U.S. Judge Questions MetLife 'Systemically Important' Designation -- Update

By Ryan Tracy 

WASHINGTON -- A U.S. District Judge challenged government lawyers in a hearing on MetLife Inc.'s push to overturn its designation as a "systemically important financial institution"--a tag created by the 2010 Dodd-Frank law that comes with strict federal oversight.

Judge Rosemary Collyer told Justice Department lawyers, representing the Financial Stability Oversight Council, or FSOC, that she was "trying to figure out" how their process for tagging the company was reasonable. Her questions went to the heart of criticism, raised by MetLife as well as lawmakers and other companies, that U.S. regulators have swept companies in for stricter regulation without sufficient cause or explanation.

She also expressed skepticism about some of MetLife's arguments, however, stating that the legal standard Congress set for labeling a company "systemically important" was a relatively low bar--implying that policy makers didn't need to do much to justify their actions.

Still, most of her fire was direct at the government.

A decision from the U.S. District Court for the District of Columbia could take months and would likely be appealed by the losing side, so the case could drag on for months without a final resolution.

MetLife, the largest U.S. life insurer by assets, contends that regulators erred when they declared the firm to be a so-called systemically important financial institution, or SIFI, in December 2014. But the company is also mounting a broader legal attack that could limit future actions by FSOC, the regulatory group created by Dodd-Frank to identify firms for which failure could bring down the entire economy.

MetLife sued the oversight council in January 2015 in an effort to avoid what are expected to be tighter capital and other requirements that come with the SIFI tag. The Federal Reserve, which regulates SIFIs, hasn't published rules for insurance companies yet. Still, MetLife recently announced plans to sell off some of its core life insurance assets partly in response to the coming regulations.

The SIFI tag was created in response to the 2008 financial crisis, when large financial companies such as MetLife rival American International Group Inc. that weren't tightly regulated at the federal level got in trouble and helped precipitate a broad financial panic.

"We are grateful for the opportunity to present our case to the court and look forward to its decision," a MetLife spokesman said after the hearing Wednesday. A spokesman for U.S. Treasury Secretary Jacob Lew, who chairs the oversight council, had no comment.

Judge Collyer had probing questions for both sides in a roughly two-hour long hearing Wednesday. She questioned the oversight council's process, in which the same council members both made the decision about MetLife and heard the company's appeal of that decision.

"I'm trying to figure out how this is a reasonable way for this process to work," she said, referring to the fact that council members decide on the appeal of their own decision. "There is nobody neutral in this process."

Separately, she said the oversight council had first told the public it would conduct an analysis of a company's vulnerability to financial stress, but then didn't do so in the case of MetLife. "That's what they said and that isn't the analysis that was used," she said.

At another point, she suggested that by assuming serious financial distress at MetLife, the council created a scenario where MetLife had almost no chance to convince regulators that the company doesn't put the financial system at risk. "That is not a risk analysis," she said. "That is assuming the worst of the worst."

Eric Beckenhauer, the Justice Department lawyer representing FSOC, responded that the council was following "Congress' explicit instructions" to assess whether distress at MetLife could endanger U.S. financial stability.

He said the council's structure, in which council members hear appeals of their own decisions, is found in other administrative agencies and has been upheld by the courts. He also said the council hadn't changed its mind in laying out its decision-making process. Nowhere in the council's public statements "does it say that the council will attempt to calculate the likelihood of distress," he said.

Judge Collyer also appeared dismissive of some arguments made by MetLife, pushing each side's lawyers to move on to other arguments during discussions about whether MetLife is a financial company eligible for SIFI designation or whether it was provided full access to the record behind FSOC's decision.

She asked MetLife's lawyer, Gibson Dunn & Crutcher LLP partner Eugene Scalia, how his client could overcome the fact that the Dodd-Frank law ordered regulators to assess whether distress at the company "could" threaten financial stability. "It's in the statute and it's not a very high bar," she said.

Mr. Scalia emphasized his arguments that FSOC had not followed its own rules and had engaged in what he described as "unfettered speculation."

"They kept changing the rules of the game and moving the bar so that MetLife couldn't win," he said.

MetLife is the first and only SIFI to sue the oversight council. But three other SIFIs--insurers AIG and Prudential Financial Inc. and General Electric Co.'s financing arm, GE Capital--could file similar lawsuits if MetLife prevails. Those firms have been facing investor pressure to shrink in light of tighter SIFI regulation

Dodd-Frank also directed the Fed to adopt stricter rules for large banks deemed possible sources of systemic risk, but those firms were already under Fed regulation before the law.

An FSOC victory, on the other hand, would protect a major plank of Dodd-Frank designed to extend tighter supervision to the nation's largest financial firms.

Judge Collyer closed Wednesday's hearing by thanking the lawyers and saying, "Now we will go figure it out."

Write to Ryan Tracy at [e-mail]

(END) Dow Jones Newswires

February 10, 2016 15:42 ET (20:42 GMT)

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