U.S. Says Judge Nixing MetLife Too-Big-to-Fail Tag ‘Profoundly Mistaken’

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The U.S. properly labeled MetLife Inc. as “too big to fail,” the government said, arguing to overturn a ruling that dealt a major blow to efforts to rein in risk in the financial system.

A federal judge “was profoundly mistaken” in interpreting the guidelines required to determine whether a financial institution is systemically important, lawyers for the Financial Stability Oversight Council, a regulatory panel led by U.S. Treasury Secretary Jacob J. Lew, said in court papers filed Thursday at a federal appeals court in Washington.

The U.S. panel is seeking to reverse a March ruling from U.S. District Judge Rosemary Collyer that dealt a blow to the financial regulation enacted after the 2008 financial crisis. FSOC’s process to designate MetLife as a systemically important financial institution, or SIFI, was “fatally flawed” since the panel failed to follow its own guidelines when deciding the insurer could be a danger to markets if it’s in distress, she said. SIFIs face stricter regulation than smaller firms, including capital and leverage requirements.

“The district court overturned the collective judgment of the heads of the nation’s financial regulatory agencies,” the panel said. “The court’s ruling leaves one of the largest, most complex, and most interconnected financial companies in the country without the regulatory oversight that Congress found essential.”

MetLife will file a response to the appeals court by Aug. 15, company spokesman, Randy Clerihue, said in an e-mail.

Failure Consideration

The guidance laid out for the council was merely to explain the process and doesn’t suggest that regulators need to consider the likelihood of a large company’s failure, FSOC said in the filing. The panel also argued that the guidelines don’t require it to consider the potential costs to the New York-based insurer, saying that the judge’s determination that the cost of the too-big-to-fail tag was a risk-related factor is a conclusion not based in common sense.

Additionally, FSOC says it didn’t try to estimate specific losses to other companies if the firm were to come under distress because that would be an “impossible” task, and a financial crisis often spurs sudden and unforeseen failures.

“We continue to believe that the council acted well within its legal authority in designating MetLife,” the Treasury said in an e-mail.

Risks Amplified

The government argued in February that regulators focused on MetLife’s financial ties to firms around the world, which could amplify risks during a period of instability. Collyer questioned why FSOC seemed to assume that the insurer would be close to collapse during a crisis.

MetLife’s lawyer Eugene Scalia has argued that the company isn’t a financial institution that should be subject to FSOC and that the designation process violated federal administrative procedure law.

The case is the biggest challenge yet to the council which counts Federal Reserve Chair Janet Yellen among its members. American International Group Inc. and Prudential Financial Inc., two insurers that are also deemed SIFIs, haven’t pursued legal cases against the panel. The third non-bank SIFI, General Electric Co.’s finance arm, has been shedding assets and asked regulators to drop the label.

Smaller MetLife

Chief Executive Officer Steve Kandarian is seeking to shrink MetLife, the largest U.S. life insurer, through the separation of a domestic retail unit. The operation sells annuities and could be at a “significant competitive disadvantage” if subjected to tighter capital requirements, the insurer has said. Kandarian has said he plans to proceed with the breakup, even after his court victory, because of regulatory uncertainty and the need to focus on businesses that generate the most free cash flow.

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