Fed Pulls Overseers From MetLife in Wake of Ruling – Wall Street Journal

Updated March 31, 2016 7:25 p.m. ET

WASHINGTON—The Federal Reserve removed its supervisors from MetLife Inc. MET -1.77 % offices after a judge rescinded federal oversight of the insurer the day before, leaving the Obama administration scrambling to salvage one of its key postcrisis accomplishments.

Administration officials are weighing whether to appeal before a 60-day deadline and are widely expected to do so. Some of MetLife's rivals, including American International Group Inc. AIG -0.86 % and Prudential Financial Inc., PRU -1.00 % are discussing whether to seek to remove themselves from Fed oversight, according to people familiar with the matter.

The MetLife decision, and possible ripple effects, call into question the durability of federal regulators' moves in recent years to extend their supervision to the largest U.S. insurance firms by labeling them "systemically important financial institutions" subject to stricter oversight.

On Thursday, General Electric Co. formally asked to be released from Fed supervision, saying it has sufficiently shrunk its financial-services arm so it would no longer pose a systemic threat to the financial system. GE previously had said that it would try to appeal its designation as systemically important in the first quarter.

Meanwhile, new details emerged of the ruling that U.S. District Judge Rosemary Collyer placed under seal. While only a two-page order was made public, the sealed 33-page document references a June 2015 Supreme Court decision on regulatory cost-benefit analysis, according to a person familiar with the matter.

Part of the opinion cites the case of Michigan v. Environmental Protection Agency, according to the person. That decision, penned by the late Justice Antonin Scalia, found the EPA acted unreasonably when it didn't consider cost in making a regulatory decision.

By invoking the EPA case, the MetLife opinion portends a battle over the extent to which the Financial Stability Oversight Council, the body of senior regulators that designated MetLife for oversight, should have considered the costs and benefits of subjecting MetLife to tighter rules before deciding to do so.

The government has argued that it "appropriately declined" to conduct an analysis because the 2010 Dodd-Frank law, which set up the council and gave it authority to designate systemically important firms, doesn't explicitly require it.

Financial regulators have been criticized by the financial industry for not considering the cost of their rules. In general, Obama administration officials have said the benefits of preventing a future financial crisis are difficult to quantify, but substantial. In MetLife's case, conducting a cost-benefit analysis would have posed particular challenges because the Fed hasn't spelled out exactly what rules the firm would have had to follow.

A similar process underpinned moves to extend federal oversight to AIG and Prudential.

Wednesday's order from Judge Collyer surprised many in the regulatory community, who hadn't expected the judge would take such a drastic step despite her tough questioning of government lawyers at a hearing last month, people familiar with the matter said.

The ruling means the Fed no longer has legal grounds to regulate MetLife, the largest life insurer in the U.S. with about $ 878 billion in assets, even though senior regulators had determined that its failure could pose a threat to the economy.

The Federal Reserve Bank of New York, whose team of MetLife supervisors had been spending part of its time at a specially built office inside the firm's New York headquarters, pulled its people from the firm, and the supervisors came to work at the New York Fed's offices Thursday instead.

Officials declined to comment Thursday, but on Wednesday a spokesman for Treasury Secretary Jacob Lew, who heads the council, promised that "we will continue to defend the council's designations process vigorously."

MetLife had been fighting the December 2014 decision for more than a year and is already preparing for a possible appeal, a person familiar with the matter said.

The two sides are set to discuss in coming days which parts of the document should be redacted to hide confidential information, after which the judge's opinion is expected to be released to the public. The opinion includes "both procedural and substantive components," MetLife Chief Executive Steve Kandarian said in an interview Wednesday.

He declined to discuss further details.

Judge Collyer's two-page order also indicated she agreed with two other arguments the firm made. One accused the oversight council of improperly failing to establish MetLife's vulnerability to financial distress, and another accused the council of making unsubstantiated assumptions. The oversight council has said the law allows it to assume a firm is failing without assessing its vulnerability, and that its decision was well grounded.

A decision that faults the oversight council's process could allow a chance for the panel to designate MetLife as systemically important again, fixing the problems the judge identified.

"Courts are very punctilious about agencies following process and clearly basing their decision on all relevant facts," said Tom Dawson, head of the insurance regulatory practice at law firm Drinker Biddle & Reath LLP. "Generally, courts give the agencies a second bite at the apple."

It is possible the oversight council could direct its staff to work on another proposal to bring MetLife into the regulatory fold, while at the same time pursuing an appeal in the courts.

The government could also seek to ask Judge Collyer to delay the removal of MetLife's federal oversight while the case proceeds and, if she declines, ask an appeals court to do so.

—Ted Mann and Emily Glazer contributed to this article.

Write to Ryan Tracy at ryan.tracy@wsj.com

Starwood Bidding War Ends Abruptly, Yielding a Merger and a Puzzle – New York Times

Photo

The W hotel in Los Angeles, owned by Starwood. The merger of Starwood and Marriott will create the biggest hotel company in the world. Credit Damian Dovarganes/Associated Press

Ever since a group led by the acquisitive — and secretive — Chinese firm Anbang Insurance Group raised its bid for Starwood Hotels and Resorts, advisers to the American hotel company were a little wary that its new suitor might not be able to follow through.

And then early Thursday morning, Starwood and its advisers began to learn that Anbang was likely to walk away, just weeks after first emerging to challenge Marriott International in a highly visible merger contest.

By Thursday afternoon, Anbang and its partners formally withdrew their $ 14 billion takeover offer for Starwood, ceding the operator of the Westin and Sheraton chains to Marriott in a puzzling turn of events.

So ends what had been poised to become one of the big merger battles of 2016, as the century-old Marriott faced losing to a consortium whose leader boasted close ties to the Chinese government.

But after being topped twice in bidding by the group — which included Anbang, the American private equity firm J.C. Flowers & Company and Primavera Capital, an investment firm led by a former chairman of Goldman Sachs for Asia — Marriott decided earlier this week not to immediately raise its latest offer beyond roughly $ 13.25 billion, betting that something would befall the consortium's efforts.

That wager paid off. Combining Starwood with Marriott will create the biggest hotel company in the world, with more than 5,500 owned or franchised hotels and 1.1 million rooms.

Starwood said in a statement on Thursday that it had still managed to extract more money for the company's investors and looked forward to combining with Marriott.

"Throughout this process, we have been focused on maximizing stockholder value now and in the future," Bruce Duncan, Starwood's chairman, said. "Our board is confident this transaction offers superior value for Starwood's stockholders, can close quickly and provides value-creation potential that will enable both sets of stockholders to benefit from future financial performance."

