The Financial Stability Oversight Council’s (FSOC) decision to name MetLife as a systemically important financial institution (SIFI) was “fatally flawed” and “arbitrary and capricious” according to the judge who rescinded the designation last week.
US District judge Rosemary Collyer last week overturned the FSOC’s decision to classify MetLife as a SIFI in a suit that was filed by the life insurance giant (www.reactionsnet.com Mar 30, 2016). It was only on Thursday afternoon that the thinking behind judge Collyer’s decision was unsealed.
FSOC focused solely on the presumed benefits of MetLife’s designation as a SIFI and not the attendant costs, Collyer said. That is in itself unreasonable according to what arose from the Michigan v Environmental Protection Agency, 135 S. Ct 2699 (2015) case, Collyer added.
“While MetLife advances many other arguments against its
designation, FSOC’s unacknowledged departure from its guidance and express refusal
to consider cost require the court to rescind the
In her sealed opinion, Collyer said in designating MetLife a SIFI the FSOC “reversed itself on whether MetLife’s vulnerability to financial distress would be considered and on what means to threaten the financial stability of the United States”.
Collyer cited two grounds as to why MetLife’s SIFI designation should be reversed: “First, FSOC made critical departures from two of the standards it adopted in its guidance, never explaining such departures or even recognising them as such. That alone renders FSOC’s determination process fatally flawed.
“Additionally, FSOC purposefully omitted any consideration of the cost of designation to MetLife. Thus, FSOC assumed the upside benefits of designation (even without specific standards from the Federal Reserve) but not the downside costs of its decision. This is arbitrary and capricious under the latest Supreme Court precedent.”
Treasury Secretary Jacob Lew made his displeasure at Collyer’s ruling clear in a statement that was also released on Thursday afternoon.
“I strongly disagree with the court’s ruling,” he said. “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 MetLife’s SIFI designation was made after the FSOC determined that material financial distress at the life insurer could threaten US financial stability. This determination was supported by the head of every US financial regulatory agency, Lew explained.
“In overturning the conclusions of experienced financial regulators, the court imposed new requirements that Congress never enacted, and contradicted key policy lessons from the financial crisis,” he stated, before adding:
“Some opponents of financial reform have hailed the court’s decision as a win for our financial system. This is wrong and dangerously ignores the lessons of the financial crisis. FSOC’s authority to designate nonbank financial companies is a critical tool to address potential threats to financial stability, and it has made our financial system safer and more resilient.
“We intend to continue defending vigorously the process and the integrity of FSOC’s work, and I am confident that we will prevail.”
In the wake of being handed the SIFI status, MetLife undertook a thorough review of its operations. Once completed, the firm decided to shake up its operations and sell off various parts in a bid to offset some of the more onerous capital standards regulation that has come in following the financial crisis.
Back in January, MetLife stated that even though it was appealing its SIFI status and that none of its business is systemic, the risk of increased capital requirements meant it was looking to separate the company.
The firm’s plan included MetLife Insurance Company USA, General American Life Insurance Company, Metropolitan Tower Life Insurance Company and several subsidiaries that have reinsured risks underwritten by MetLife Insurance Company USA in the new company.
Collyer’s decision could also benefit two other insurance groups that have been designated as SIFIs – AIG and Prudential. Activist shareholder Carl Icahn has already called on AIG to break up some of its operations to avoid punitive capital charges relating to its scale and size and the company is in the midst of a shakeup which has seen a significant number of senior executives leave the firm as part of a wide-reaching cost-cutting scheme.