Judge Calls FSOC Review of MetLife ‘Fatally Flawed;’ Government Vows Appeal

By and | April 8, 2016

The U.S. government panel that decided MetLife Inc. was too big to fail erred in not analyzing the insurer’s vulnerability to financial distress, according to the federal judge who rescinded that designation last week.

U.S. District Judge Rosemary M. Collyer in Washington called the council’s determination process “fatally flawed” in a March 30 legal opinion which was unsealed Thursday. The judge previously issued just a two-page order stating her conclusion and offering only bare indications of its basis.

The Financial Stability Oversight Council’s action was “arbitrary and capricious,” Collyer ruled, saying the panel didn’t follow its own guidelines before deciding the biggest U.S. life insurance company was a source of economic danger.

“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 U.S.,” the judge said in a 33-page decision. She didn’t make that document public until both sides had had an opportunity to request redactions. They said none was necessary.

The government will appeal the ruling, a Treasury spokesperson said in an e-mail statement.

MetLife Shares

MetLife shares surged 5.3 percent to $44.73 on the day the court first announced its determination as investors reacted to the decision and speculation grew about its implications for other banks and nonbanks labeled as systemically important financial institutions by FSOC. The panel was created under the 2010 Dodd-Frank Wall Street reform legislation.

Shares of the insurer fell 3.1 percent to $41.64 at 2:24 p.m. Thursday after the news that the panel may appeal.

Attorneys for New York-based MetLife had argued in February that FSOC’s determination was arbitrary and that the panel hadn’t considered the economic effect of subjecting the biggest U.S. life insurer to new capital requirements.

The council, whose voting members include Treasury Secretary Jacob Lew and Federal Reserve Chair Janet Yellen , “focused exclusively on the presumed benefits of the designation and ignored the attendant costs, which itself is unreasonable,” Collyer wrote, agreeing with MetLife’s attorneys.

Government’s View

Government lawyers defending the designation emphasized the insurer’s interconnectedness to financial firms around the world and asked Collyer to defer to the “considered judgment” of FSOC’s panel members.

The judge did agree with the council that “as an initial matter” the company was eligible for such a designation. Still, she said, the council “hardly adhered to any standard” in making its final assessment.

“This court cannot affirm a finding that MetLife’s distress would cause severe impairment of financial intermediation or of financial market functioning — even on arbitrary-and-capricious review — when FSOC refused to undertake that analysis itself,” the judge wrote. “Predictive judgment must be based on reasoned predictions; a summary of exposures and assets is not a prediction.”

MetLife Chief Executive Officer Steven Kandarian fought the SIFI label, saying his firm is well regulated by state watchdogs and isn’t vulnerable to sudden withdrawals like banks.

Company ‘Pleased’

After Collyer’s opinion was unsealed, the New York-based insurer said in a statement, “We remain pleased with the U.S. District Court’s decision.”

Lew said in a statement he disagreed with the decision and defended the council’s work.

“This decision leaves one of the largest and most highly interconnected financial companies in the world subject to even less oversight than before the financial crisis,” Lew said.

He called FSOC’s review “thorough” and said it had “determined that material financial distress at the company could threaten U.S. financial stability — the threshold for heightened supervision under Wall Street Reform. The heads of every U.S. financial regulatory agency concurred in this judgment.”

Lew also rejected the notion the council erred in failing to conduct a cost-benefit analysis, asserting that none was required by its enabling legislation.

The Struggle Getting U.S. Regulators to Understand Insurance

$2.5 Billion

MetLife’s escape from SIFI status may free $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 nonbank SIFIs.

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 new Labor Department rules on retirement-product sales as an example.

GE Petition

General Electric Co. on March 31 petitioned the council to remove its too-big-to-fail designation after largely withdrawing from the finance business. 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 said in a CNBC interview March 31 that the ruling “opens up the opportunity” to look for ways to escape SIFI status, although the insurer would reserve judgment until it sees how final rules are written.

Sean Dargan, an analyst at at Macquarie Group Ltd., said in a phone interview that even as the court’s decision concerns only MetLife’s case, it could be “kind of a watershed moment” for the financial markets and for the regulator.

The case is MetLife Inc. v. Financial Stability Oversight Council, 15-cv-00045, U.S. District Court, District of Columbia (Washington).

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