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Shares in Starwood fell more than 4 percent in after-hours trading after Anbang's disclosure, to $ 79.92. Shares in Marriott fell 5 percent, to $ 67.61.

What happened to Anbang's takeover effort is unclear. In a statement on Thursday, the insurer's consortium blamed unspecified "various market considerations" for its need to withdraw.

The abrupt withdrawal of the offer raised new questions, including whether the Chinese government, which has close ties with Anbang, had blocked the proposed transaction, or whether the insurer and its fellow bidders had run into issues with the financing for the deal.

It is a mysterious end to the pursuit by Anbang, a huge insurer that has risen to prominence in recent years, in part through audacious deal-making. The Chinese firm, which has assets of more than $ 291 billion, became a force in the luxury hotel business in less than two years after buying the likes of the Waldorf Astoria and the JW Marriott Essex House.

Its chairman, Wu Xiaohui, had begun to gain a reputation as a Chinese counterpart to Warren E. Buffett, his wealth compounding rapidly since founding the insurer in 2004.

Still, the company he oversees has been criticized for its unusually opaque corporate structure: Thirty-seven interlocking holding companies control over 93 percent of Anbang's shares, while two government-owned companies own the remainder.

Had Anbang won Starwood, its deal would have been the biggest takeover of an American target by a Chinese buyer, according to data from Dealogic.

Yet from the time Anbang publicly bid for the hotel chain, investors and analysts questioned whether the Chinese-led group could actually close on its offer.

Anbang sought to break up Starwood's first deal with Marriott by offering $ 76 a share in cash, going up to $ 78 a share, a proposal that people briefed on the discussions said was fully documented, meaning the financing was in place.

Marriott countered with a new cash-and-stock proposal on March 21 valued then at $ 79.53 a share, raising the prospect that the Chinese-led group would come back with an even higher bid.

Anbang and its partners indeed responded, by offering $ 81 a share and then $ 82.75 a share in cash. But the latest offer, which came last weekend, seemed on shakier grounds with its financing, according to people briefed on the matter.

Analysts said that Marriott would be hard-pressed to beat that price, since doing so could hurt its earnings per share.

But Marriott publicly questioned whether Anbang and its partners truly had the financing needed to close their offer, as well as how long American government regulators would take to bless the deal.

Another particular concern was whether a government panel focused on the national security aspects of mergers would require selling off Starwood properties near sensitive locations. The St. Regis Washington D.C., for example, is only blocks away from the White House, while a W hotel is near the Treasury Department.

Starwood and its advisers pressed the consortium for more information about financing and whether the Chinese government would bless the new proposal, these people said, requesting anonymity to discuss confidential negotiations.

People involved in the transaction spoke on the condition of anonymity.

Publicly, Starwood noted on March 28 that while its board had determined that Anbang's second bid was "reasonably likely to lead to a 'superior proposal,'" the new proposal was nonbinding and that the two sides needed to hammer out "nonprice terms."

The hotelier had been waiting several days for a response from the Chinese-led group when word first began to filter in early Thursday that Anbang and its partners were preparing to walk away, according to the people briefed on the matter.

Then around midafternoon on Thursday, Anbang's consortium sent Starwood's board a letter thanking them for their work but stating that it needed to walk away for unspecified market reasons.

No further reason was given.

Continue reading the main story

China’s Anbang abandons $14 billion bid to buy Starwood Hotels – Reuters

China’s Anbang Insurance Group Co said on Thursday it has abandoned its $ 14 billion bid for Starwood Hotels & Resorts Worldwide Inc (HOT.N), paving the way for Marriott International Inc (MAR.O) to buy the Sheraton and Westin hotels operator.

The surprise withdrawal marks an anticlimactic end to a bidding war that had pitted Marriott’s ambitions to create the world’s largest lodging company, with about 5,700 hotels, against Anbang’s drive to create a vast portfolio of U.S. real estate assets.

It also represents a blow to corporate China’s growing ambitions to acquire U.S. assets. Anbang’s acquisition of Starwood would have been the largest takeover of a U.S. company by a Chinese buyer.

“We were attracted to the opportunity presented by Starwood because of its high-quality, leading global hotel brands, which met many of our acquisition criteria, including the ability to generate consistent, long-term returns over time,” Anbang said in a statement.

“However, due to various market considerations, the consortium has determined not to proceed further,” Anbang added, referring to the joint bid it had put together with private equity firms J.C. Flowers & Co and Primavera Capital Ltd.

Anbang did not offer Starwood a reason for not following through on its raised offer of March 26, according to people familiar with the matter. They asked not to be identified disclosing confidential discussions.

Starwood said on Monday that Anbang had raised its offer to almost $ 14 billion. Anbang had been expected to firm up that non-binding offer, so that Starwood would formally declare it superior to Marriott’s.

Anbang had already made a $ 13.2 billion binding and fully financed offer earlier this month, which Starwood accepted as superior. Had Marriott not counterbid on March 21, Starwood would have proceeded with the earlier Anbang offer.

Starwood also said in a statement on Thursday that Anbang had withdrawn its offer “as a result of market considerations,” which it did not specify. Marriott declined to provide immediate comment.

The move fueled speculation on what drove Anbang to change course, especially given that many Chinese overseas acquisitions have been encouraged by the country’s authorities.

Chinese financial magazine Caixin reported earlier this month that China’s insurance regulator would likely reject a bid by Anbang to buy Starwood, since it would put the insurer’s offshore assets above a 15 percent threshold for overseas investments.

Should Anbang have clinched an agreement with Starwood, it would have been scrutinized by the Committee on Foreign Investment in the United States (CFIUS), an interagency panel that reviews deals to ensure they do not harm national security. However, sources had said that both Starwood and Anbang believed the deal would have received CFIUS clearance.

“My guess is that Starwood wanted either a higher break-up fee, maybe a billion dollars, or a higher price from Anbang to offset the risk,” said Ryan Meliker, an analyst at Canaccord Genuity Group Inc (CF.TO).

In its latest offer, Anbang’s consortium had offered $ 82.75 per share in cash. Marriott’s latest cash-and-stock offer, which was announced on March 21, is worth around $ 75 per share.

Starwood shareholders will also receive stock in Interval Leisure Group Inc (IILG.O), worth $ 6.13 per Starwood share. This is the result of a deal last year to spin off Starwood’s timeshare business and combine it with Interval Leisure Group.

