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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