Cry Of Protest From MetLife Signals Right Direction For Regulators
November 6, 2014 by STEPHEN J. LUBBEN
$214 billion. As of the middle of this year, that was the value of MetLife’s bond portfolio, according to Bloomberg.
Nevertheless, MetLife is fighting its designation as “systemically important” under the Dodd-Frank financial overhaul law, which subjects such institutions to additional oversight by the Federal Reserve and tougher capital requirements. Earlier this week, senior executives appeared before the Financial Stability Oversight Council, a collection of regulators that determines the designation, to make the argument that its decision was in error.
I think we can expect that the council won’t change its mind, but the hearing was a necessary step before the designation can be challenged in court.
The basic question is: “If not MetLife, who?”
The argument in favor of heightened regulation of MetLife is the American International Group, the giant insurer that had to be bailed out by the taxpayers to the tune of $185 billion. The antics of A.I.G.’s London arm are well known and show the potential for insurance companies to slide into activities more commonly associated with broker-dealers or hedge funds. Or casinos.
Indeed, since the late 19th century it has been understood that insurance companies, especially life insurance companies, are some of the biggest asset managers around, and controlling that pot of money can be really attractive.
In short, it is not difficult to understand how the failure of an insurance behemoth like MetLife could be quite disruptive. Sure, there is room for improvement — not every financial institution should be regulated the same way depository banks are regulated — but the regulators have to work with the tools Congress has given them, and it would be of great benefit if Congresswere to provide a bit of flexibility soon.
MetLifeis apparently responding that it held up well during the recent financial crisis. That, of course, should not be the standard.
While this is a common argument made by not only MetLife but also hedge funds, mutual funds and derivatives traders, there is nothing that says that Congress and regulators must only address the most recent crisis. Indeed, it would be refreshing to see regulators get out ahead of a potential problem for a change.
So it seems as if MetLife will remain “designated.” The real question is, who’s next? After all, if an insurance company can be designated for the size of its investment activities, asset managers might be next.
The real question, of course, is where to draw the line. Presumably we don’t want all financial institutions to be subject to “extra” regulation. It would hardly be extra if it were routine.
But is it better to extend this special regulation to new areas — like asset managers — or smaller forms of the already regulated institutions, like large regional banks and somewhat smaller broker-dealers? In part this will depend on how these institutions react to any advantage they gain by escaping extra scrutiny. If they start to do things that only the big players used to do, additional regulation should follow.
In short, the designation of financial institutions as systemically important will by necessity be a dynamic process. But in no way should it be driven by what happened “last time.”
Stephen J. Lubben is the Harvey Washington Wiley Chair in corporate governance and business ethics at Seton Hall Law School and an expert on bankruptcy.