Starwood’s shares fell 4.4 percent to $ 79.80 in extended trading, while Marriott shares fell 4.9 percent to $ 67.68. This indicates that some Marriott shareholders are disappointed that the company is moving ahead with the deal at such a high price.

GLOBAL SHOPPING SPREE

Anbang was established in 2004 as an automotive and property insurer by Chairman Wu Xiaohui, a native of China’s entrepreneurial coastal city Wenzhou. The company has been leveraging its 1.65 trillion yuan ($ 253 billion) in assets to transform into a worldwide investor.

In October 2014, Anbang agreed to pay $ 1.95 billion for the Waldorf Astoria Hotel in New York, a move Wu said brought the insurer “extra brand recognition” and business opportunities. Earlier this month, Anbang agreed to pay Blackstone Group LP (BX.N) $ 6.5 billion for Strategic Hotels & Resorts Inc, whose 16 luxury properties include the Four Seasons Washington D.C.

Last year, Anbang agreed to buy U.S. insurer Fidelity & Guaranty Life (FGL.N) for $ 1.6 billion, and paid around $ 1 billion for South Korea’s Tong Yang Life Insurance Co (082640.KS).

It has also bought control of Fidea, a Belgium-based insurer, and the Belgian banking operations of Dutch insurer Delta Lloyd NV (DLL.AS).

At home, Anbang has a leading stake in China Minsheng Banking Corp Ltd (600016.SS) (1988.HK), the country’s biggest private lender, and is a significant shareholder in China Vanke Co (000002.SZ) (2202.HK), the largest residential property developer.

The Starwood deal would give Marriott a greater presence in markets such as Europe, Latin America and Asia, and allow it to better compete with apartment-sharing startups such as Airbnb.

Marriott said last week it believed it could achieve $ 250 million in annual cost synergies within two years after closing the deal with Starwood, up from $ 200 million estimated in November 2015 when it signed its original merger agreement.

Starwood and Marriott shareholders are separately scheduled to vote on the deal on April 8.

Lazard Ltd (LAZ.N) and Citigroup Global Markets Inc (C.N) are financial advisers to Starwood. Cravath, Swaine & Moore LLP is its legal counsel. Deutsche Bank Securities (DBKGn.DE) and Gibson, Dunn & Crutcher are advising Marriott.

PJT Partners Inc PJT.N is Anbang’s financial adviser, while Skadden, Arps, Slate, Meagher & Flom LLP is its legal counsel.

(Reporting by Greg Roumeliotis in New York; Addtional reporting by Mike Stone in New York and Ramkumar Iyer in Bengaluru; Editing by Kirti Pandey and Richard Chang)

Amazon expands Dash Button line-up, top sellers to date include Tide, Bounty, Cottonelle – TechCrunch

Amazon this morning announced an expansion of its Dash Buttons product line – those Wi-Fi connected, push-button devices that let you buy products from its site with just a press. One year after the buttons went live, and apparently not the April Fool's joke people once imagined, Amazon says it now has over 100 buttons available, and orders have increased by more than 75 percent in the last three months.

The expansion includes roughly 80 more brands joining the previous line-up, including several now in the food and drink space, as opposed to consumer packaged goods (CPG).

Of course, Amazon being Amazon, the company declined to offer any real numbers regarding these buttons' performance and their contribution to Amazon's bottom line. It's unclear how many customers have bought the buttons, how many are in the wild being used, or what they deliver in terms of sales, among other things.

Still, those who own buttons appear to be active users – Amazon says that Dash Button orders occur, on average, more than once per minute.

Initially, the devices were used to re-order common household items, like paper towels, laundry detergent, toilet paper, trash bags, dog food, diapers, and more. But in the year since their debut, Dash Buttons have rolled out for a variety of products – including, as of today, those you wouldn't think require the convenience of push-button ordering, like gum, or food and drink products like Red Bull and Slim Jim. (Coders, maybe?)

You can even push a button to re-order condoms, if you like.

Today, the online retailer says it has tripled the available brands available in the program, which is only available to Prime members. There are now over 100 buttons to choose from, including new brand additions such as Brawny, Charmin, Clorox, Doritos, Energizer, Gain, Honest Kids, L'Oreal Paris Revitalift, Lysol, Peet's Coffee, Playtex, Purina, Red Bull, Seventh Generation, Slim Jim, Snuggle, Starbucks, Trojan, Vitamin Water, and others.

Effectively, every CPG company wants to have its products available via Dash Button, it seems.

Since Amazon isn't offering any true insight into how the devices are performing, we can only look to third-party data to come to any conclusions.

Earlier this month, a study from 1010data's Ecom Insights Panel, which consists of millions of online shoppers in the U.S., revealed that the top-selling individual Dash Buttons were those for two P&G products, Tide Pods and the Powder Dash Button (both tied for #1); with P&G's Bounty Dash Button at #2; followed by Kimberly Clark's Cottonelle Dash Button at #3.

The data was collected from May 2015 through January 2016, the company said.

P&G, in fact, rules the Dash Button market, the study indicated, taking the lion's share of sales at 31 percent. After P&G, Kimberly Clark (Cottonelle, Huggies) sits at #2 with 14 percent of the market share, and Clorox (Glad) rounds out the top three with 11.7 percent.

The study also found that the other companies in the top 10 included PepsiCo, SC Johnson, Kraft Heinz, Reckitt Benckiser, Amazon, Coca-Cola and Wellness.

Though you have to pony up $ 4.99 to buy a Dash Button, the buttons themselves end up being effectively free. With your first order, Amazon credits your account $ 4.99.

That wasn't always the case – at launch, Amazon charged customers for the buttons, which seemed a little ridiculous. Spend money in order to more easily shop at Amazon, and therefore, give them money? Amazon soon realized that getting the buttons into the hands of shoppers was worth the $ 5 in the long run, apparently.

If you're wondering what it's like to use a Dash Button, you can check out our guide here.

Mortgage rates flat this week but may be headed lower – Washington Post

Federal Reserve Chair Janet Yellen indicated earlier this week that the central bank should move cautiously in raising rates. The news spurred investors to purchase government bonds, sending yields lower.

Because the movement of the 10-year Treasury bond is one of the best indicators of whether mortgage rates will rise or fall, home loan rates are likely to fall.

Yellen's remarks Tuesday before the Economics Club of New York came too late, however, to affect Freddie Mac's mortgage rates survey. The government-supported mortgage backer aggregates home loan rates weekly from 125 lenders nationwide to come up with a national average mortgage rate.

