The U.S. government panel that decided MetLife was too big to fail erred by not evaluating the insurer's vulnerability to financial distress, according to the federal judge who rescinded that designation last week.
That finding was one of several underpinning U.S. District Judge Rosemary M. Collyer's March 30 legal opinion which was unsealed Thursday. Collyer had previously issued just a two-page order stating her conclusion and offering only bare indications for its basis.
Collyer said in her opinion that the Financial Stability Oversight Council's action was "arbitrary and capricious" and that the panel didn't follow its own guidelines in concluding that MetLife was a threat to financial stability.
"FSOC reversed itself on whether MetLife's vulnerability to financial distress would be considered and on what it means to threaten the financial stability of the United States," the judge said in a 33-page decision.
MetLife shares surged 5.3 percent to $44.73 by that day's end as investors reacted to the court decision and speculation grew about its implications for other banks and non-banks labeled as systemically important financial institutions by the FSOC.
Attorneys for New York-based MetLife argued in February that the FSOC's determination was arbitrary and that the panel — which includes Treasury Secretary Jacob Lew, Federal Reserve Chair Janet Yellen and seven more voting members — hadn't considered the economic effect of subjecting the biggest U.S. life insurer to new capital requirements.
Government lawyers defending the designation had emphasized the insurer's interconnectedness to financial firms around the world and asked Collyer to defer to the "considered judgment" of the FSOC's panel members.
MetLife Chief Executive Officer Steve Kandarian had fought the SIFI label, saying his firm is well regulated by state watchdogs and isn't vulnerable to sudden withdrawals like banks.
The escape from SIFI status may free up $2.5 billion or more that could be returned to shareholders, according to John Nadel, an analyst at Piper Jaffray Cos. Kandarian had scaled back share buybacks as federal regulators worked to finalize tighter capital standards for non-bank SIFIs.
"This is a big win for the company, as it removes the SIFI designation and an unknown federal regulatory regime, and also validates a controversial management decision," Ryan Krueger, an analyst at Keefe, Bruyette & Woods Inc., said March 30 in a note to clients.
Kandarian announced in January that the insurer was weighing a possible sale, spinoff or public offering of a U.S. retail operation, which sells variable annuity and life insurance products. He's sticking with that plan even after the court ruling, as the insurer looks to focus on businesses that have lower capital requirements and greater cash-flow generation.
"While this decision is a very good one from our perspective, the strategic reasons remain in place as well as other regulatory matters that relate to that business," Kandarian said March 30 in an interview after the ruling, citing the Labor Department's possible rules on retirement-product sales as an example.
American International Group Inc. and Prudential Financial Inc., the other two insurers named as SIFIs, might face pressure from shareholders to challenge the designation, according to Robert Haines, an analyst at CreditSights Inc.
Scot Hoffman, Prudential's spokesman, said after the ruling that the Newark, New Jersey-based company continuously reviews developments and evaluates what's best for shareholders. AIG CEO Peter Hancock has called the ruling somewhat surprising and said he is watching the dispute closely.
"It certainly opens that opportunity" to look for ways to escape SIFI status, he told CNBC March 31. "We'd want to reserve judgment to see how the rules ultimately get written and how they get interpreted by the regulators."
The case is MetLife Inc. v. Financial Stability Oversight Council, 15-cv-00045, U.S. District Court, District of Columbia (Washington).