A U.S. lawyer defending the government’s decision to designate MetLife Inc. a potential threat to the economy was questioned sharply by a federal judge who was asked by the company to remove the label.
The Financial Stability Oversight Council, a group of regulators led by Treasury Secretary Jacob J. Lew, has asked U.S. District Judge Rosemary Collyer in Washington to throw out MetLife’s 2015 lawsuit, which contends the FSOC designation was arbitrary and unjustified.
Collyer peppered the FSOC’s lawyer, Eric Beckenhauer, with questions about why the council said it would conduct a “vulnerability analysis” of MetLife and then didn’t follow through. But she also noted that the standard for designation — that a company “could pose” a threat to the financial system — isn’t “a very high bar.”
The suit by New York-based MetLife is the biggest challenge yet to the council, which was created by the 2010 Dodd-Frank law to help avert future financial crises. If the insurer prevails, that could reduce the government’s ability to rein in large financial firms and encourage those companies to challenge FSOC designations in court.
Country’s Biggest
MetLife, the nation’s biggest life insurer, is one of four companies labeled by the FSOC as a systemically important financial institution. The designation means it may be subject to tougher capital and leverage requirements imposed by the Federal Reserve.
Collyer asked Beckenhauer why the FSOC seemed to proceed from the proposition that, in a crisis,MetLife would be at the brink of collapse.
“That’s not risk analysis,” she said. “That’s assuming the worst of the worst of the worst.”
Beckenhauer responded that it’s the nature of financial crises to be unanticipated. MetLife is asking her to override the “considered judgment” of the heads of nine major financial regulators, he said.
The government’s lawyer said the council was acting on authority granted by Congress to assess which nonbank financial companies pose a potential risk to the broader economy. He focused on MetLife’s financial ties to other firms around the world, or interconnectedness, a factor that was crucial in the 2008 financial crisis.
MetLife Attorney
MetLife lawyer Eugene Scalia said his client isn’t a financial institution that should be subject to FSOC and that, even if it were, the methods used by the council to arrive at its conclusions violated federal administrative procedure law and the company’s right to due process.
The designation process, he said, was “clouded in mystery.” Collyer expressed sympathy for his assertion that the FSOC had said it would conduct a study on MetLife’s risks, or vulnerabilities, but failed to do.
Scalia, a partner at Gibson Dunn & Crutcher LLP who has filed several cases seeking to overturn regulations in the Dodd- Frank financial law, said companies hit with the FSOC designation were trying to restructure themselves to avoid the extra oversight and the costs associated with it.
MetLife last month announced plans for a sale, spinoff or initial public offering of a U.S. retail operation that has about $240 billion in assets. The unit offers products such as annuities, and the company said the division would be at a competitive disadvantage as part of a SIFI.
FSOC ‘Speculation’
MetLife has said the FSOC relied on “unsubstantiated speculation” and that the insurer poses no risk to the financial system. The three other nonbank financial companies designated by FSOC are insurers American International Group Inc. and Prudential Financial Inc. and General Electric Co.’s finance unit.
GE, which is exiting most of its lending businesses, has said it will ask the FSOC to remove the systemically important label from GE Capital. MetLife is the only institution bearing the too-big-to-fail label to go to court over the determination.
The case is MetLife Inc. v. Financial Stability Oversight Council, 15-cv-00045, U.S. District Court, District of Columbia (Washington).
Related ticker: MET US (MetLife Inc.)
–With assistance from Katherine Chiglinsky.