Federal Judge Questions Validity of MetLife SIFI Designation
February 12, 2016 by Frank Klimko, Washington correspondent, BestWeek: email@example.com
WASHINGTON – A federal judge questioned the legality of how the Financial Stability Oversight Council designated MetLife Inc. as a systemically important financial institution, saying she doubted whether neutral adjudicators were involved in the decision.
“What I’m trying to understand here is the council’s adjudication process,” said U. S. District Judge Rosemary M. Collyer, of the U. S. District Court for the District of Columbia. “As they (MetLife) moved through I don’t see where there was a neutral third party in this adjudication. In other agencies you see a separation of powers.”
Attorneys for MetLife and the FSOC appeared Feb. 10 before Collyer. MetLife is asking Collyer to invalidate the designation, arguing the process was defective and the company never got a fair hearing.
Collyer, a judicial appointee of President George W. Bush, focused on how companies become potential designees.
Eric Beckenhauer, a U.S. Department of Justice attorney representing FSOC, called it a “blending of functions,” that did not deny MetLife due process under the law. “The record clearly shows that MetLife had a full and fair opportunity to be heard,” Beckenhauer said.
In general, companies are evaluated for designation at the intake level, made up of council staff, which forwards the most compelling SIFI candidates to an internal Deputies Committee. That committee sends its recommendations to the full 15-member FSOC board, which has final say, Beckenhauer said.
However, the judge pointed out the process doesn’t include a neutral mediator, like an administrative law judge, who could act as a check-and-balance to agency momentum building toward a designation.
“The way this (process) is structured, there is no separate structure from those that are making the decision,” for a SIFI designation, Collyer said.
Beckenhauer noted the final check does exist with the council itself, chaired by U.S. Treasury Secretary Jacob “Jack” Lew, which must vote in favor of a designation.
“The council decision is not a punishment or a sanction,” Beckenhauer said, “but a judgment that a company could cause financial distress.”
The judge’s questions about the structure of the SIFI process were a surprise for both sides because they had not addressed the council’s internal workings in their pre-argument briefs. MetLife attorney Eugene Scalia, of Gibson, Dunn & Crutcher, refused to declare victory on that point after the hearing. It is difficult to presage a judge’s decision from questions raised during oral arguments, attorneys from both sides agreed.
Scalia said although the designation may not have been intended as a punishment, the consequences of a SIFI label were not appealing. Another SIFI, American International Group Inc. is under attack by a prominent shareholder who wants to break up the company to shed the SIFI designation and MetLife itself is considering a spin-off of some retail operations, he said.
In general, the FSOC botched the job of culling the risky, over-leveraged companies from the vast pool of large corporations that are already sufficiently regulated and pose no threat, Scalia said.
“FSOC failed on all counts. Its decision to designate MetLife as a nonbank systemically important financial institution was predicated on unbounded speculation, ahistorical analysis, shifting standards, and undisclosed evidentiary material,” Scalia said. “It departed from the controlling statutory standards, its own regulations and interpretive guidance, and the overwhelming evidence in the record.”
The company is subjected to tight regulation and capital standards at the state level, where regulators are quick to step in to prevent a failing insurer’s problems from spreading beyond what its own assets can handle, Scalia said.
And, the process was weighted against the company because FSOC refused to do a vulnerability analysis to see if MetLife could withstand a theoretical collapse.
Collyer noted FSOC seemed to proceed from the suggestion that in a fiscal crisis, MetLife would immediately be at the brink of collapse. “That’s not risk analysis,” she said. “That’s assuming the worst of the worst of the worst.”
MetLife was designated a SIFI in December 2014 and filed the lawsuit a month later. It is the only SIFI designee to bring such a legal challenge. The other insurance companies so designated are AIG and Prudential Financial Inc. (Best’s News Service, Feb. 3, 2016).
Operating units of MetLife have current Best’s Financial Strength Ratings of either A (Excellent) or A+ (Superior). On the afternoon of Feb. 10, shares of MetLife Inc. (NYSE: MET) were trading at $37.32, up 0.43% from the previous close.