[Fed Chair Janet Yellen: Central bank should move 'cautiously' in raising rates]

Perhaps because the market was waiting to hear what Yellen said, mortgage rates were essentially flat this week, according to the latest data released Thursday by Freddie Mac.

The 30-year fixed-rate average held steady at 3.71 percent with an average 0.5 point, the same as it was a week ago. (Points are fees paid to a lender equal to 1 percent of the loan amount.) It was 3.70 percent a year ago. The 30-year fixed rate has remained below 4 percent since late December.

The 15-year fixed-rate average crept up to 2.98 percent with an average 0.4 point. It was 2.96 percent a week ago and 2.98 percent a year ago. The 15-year fixed rate has stayed under 3 percent since early February.

The five-year adjustable rate average also moved slightly higher, rising to 2.9 percent with an average 0.5 point. It was 2.89 percent a week ago and 2.92 percent a year ago.

[Home buyers don't seem to be using new tool to shop for mortgages]

"Dovish comments by Federal Reserve Chair Janet Yellen on Tuesday triggered a rally in Treasury markets and drove the 10-year yield down 13 basis points from last week's high," Sean Becketti, Freddie Mac chief economist, said in a statement.

"Yellen's comments came too late to affect this week's mortgage rate survey, and the 30-year mortgage rate remained unchanged at 3.71 percent. However, if the Fed's cautious tone persists, mortgage rates may register the impact in subsequent weeks."

[Why prequalified doesn't always mean you'll get that mortgage]

Meanwhile, mortgage applications were down, according to the latest data from the Mortgage Bankers Association.

The market composite index — a measure of total loan application volume — fell 1 percent from the previous week. The refinance index dropped 3 percent, while the purchase index rose 2 percent.

The refinance share of mortgage activity accounted for 52.4 percent of all applications.

Kathy Orton is a reporter and Web editor for the Real Estate section. She covers the Washington metropolitan area housing market.

GE Files to End Fed Oversight After Shrinking GE Capital – Wall Street Journal

Updated March 31, 2016 7:59 a.m. ET

General Electric Co. GE 1.11 % formally asked to be released from supervision by the Federal Reserve on Thursday, saying it has sufficiently shrunk its once-massive financial services arm so it would no longer pose a systemic threat to the banking system.

Being categorized as a "systemically important financial institution," or SIFI, required GE to submit to financial supervision by Fed staff and rein in leverage, two factors in GE's decision last year to exit most of its lending business, which until recently provided as much as half of the conglomerate's profits.

In a filing sent Thursday to the Financial Stability Oversight Council, GE said it had cut its total assets in the financing division by more than half, eliminated the majority of its U.S. operations, and cut the company's ties to the rest of the financial system that had led to its receiving the SIFI designation.

A representative of Treasury Secretary Jacob Lew, who chairs the FSOC, did not immediately respond to a request for comment.

The remnants of GE Capital, the company's finance arm, are "smaller, simpler and less interconnected with the U.S. financial system," the company said, and the unit "does not pose any conceivable threat to U.S. financial stability."

GE announced almost one year ago, in April 2015, that it would pivot away from financial services and sell off most of GE Capital, what was then its $ 500 billion lending business. GE has since signed agreements to sell lending businesses worth some $ 168 billion, out of a goal of roughly $ 200 billion. Of those, the company said this week, $ 138 billion worth of deals have been closed.

Chief Executive Jeff Immelt said changed market conditions and new regulations had caused GE Capital's returns to fall below its cost of capital. And investors had long urged Mr. Immelt to get out of the lending business, which nearly sunk the entire company during the financial crisis.

GE is the first of the four nonbank companies labeled as SIFIs to formally apply to regulators to drop that status after making significant changes to its business. On Wednesday, MetLife Inc., MET 5.35 % another nonbank SIFI, won a victory in its bid to shed its SIFI label when a federal judge overturned the government's determination that the insurance company poses a threat to the financial system. MetLife had been fighting the decision for more than a year.

Rather than fight the FSOC, GE has narrowed its focus to high-tech industrial products like jet engines, power turbines, locomotives and medical scanners. That has meant jettisoning the lending businesses to buyers from the U.S. and elsewhere. GE unloaded more than $ 30 billion in real estate, including office buildings and hunks of debt, to Blackstone Group and Wells Fargo WFC 1.25 % & Co.

The company's North American commercial lending business was sold to Wells Fargo last fall, which at $ 30 billion in assets was one of the largest pieces that it had to shed. The completion of that sale, earlier this year, largely cleared the path for GE to apply to lose its SIFI designation.

It is still working to sell off smaller units, including a hotel lending unit that GE agreed to sell this week to a subsidiary of Western Alliance Bancorporation. WAL 9.42 % The company is still looking to sell small pieces of its North American operations, including a business making loans for fast-food franchises, as well as other assets overseas.

The company says the breakup of the finance business will ultimately allow it to send roughly $ 35 billion in dividends from GE Capital to the corporate parent, if regulators approve.

GE Capital's total assets have declined from $ 549 billion at the end of 2012 to $ 265 billion today, the company said. Excluding cash and insurance assets that the company has been running off, GE has about $ 50 billion in finance assets remaining in the U.S., it said in the filing.

The company has also slashed its dependence on commercial paper, once a major funding source for the company's loans, from $ 43 billion outstanding at the end of 2012 to $ 5 billion now. GE Capital was once the largest issuer of commercial paper, and now has less than one-tenth of 1% of the market, the company says.

GE will continue to operate its aircraft and jet engine financing operation, as well as a unit that invests in energy and power projects, and a smaller unit that provides health care-related financing. Over all, the share of GE's profits from lending will drop substantially, however, from roughly half in the middle of the last decade, to less than 10% of total earnings by 2017, the company says.

The FSOC hasn't detailed exactly what criteria it will use when re-evaluating a designation, but has said generally that it will be looking for material changes at a firm.

Write to Ted Mann at ted.mann@wsj.com

Judge Curbs Oversight Of MetLife – Nasdaq

By Ryan Tracy and Erik Holm

(FROM THE WALL STREET JOURNAL 3/31/16)

WASHINGTON — MetLife Inc. won a legal battle over federal regulators seeking to brand the insurer a threat to the financial system and to ramp up government oversight of the company and its operations.

The Obama administration criticized the ruling and could still appeal. But for now, the decision means MetLife, the largest U.S. life insurer by assets, has shaken off potential higher capital requirements and other restrictions that came with its December 2014 designation as a “systemically important financial institution,” or SIFI. Regulators apply the label to financial giants whose failure they believe would threaten the economy, and it submits them to much tougher rules on capital and use of borrowed money to reduce their risks.

