A ruling that rescinded MetLife’s designation as a systemically important financial institution by the Financial Stability Oversight Council has been made public following an agreement to do so by both parties. U.S. District Judge Rosemary Collyer, in the now public March 30 opinion, determined that FSOC’s designation was “arbitrary and capricious,” that the process it engaged in failed to follow both internal guidelines and external guidance, and little or no effort was made to consider the costs and impairments MetLife would suffer as a result of the designation.
“FSOC made critical departures from two of the standards it adopted in its Guidance, never explaining such departures or even recognizing them as such. That alone renders FSOC’s determination process fatally flawed,” Collyer wrote.
FSOC was established under the Dodd-Frank Act, charged with identifying risks to the nation’s financial stability and responding to emerging risks. In December 2014, it designated Metlife, the nation’s largest insurance company, as a SIFI. In January 2015, MetLife challenged the designation.
“During the designation process, two of FSOC’s definitions were ignored or, at least, abandoned,” Judge Collyer wrote in an opinion that was initially sealed.
FSOC, she wrote, “focused exclusively on the presumed benefits of its designation and ignored the attendant costs.” Also, “no specific prudential standards [including final enhanced prudential standards for designated insurers] had been established by the Federal Reserve for MetLife when it was designated.”
“The final determination changed policies” and FSOC “never established a basis for a finding that MetLife’s material financial distress would ‘materially impair’ counterparties” within the meaning of its Interpretive Guidance, the opinion says.
It was troubling to Collyer that “assumptions pervade the analysis.” Every possible effect of MetLife’s imminent insolvency “was summarily deemed grave enough to damage the economy,” she wrote. The term “could sustain losses” was bandied about “with no quantification whatsoever.” FSOC was “content to evaluate interconnectedness and to refrain from calculating actual loss and stopped short of projecting what could actually happen if MetLife were to suffer material financial distress.”
The lack of a comprenensive analysis of costs and benefits undermined FSOC’s case. “[It] refused to consider the costs of its final determination to MetLife, and purposefully so,” Collyer wrote. “It “foisted billions of dollars of regulatory costs upon MetLife under the auspices of safeguarding it.”
FSOC had argued that the Dodd-Frank Act did not require a cost-benefit analysis. Collyer, however, cited a decision by the Supreme Court during its previous term, Michigan v. Environmental Protection Agency, that vacated certain regulations under the Clean Air Act because the statute empowers that agency to regulate power plants only if “regulation is appropriate and necessary.” Despite estimating $9.6 billion per year in regulatory costs, the EPA refused to consider cost in its calculus, leading justices to invalidate the rule the grounds that it misinterpreted the statue.
“In light of Michigan and of Dodd- Frank’s command to consider all “appropriate” risk-related factors, FSOC’s position is at odds with the law and its designation of MetLife must be rescinded,” Collyer wrote.
The ruling is unlikely to mean the end of an already lengthy legal battle. Collyer stopped short of removing FSOC’s future ability to designate MetLife as systemically important.
MetLife argued that it is not predominantly engaged in financial activities under FSOC’s designation authority because the agency is limited by the Dodd-Frank Act to “U.S. nonbank financial companies.” MetLife is not eligible for designation, the lawsuit said, because more than 30 percent of its consolidated assets and more than 25 percent of consolidated revenues are extraterritorial.
FSOC disputed the argument, pointing out that when MetLife sought registration as a financial holding company in 2000, it certified that “the vast majority of [its subsidiaries] are engaged in activities that are financial in nature as expressly identified and described in the Bank Holding Company Act.” It conferred financial holding company status upon MetLife, agreeing that it was engaged “in a variety of other financial activities in the United States and internationally.” MetLife’s response was that foreign assets are “two steps removed” from domestic financial activities “and accordingly not related to” them.
“MetLife cuts its ‘two steps’ test from whole cloth and gives no reason why the assets are ‘accordingly’ not related,” Collyer wrote. “MetLife’s foreign assets are clearly related to its domestic financial activities.”
In response to the unsealing of the distinct court’s opinion, Treasury Secretary Jacob Lew said it “leaves one of the largest and most highly interconnected financial companies in the world subject to even less oversight than before the financial crisis.”
“Some opponents of financial reform have hailed the court’s decision as a win for our financial system,” Lew said. “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.”