MetLife Victory an 'Embarrassment' for FSOC, But Impact Unclear
WASHINGTON — The DC District Court’s surprise ruling Wednesday throwing out an interagency council’s designation of the insurance giant MetLife as a "systemically important financial institution" is undoubtedly a blow to regulators, but its practical impact may be limited for now.
The Financial Stability Oversight Council has designated just four nonbanks as SIFIs, and MetLife was the only one to file a lawsuit protesting it. But there are no other designations on the immediate horizon, suggesting the FSOC has time to see this played out in court if the council — as is likely — appeals the ruling.
"It’s a profound embarrassment and a political hit" for the FSOC, "but practically FSOC was not planning any near-term designations anyway," said Karen Shaw Petrou, managing partner at Federal Financial Analytics. "This ruling doesn’t avert anything that might otherwise have happened."
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.
While the courts generally accord deference to regulators, Judge Rosemary M. Collyer of the D.C. District Court appeared highly skeptical of the Financial Stability Oversight Council's case during the first round of oral arguments on Wednesday.
The overall impact of the ruling remains uncertain because it is under seal — based on long-standing concerns about the protection of the firm’s proprietary business information — at least until the parties meet April 6 to discuss the terms of releasing the decision.
But a Treasury spokesman said that officials at the agency "strongly disagree with the court’s decision" and that it will "continue to defend the Council’s designations process vigorously," strongly supporting the expectation that the government will appeal.
"FSOC conducted a rigorous analysis of MetLife, including extensive engagement with the company, and determined that material financial distress at MetLife could pose such a threat to the financial system," the spokesman said. "We firmly believe that FSOC acted well within its legal authority to protect the entire global economy."
But there is little doubt that in the short term, the decision has given considerable ammunition to the council’s critics.
Steven Kandarian, MetLife’s chairman, president, and chief executive, said the ruling justified the firm’s decision to sue.
"From the beginning, MetLife has said that its business model does not pose a threat to the financial stability of the United States," he said in a statement. "This decision is a win for MetLife’s customers, employees and shareholders."
House Financial Services Committee chairman Jeb Hensarling, R-Texas, also praised the order. The FSOC’s designation authority is "one of the greatest dangers facing hardworking taxpayers" and it gives the Fed "near de facto management authority over such institutions," he said.
Hensarling reiterated his plan to propose a Republican alternative to the Dodd-Frank Act that would end "taxpayer-funded bailouts and Washington bureaucrats’ ability to anoint any business as too big to fail."
"The Financial Stability Oversight Council typifies the unfair Washington insider system that Americans have come to fear and loathe: powerful government bureaucrats, secretive government meetings, arbitrary and capricious rules, and the power to pick winners and losers — and taxpayers always end up being the losers," Hensarling said.
The ruling stunned industry observers, particularly because courts often defer to government agencies in the interpretation of their mandates.
Mayra Rodriguez Valladares, managing principal of MRV Associates, said MetLife has all the hallmarks of a SIFI institution based on its size, complexity, international footprint, involvement in derivatives and management of public funds. That could make future designations more difficult, she said.
"The decision on MetLife is a big disappointment," Valladares said. "The job of the FSOC to minimize systemic risk, from both banks and nonbanks, in the U.S. has been [made] much harder by today's ruling."
But Justin Schardin, acting director of the Bipartisan Policy Center’s Financial Regulatory Reform Initiative, said that in addition to appealing the decision, the council could also ask an appellate court for a stay. Depending on how sweeping the decision is, the FSOC could also simply redesignate MetLife according to the strictures of the ruling.
Schardin added, however, that Dodd-Frank includes two bases for assessing systemic risk: one examines the risk posed by a firm assuming that it failed or was in severe distress, and the other examines some specific exposures or activity of a firm that could put it or the financial system at risk. If the ruling focuses on or substantially circumscribes the first criterion, it could have major effects.
"FSOC has used the first criterion for all four of its designations," Schardin said. "If that is the basis, or at least part of the basis for this order, it would raise questions about whether FSOC could use that criterion again."
There are some clues to the nature of the opinion. The court order stated that it found in favor of counts four and seven in MetLife’s sealed motion for summary judgement and found in favor of count six in part. All remaining counts in MetLife's motion were denied and the 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 the 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 the FSOC's designation, which MetLife considered to be "unsubstantiated, indefinite" and amounting to "speculation." MetLife argued that the council'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.
It is also uncertain whether or how the other nonbank SIFIs — American International Group, Prudential and GE Capital — will be affected by the suit. GE Capital announced last year that it was restructuring its business and selling off assets in order to shed its SIFI label, while AIG has said several times in recent years that it is comfortable with its SIFI designation. A spokesman for Prudential declined to comment on the ruling.
Oliver Ireland, a former Fed official who is now a partner at Morrison & Foerster, said that the probability of a stay being awarded to the FSOC is somewhat remote, since the Federal Reserve has not yet issued rules for nonbank SIFI insurance companies and so there is little about the designation that is time-sensitive. Regardless of how broad or narrow the ruling might be, he said the symbolic importance is great because it says, for the first time, that there are judicial limits on what a government body can do in its nonbank designation process.
"To my mind, one of the centerpieces of Dodd-Frank is addressing systemic risk, and the key feature of addressing systemic risk was nonbank financial institution designation," Ireland said. "It does send a message that eight years [since the housing bust] we have a court questioning the discretion of the regulators on one of the key issues of the crisis, and I think that is a pretty significant event."