Investors cheered the news, pushing MetLife shares up 5.4% Wednesday. Shares also rose about 2% for the insurer’s two main rivals, Prudential Financial Inc. and American International Group Inc., which have also been designated systemically important and are expected to consider challenges to that designation following MetLife’s successful legal challenge, said people familiar with the matter.

Defenders of the 2010 Dodd-Frank Act that gave regulators the powers to expand their oversight of MetLife warned of the ruling’s dangers. Jeffrey Gordon, a Columbia Law School professor who helped write a brief in the case supporting the government, said the decision could be “damaging to long-term financial stability of the United States. . .”

U.S. District Judge Rosemary Collyer’s two-page order said she sided with MetLife on two counts of its legal complaint and partially sided with the firm on a third. Those counts included arguments that regulators made an arbitrary and capricious decision based on a faulty process, raising the prospect that Judge Collyer’s ruling could have broader implications for other firms that underwent a similar process.

Still, the exact scope of the decision remains unclear because she issued her opinion under seal. A public version may be released later, possibly with redactions. It is possible Judge Collyer’s decision is worded narrowly enough that the government could redo its homework on MetLife and reaffirm its decision on a basis that would stand up in court.

The applicability of the decision for other firms “may be limited given the scope of the decision,” Isaac Boltansky, an analyst with Compass Point Research & Trading LLC, said in a note to clients Wednesday.

But the decision is a major rebuke of the Obama administration and the Dodd-Frank law it implemented as its main response to the financial crisis. The law sought to prevent a repeat of the 2008 bailouts in part by creating a new Financial Stability Oversight Council, or FSOC, made up of regulators and empowering it to bring large financial firms that don’t have a federal regulator under tighter oversight. Those provisions were a direct response to the taxpayer support of AIG, which didn’t previously have a federal regulator watching over all of its operations.

The ruling Wednesday suggests the government may have overreached. Judge Collyer had appeared sympathetic during a hearing in February to arguments that FSOC created a foregone conclusion by starting with a hypothetical assumption that MetLife was failing. She also questioned the propriety of the process, in which the same council members made the decision about MetLife and heard the company’s appeal. The council includes the Treasury secretary and heads of regulatory agencies such as the Federal Reserve and Securities and Exchange Commission.

“We strongly disagree with the court’s decision,” said a spokesman for Treasury Secretary Jacob Lew, who heads the oversight council. The statement didn’t explicitly commit to a legal appeal but said “we are confident that FSOC’s determination was lawful and will continue to defend the Council’s designations process vigorously.”

MetLife Chief Executive Steve Kandarian was in his office Wednesday when people entered waving papers showing the firm had won. He called the ruling “a win for MetLife’s customers, employees and shareholders.”

“From the beginning, MetLife has said that its business model does not pose a threat to the financial stability of the United States,” Mr. Kandarian said.

The ruling could also energize congressional critics of Dodd-Frank who have been working to make several changes to the law, including making it harder for the oversight council to designate firms as SIFIs without first giving the firms a chance to address problems that regulators identify.

“It is simply unacceptable for there to be unanswered questions about the FSOC’s designation process, which is why I have advocated for increased congressional oversight and accountability,” Senate Banking Committee Chairman Richard Shelby (R., Ala.) said in a statement.

While the ruling will encourage critics in the financial industry who feel the government’s regulatory apparatus has grown so large that it is stifling business, it is in some ways too late. Just the prospect of the rules has already left a changed industry.

Despite appealing the designation, MetLife said in January that it was seeking to divest itself of a large piece of its U.S. life-insurance unit as part of its plan to ease some of the capital burden under the regulations. Mr. Kandarian said Wednesday’s decision doesn’t change those plans, as the company had elected to pursue a split because of other factors, too. He has previously said the stand-alone U.S. life insurer that MetLife envisions “will be more nimble and competitive.”

    (END) Dow Jones Newswires   03-31-160249ET   Copyright (c) 2016 Dow Jones & Company, Inc. 

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MetLife’s Big Win for Taxpayers – Wall Street Journal

March 30, 2016 7:39 p.m. ET

The Dodd-Frank Act of 2010 has become a license for regulators to control the U.S. financial system, and on Wednesday the insurance company that dared to resist won a legal reprieve. Federal Judge Rosemary Collyer rescinded the federal government's designation of MetLife MET 5.35 % as a "systemically important" institution.

Thanks to Judge Collyer, taxpayers are now standing behind one fewer financial giant. And thanks to MetLife's Steve Kandarian, the one CEO with the gumption to challenge the Financial Stability Oversight Council, even federal regulators must now recognize at least some limits on their power. Kudos as well to Eugene Scalia, the son of the late Justice Antonin Scalia, who crafted the MetLife challenge.

For the next week or so, Judge Collyer's decision will remain sealed while she gives MetLife and the feds an opportunity to propose redactions before public release. But based on the short order released Wednesday and a public hearing in February, it's clear the judge was unwilling to tolerate mere speculation as a basis for federal regulators to remake the financial economy.

The 2010 Dodd-Frank law that created the council handed enormous power to the regulatory agency heads who populate this financial star chamber. Their ability to induct a business into the too-big-to-fail club allows them to bestow both an enormous benefit in the form of an implied federal guarantee as well as a massive burden in additional compliance costs. But by refusing to rush this fraternity, MetLife has shown that even Dodd-Frank has not obliterated basic concepts of administrative law.

The stability council refused to make a fact-based, reasoned case about how the insurance company could threaten the U.S. economy. Along the way to its courtroom defeat, the government failed to conduct a cost-benefit analysis, abandoned its own financial metrics when convenient, changed the criteria on which its decisions were based, and even ignored its own independent insurance experts.

The government pointed with alarm at MetLife's exposures to big banks. But in one especially amusing legal exchange, the company's lawyers showed that the potential losses were smaller than the fines the government itself has extracted from giant banks.

The government nonetheless asked Judge Collyer to trust its "expert judgment." Federal judges typically defer to agencies, but this normally happens when the government gives some factual basis for its predictions, rather than asserting a right to make uneducated guesses. In February's hearing, Judge Collyer was also skeptical of the government's description of its work as "adjudication." Since the same regulators are investigating, prosecuting, judging and then considering a company's appeal of council designations, the judge noted that "there's nobody neutral in this process."

And there's almost nobody who isn't partisan. Congress typically sets up independent regulatory agencies with a governing panel consisting of both Democrats and Republicans to provide political and philosophical balance. But around the table at the stability council there are no seats reserved for dissenters from the party out of power. The council's chairman is Treasury Secretary Jack Lew.

