would collapse.
"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."
American International Groups announcement Tuesday that it plans to split off its mortgage insurance business takes the prospect of a broader breakup off the table in the short term, but some observers think the firm may still break itself up eventually.
The Financial Stability Oversight Council will face critical tests in 2016, including a lawsuit over its designation of MetLife as a systemically important nonbank and whether it will de-designate GE as a SIFI.
The FSOC voted in December 2014 to designate MetLife a SIFI — one of only four nonbanks to be so designated since the council was created in 2010. The insurer almost immediately filed suit to overturn the designation in January 2015, in what is seen as a potentially groundbreaking case that will shape the oversight council's powers for the foreseeable future.
Among other things, MetLife argues that the FSOC violated its own guidance on nonbank designations by not first assessing the "vulnerability" of a nonbank as part of its analysis — that is, determining how likely it would be for a given firm to endure financial stress before it stresses the system as a whole.
Eugene Scalia, a partner with Gibson Dunn who represents MetLife, said that the council's decision to simply skip that step and examine an assumed catastrophic failure of MetLife's assets is a violation of the Administrative Procedure Act and due process.
"If they want to change the rules, they need to recognize that they've changed the rules," Scalia said. "They're not locked down. They can change. They just need to acknowledge" that they have made that decision.
Eric Beckenhauer, senior trial counsel for the Department of Justice, argued that Congress clearly intended to empower the FSOC to designate certain financial institutions as systemically important. The Dodd-Frank Act expressly gave the council a free hand to subject the type of institutions that were bailed out or nearly failed during the 2008 crisis to enhanced supervisory standards.
"MetLife is asking the court to neuter these reforms by holding the council to standards found nowhere in the statute," Beckenhauer said. "The court should decline that invitation."
Collyer asked Beckenhauer extensively about the nature of the FSOC's staffing and decision-making process. Beckenhauer said that some of the council's staff are "detailed" from member agencies, but that a number are exclusively assigned to FSOC-related projects. Collyer said it was unclear whether there was a potential violation of due process if the SIFI determination ultimately came from a decision by staff who were members of other agencies.
"This is an agency that remains bundled up," Collyer said, referring to a pre-APA era when federal agencies had very broad mandates. "I'm trying to determine whether that's OK or that's really a problem."
Collyer also sought clarity on whether the FSOC was bound by its guidance under the APA to perform a vulnerability assessment, or whether it was only bound by the statute, which says that the council may designate a nonbank as a SIFI if the nonbank "could pose a threat" to financial stability. Administrative case law requires executive decisions to at least be reasonable in order to be valid, Collyer said, so that would suggest that council has a fairly modest standard to meet under the law.
"The statutory language is 'could,' " Collyer told Scalia. "And the analysis has to be reasonable. So between 'could' and 'reasonable' … it's not a very high bar, is it?"
"It can't be implausible, and yet it plainly is," Scalia replied. "It can't be against information in the [administrative] record."
In her questioning of the FSOC's position, Collyer asked how the council could have considered a risk analysis by mentioning it in its guidance, but then apparently reached the conclusion that MetLife posed a systemic risk by imagining the fallout from its stress rather than posing a plausible scenario in which it could be endangered.
"Instead of a risk analysis, the agency [assumed] a macroeconomic weakness, that the U.S. financial system is unstable, and MetLife or anybody else is at the brink of insolvency," Collyer said. "That is not a risk analysis. That takes all the risk out of it. That's assuming the worst of the worst of the worst of the worst."
"But the FSOC argued that its determination fell within the bounds of its interpretive guidance. But that even if it hadn't, Beckenhauer argued, the SIFI determination would still have been validly reached under the language of the statute."
"Congress explicitly instructed [the FSOC] to determine whether stress could pose a threat, not to determine if stress could occur and then if it could be a threat," Beckenhauer said. "The interpretive guidance mentions vulnerability … but in the final determination it did what it said it would do."
Beckenhauer also said that the FSOC conducted similar assumptions in its determinations for the other three nonbank SIFIs, and that the argument that MetLife was somehow unaware of the designation process or was denied its due process is counter to case law.
"What we have here is not a prosecution," Beckenhauer said. "I think the record clearly shows the opposite. The council engaged in a 17-month dialogue [with MetLife] in stage three" of the designation process.
Collyer, who was appointed to the bench by former President George W. Bush, was not entirely swayed by MetLife's case either. She told Scalia at one point that she was "not sympathetic to the argument that" MetLife was not privy to the record before the determination was made.