The feds may appeal their MetLife loss, especially given the liberals President Obama and Harry Reid added to the D.C. Circuit Court of Appeals after trashing the Senate's filibuster rule. But the feds may want to think twice. Judge Collyer, a respected centrist among Republican appointees, presided over a legal debate that was not partisan or ideological. In its first legal test, the stability council looked like a rookie and was exposed for sloppy mistakes of administrative procedure. It made claims about a company that it did not have evidence to support.

Moreover, Judge Collyer didn't decide for MetLife based on its legitimate constitutional claims related to due process and separation of powers. An appeal would open the way to a much larger challenge to the legal foundations of this new regulator. While we would welcome such a challenge, there's also a question of how long taxpayers should have to underwrite an effort to defend the indefensible work of Mr. Lew and his council.

Metlife’s escape of ‘too big to fail’ label is defeat for Obama administration – Washington Post

A federal judge on Wednesday delivered a significant setback to the Obama administration's efforts to rein in the financial sector and prevent a repeat of the conditions that caused the 2008 financial crisis.

In 2014, a government panel run by Treasury Secretary Jack Lew determined that Metlife should come under stricter federal scrutiny, essentially calling the nation's largest life insurance company "too big to fail." With that designation, Metlife would be forced to set aside a bigger financial cushion and put in place other safeguards to protect taxpayers if it fell into financial trouble.

Metlife sued, arguing that the new rules would force it to raise prices, and on Wednesday, U.S. District Judge Rosemary M. Collyer sided with the New York-based firm. Collyer did not explain her decision in the two-page ruling.

"From the beginning, MetLife has said that its business model does not pose a threat to the financial stability of the United States," Steven A. Kandarian, Metlife's chairman and chief executive, said in a statement. "This decision is a win for MetLife's customers, employees and shareholders."

The ruling comes at a time when the Obama administration is struggling to put in place the final portions of the massive 2010 financial reform package, the Dodd-Frank Act. That effort has come under greater scrutiny recently as Democratic presidential candidate Bernie Sanders has called for the breakup of large financial institutions.

This defeat could also give ammunition to Republicans in Congress who have argued that Dodd-Frank goes too far. The rules "ominously grants the Federal Reserve near de facto management authority over such institutions, thus allowing huge swaths of the economy to potentially be controlled by the federal government," Rep. Jeb Hensarling (R-Tex.), chairman of the Financial Services Committee, said in a statement.

This aspect of Dodd-Frank attempts to identify financial firms, outside of banks, that could pose a threat to the economy. These firms have traditionally received little government scrutiny. But after massive insurance company AIG nearly collapsed in 2008 and required a $ 182 billion taxpayer bailout, lawmakers called for stricter oversight of this portion of the financial industry.

The Financial Stability Oversight Council named four firms — AIG, Prudential, General Electric's financing arm and Metlife – "systemically important financial institutions," subjecting them to tougher government rules. But Metlife launched a public battle against the designation, arguing that FSOC did not properly assess the insurer's financial strength, noting that the company does not engage in the type of risky behavior that could rattle the economy.

Despite Wednesday's ruling, the Treasury Department remained steadfast to the FSOC's assessment of Metlife.

"We strongly disagree with the court's decision. We are confident that FSOC's determination was lawful and will continue to defend the Council's designations process vigorously," a Treasury spokesman said in a statement.

"FSOC conducted a rigorous analysis of MetLife, including extensive engagement with the company, and determined that material financial distress at MetLife could pose such a threat to the financial system. We firmly believe that FSOC acted well within its legal authority to protect the entire global economy."

Renae Merle covers white collar crime and Wall Street for The Washington Post.

GM Wins Second Trial Over Crashes Blamed on Ignition Flaw – Bloomberg

General Motors Co. won its second straight trial against drivers who blamed car wrecks on faulty ignition switches, boosting the company's outlook for resolving hundreds of similar cases on more favorable terms.

The crash of Dionne Spain's 2007 Saturn Sky on a New Orleans bridge in 2014 was the result of a rare Louisiana ice storm even though the car had a defect found in millions of GM vehicles, a Manhattan federal jury found on Wednesday.

"The jurors studied the merits of the case and saw the truth: This was a very minor accident that had absolutely nothing to do with the car's ignition switch," GM said in a statement.

The trial was the second of six bellwether cases, so called because they are used to test strategies. The jury's reaction to the evidence may push either side to settle — or battle out — hundreds of other cases and help set the size of any settlements. Each side selected three of the six bellwethers. GM chose this one.

"This was GM's handpicked, easy case to win. If they didn't win this one, they wouldn't win any case," said Erik Gordon, a business professor at the University of Michigan Law School who isn't involved in the litigation.

'Unreasonably Dangerous'

While the jury sided with Detroit-based GM, it nevertheless agreed that Spain's Saturn Sky was "unreasonably dangerous" and deviated from the company's performance standards. GM had argued during the trial that there wasn't enough evidence that her car contained one of the defective switches.

"We are pleased that the jury agreed that we proved that our client's vehicle was defective, that it was unreasonably dangerous, and that GM failed to use reasonable care to provide an adequate warning of that danger to consumers, including our clients," attorney Randall Jackson said in a statement. "In a case that was selected by GM as their first bellwether, the jury was still able to look objectively at the proof and arrive at these findings, despite GM's arguments to the contrary."

"I do think that the jury's findings on Spain's vehicle are good findings, and that they advance the goals" of other plaintiffs, Jackson said.

Pretrial Rulings

The trial tilted in GM's favor even before the jury began deliberating. U.S. District Judge Jesse Furman threw out the plaintiffs' key fraud claim against GM this week at the end of witness testimony, saying Spain hadn't presented enough evidence to show that the company made false or misleading statements to her about the defect. He rejected other claims before the trial, including a demand for punitive damages.

GM, which recalled millions of vehicles over the flaw in 2014, admitted using defective ignition switches for years and hiding it from customers and regulators. But the company is challenging suits that it says wrongfully blame the flaw for crashes, injuries and deaths.

The carmaker has already paid out more than $ 2 billion to resolve legal claims stemming from the scandal, including $ 900 million to end a criminal probe by the U.S. government; $ 575 million to settle a shareholder suit and more than 1,380 civil cases by victims; and $ 595 million through a victims' compensation fund outside of court.

CEO's Actions

Since the scandal broke, GM Chief Executive Mary Barra has moved to change the company's culture. She fired fired 15 people for the involvement in the ignition failure. Barra also added a vice president of safety and has streamlined the process for reporting defects. Company executives will even monitor chat rooms to look for customer complaints that could be defect-related.

When the flaw was discovered, it could have been been fixed by spending $ 1 on each vehicle, prosecutors said.

Spain and her passenger, Lawrence Barthelemy, suffered only minor injuries in the New Orleans crash and didn't report other health problems until weeks later, GM attorney Mike Brock said in his opening statement to jurors on March 14. The attorney said the vehicle was only scratched.

"This is a case about a car that doesn't even have a dent," Brock, of Kirkland & Ellis LLP in Washington, said at the trial. "This car is not the villain in this case."

Ice Storm

Brock said the crash was caused by an ice storm that was responsible for dozens of accidents on the same bridge that night. Even the police cruiser that responded to the crashes was rear-ended by an ambulance near the pileup, the jury was told.

"Sometimes, accidents just happen," Brock said at the trial.

GM also argued that Spain's injuries, reported weeks after the crash, weren't caused by the accident but were work-related. The carmaker told jurors that Barthelemy's back pain was the result of sitting in jail for several days for an unrelated traffic violation.

The first bellwether trial, in a case selected by the plaintiffs, ended in embarrassment for their lawyers, who are among the best-known attorneys in the industry. The trial ended abruptly when GM revealed evidence that the plaintiffs, an Oklahoma couple, had lied under oath and wrongfully blamed GM for the family's eviction from their "dream house."

Driver Danger

Plaintiffs in all the cases allege GM endangered drivers and passengers by delaying the recall of defective vehicles. Due to a weakness in the design of ignition switches, jostled keys or a bump from a knee could shut off the engine, disable power steering, power brakes and air bags and leave occupants almost helpless as vehicles careen out of control.

GM has said top executives didn't know the switch was a persistent problem, but in the Justice Department settlement the company admitted knowing about the defect by 2005 and concealing it from regulators from 2012 to 2014. The knowledge was established before the company's $ 49.5 billion government bailout in 2009, and the concealment continued after its sale to "New GM" in a bankruptcy reorganization.

The company is separately awaiting an appeals court ruling in a group of lawsuits rejected as a result of the bankruptcy sale. GM argues it was shielded from the suits by bankruptcy law. GM, which received in a 2009 government bailout, was able to dodge the cases because the sale barred litigation against the "old" entity, even though new one employed many of the same employees and executives.

The case is In re General Motors LLC Ignition Switch Litigation, 14-MD-2543, U.S. District Court, Southern District of New York (Manhattan).

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Foxconn Offers to Buy Sharp for $3.5 Billion – New York Times

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Workers at Foxconn's Longhua factory complex in Shenzhen, China, where it employs more than 100,000. Credit Bobby Yip/Reuters

HONG KONG — Foxconn made its biggest move yet on Wednesday to forestall the weakening of its ties with Apple, striking a deal to acquire control of the Japanese screen maker Sharp for $ 3.5 billion after weeks of public negotiations and high-profile setbacks.

The deal is intended to make Foxconn a more attractive partner for Apple, because the American company uses Sharp screens. The iPhone transformed the technology industry by popularizing the smartphone and blazing a path to a mobile future.

But to do it, the American gadget company needed an important ally: A penny-pinching Taiwan-based factory operator named Foxconn.

Using vast facilities in mainland China employing hundreds of thousands of workers, Foxconn figured out how to assemble the iPhone at a cost low enough that middle-class Americans could afford it. The business offered low profit margins, but the popularity of the iPhone and the competing products that followed buffed its financial results and cemented Foxconn's status as the world's largest maker of hardware for companies like Apple and Sony.

Those relationships are shifting. Apple has been diversifying its supply chain, giving some production contracts to other assemblers and component makers. And Foxconn is grappling with China's rising labor costs and a slowdown in the global smartphone market.

Some analysts say the deal will saddle Foxconn with an ailing business that will take considerable money and effort to turn around. Still, it shows the huge pressure that the industry's shifting dynamics are placing on Foxconn. While Sharp will give Foxconn a bigger piece of Apple's supply chain, it also will give it a bigger chunk of the global electronics supply chain, which Foxconn is betting it can turn into bigger profits.

"On the one hand, you can see why Foxconn is trying to do it. It's not clear the economics make sense, but it's that they need to control more and more of the supply chain," said Willy Shih, a professor at Harvard Business School. He noted that Apple may soon switch to screens made by other producers.

The deal follows months of dramatic back-and-forth talks about the terms. The investment is far short of the $ 5.5 billion that Foxconn was expected to pay last month before it learned that a new owner could have to take on nearly $ 3 billion in potential liabilities at Sharp.

Acknowledging Sharp's poor performance, Terry Gou, Foxconn's founder and chairman, said in the news release that he was "confident that we will unlock Sharp's true potential."

The deal is a return to form for Foxconn — formally known as Hon Hai Precision Industry — in its emphasis on scale. The company in recent years has been looking for ways to further cut costs, including investment in automation. It has also expanded into businesses potentially more lucrative than grunt-work manufacturing, opening factories producing new technology like batteries for electric cars. It even created incubators to help hardware start-ups.

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Night-shift workers leaving a Foxconn factory in Zhengzhou. Like China itself, the Taiwan-based Foxconn is trying to move up from basic manufacturing to higher-end businesses. Credit Gilles Sabrie for The New York Times

Foxconn, most of whose factories are in China, is emblematic of the challenges facing the Chinese economy at large. Even while it tries to maintain the huge scale and efficiency of its production base, it is trying to climb the value chain to find new, more profitable streams of revenue.

Near Beijing, Foxconn operates a hardware incubator called Innoconn, which helps start-ups with production management while looking for investment targets.

Liu Haoyang, founder of Noitom, a company that makes motion-capture sensors and hardware, said Foxconn had approached his company when it was seeking crowdfunding for a sample product in 2014. Ultimately Foxconn gave Noitom advice, and it now helps Noitom produce, Mr. Liu said.

"They make parts of high complexity for us," he said. "Average factories aren't able to make this type of thing, never mind in small batches."

Foxconn, founded in Taiwan as a maker of television knobs in 1974 by Mr. Gou, became a company with more than $ 100 billion in annual revenue by making stuff for other companies. Starting in the 1990s, as orders poured in to make personal computers, Mr. Gou built new and larger factories in China, culminating in the city-size Longhua plant in Shenzhen, near Hong Kong.

At the Longhua complex, Foxconn coordinates more than 100,000 workers assembling gadgets — including the iPhone — in daily and nightly shifts, and the feeding, clothing and planning for the turnover of workers are gargantuan challenges. The company developed recreation facilities for the campus and designed a kitchen able to churn out the huge amounts of food necessary to feed tens of thousands of workers each day.

A marvel of modern manufacturing, the Longhua plant is the most extreme example of Foxconn's philosophy of maximizing efficiency through huge scale, though in some ways the Longhua plant has proved too large. It was there in 2010 that a series of worker suicides drew international scrutiny from workers' rights groups and the news media. The company put nets on the sides of buildings to catch would-be jumpers. On many buildings the nets still sag today.

Foxconn's sales growth has slowed to single-digit percentages in the past two years from the double-digit growth it posted in the past, although profit growth has picked up recently, thanks in part to consumers buying bigger, more expensive phones with bigger screens.

While Foxconn's revenue has been padded by booming orders for less expensive Chinese-branded smartphones, increased competition from China-based suppliers has been a concern highlighted by analysts. Also, Apple has actively sought to diversify its supply chain, giving orders for iPhone assembly to Pegatron, another Taiwan-based contract manufacturer, which operates a huge factory near Shanghai.

Foxconn's previous takeovers of screen makers have not played out well. In 2010, Foxconn took over a Taiwan screen maker, Chimei Innolux, for nearly $ 10 billion; analysts say the acquisition has failed to produce the efficiencies and profitability hoped for.

In Sharp, Foxconn picks up screen-making operations that have long been unprofitable and costlier than those of its rivals in China. Alberto Moel, an analyst at Sanford C. Bernstein, says that the Sharp acquisition would probably distract Foxconn from more important ventures, while also proving difficult to integrate and turn into a profitable business.

"Terry Gou is going to have to do some serious restructuring, spinouts, carve-outs, reduced head counts, centralizing things, and he'll have to do it at a distance, across a sea with management he doesn't really control," Mr. Moel said. "It won't be easy."

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Politics|Apple Remains in Dark How FBI Hacked iPhone Without Its Help – New York Times

WASHINGTON — The FBI’s announcement that it mysteriously hacked into an iPhone is a public setback for Apple Inc., as consumers learned that they can’t keep the government out of even an encrypted device that U.S. officials had claimed was impossible to crack. Apple, meanwhile, remains in the dark about how to restore the security of its flagship product.

The government said it was able to break into an iPhone used by a gunman in a mass shooting in California, but it didn’t say how. That puzzled Apple software engineers — and outside experts — about how the FBI broke the digital locks on the phone without Apple’s help. It also complicated Apple’s job repairing flaws that jeopardize its software.

The Justice Department’s announcement that it was dropping a legal fight to compel Apple to help it access the phone also took away any obvious legal avenues Apple might have used to learn how the FBI did it. Magistrate Judge Sheri Pym on Tuesday vacated her Feb. 16 order, which compelled Apple to assist the FBI in hacking their phone.

The Justice Department declined through a spokeswoman to comment Tuesday.

A few clues have emerged. A senior law enforcement official told The Associated Press that the FBI managed to defeat an Apple security feature that threatened to delete the phone’s contents if the FBI failed to enter the correct passcode combination after 10 tries. That allowed the government to repeatedly and continuously test passcodes in what’s known as a brute-force attack until the right code is entered and the phone is unlocked.

It wasn’t clear how the FBI dealt with a related Apple security feature that introduces increasing time delays between guesses. The official spoke on condition of anonymity because this person was not authorized to discuss the technique publicly.

FBI Director James Comey has said with those features removed, the FBI could break into the phone in 26 minutes.

The FBI hacked into the iPhone used by gunman Syed Farook, who died with his wife in a gun battle with police after they killed 14 people in December in San Bernardino. The iPhone, issued to Farook by his employer, the county health department, was found in a vehicle the day after the shooting.

The FBI is reviewing information from the iPhone, and it is unclear whether anything useful can be found.

Apple said that the legal case to force its cooperation “should never have been brought,” and it promised to increase the security of its products. CEO Tim Cook has said the Cupertino-based company is constantly trying to improve security for its users. The company declined to comment more Tuesday.

The FBI’s announcement — even without revealing precise details — that it had hacked the iPhone was at odds with the government’s firm recommendations for nearly two decades that security researchers always work cooperatively and confidentially with software manufacturers before revealing that a product might be susceptible to hackers.

The aim is to ensure that American consumers stay as safe online as possible and prevent premature disclosures that might damage a U.S. company or the economy.

As far back as 2002, the Homeland Security Department ran a working group that included leading technology industry executives to advise the president on how to keep confidential discoveries by independent researchers that a company’s software could be hacked until it was already fixed. Even now, the Commerce Department has been trying to fine-tune those rules. The next meeting of a conference on the subject is April 8 in Chicago and it’s unclear how the FBI’s behavior in the current case might influence the government’s fragile relationship with technology companies or researchers.

The industry’s rules are not legally binding, but the government’s top intelligence agency said in 2014 that such vulnerabilities should be reported to companies and the Obama administration put forward an interagency process to do so.

“When federal agencies discover a new vulnerability in commercial and open source software — a so-called ‘zero day’ vulnerability because the developers of the vulnerable software have had zero days to fix it — it is in the national interest to responsibly disclose the vulnerability rather than to hold it for an investigative or intelligence purpose,” the Office of the Director of National Intelligence said in a statement in April 2014.

The statement recommended generally divulging such flaws to manufacturers “unless there is a clear national security or law enforcement need.”

Last week a team from Johns Hopkins University said it had found a security bug in Apple’s iMessage service that would allow hackers under certain circumstances to decrypt some text messages. The team reported its findings to Apple in November and published an academic paper after Apple fixed it.

“That’s the way the research community handles the situation. And that’s appropriate,” said Susan Landau, professor of cybersecurity policy at Worcester Polytechnic Institute. She said it was acceptable for the government to find a way to unlock the phone but said it should reveal its method to Apple.

Mobile phones are frequently used to improve cybersecurity, for example, as a place to send a backup code to access a website or authenticate a user.

The chief technologist at the Center for Democracy and Technology, Joseph Lorenzo Hall, said keeping details secret about a flaw affecting millions of iPhone users “is exactly opposite the disclosure practices of the security research community. The FBI and Apple have a common goal here: to keep people safe and secure. This is the FBI prioritizing an investigation over the interests of hundreds of millions of people worldwide.”

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Follow Tami Abdollah on Twitter at https://twitter.com/latams.

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