By Victoria McGrane And Leslie Scism
Life insurer MetLife Inc. on Tuesday said it would sue the
federal government over a finding late last year that the firm
poses significant risks to the U.S. financial system and should be
drawn in for tougher oversight, setting up the biggest test yet of
the 2010 Dodd-Frank law.
The lawsuit pits the nation's largest life insurer by assets
against the Financial Stability Oversight Council, a group of top
financial regulators created by Dodd-Frank and given authority to
identify companies that could threaten the U.S. economy in a
crisis. MetLife, the fourth company to be designated as
"systemically important" by FSOC, is the first company to legally
challenge that conclusion.
The fight comes amid a larger battle over Dodd-Frank, which
remains under attack from Wall Street and congressional
Republicans. Lawmakers in recent months have mounted several
successful attempts to roll back or change portions of the law,
including eliminating a requirement big banks "push out" certain
derivatives trading activities into separate affiliates. Additional
efforts are expected in the coming months with Republicans now in
control of both the House and Senate. Liberal Democrats led by
Massachusetts Sen. Elizabeth Warren are mounting a vigorous
campaign to derail even minor changes.
The lawsuit, expected to be filed in the U.S. District Court for
the District of Columbia, will be a big test of FSOC's power and
ability to identify potential financial system threats. The group,
which includes the heads of the Treasury, Federal Reserve,
Securities and Exchange Commission and other agencies, is supposed
to identify financial system risks and take steps to prevent them
from building up.
MetLife is challenging the designation as "premature" since the
rules governing insurers aren't yet written. MetLife Chairman and
Chief Executive Steven Kandarian said in a news release FSOC
"should wait until the rules are in place and it knows the impact
on designated firms."
The 62-year-old executive has been adamant in recent months that
the state-regulated insurer doesn't deserve the designation because
if it were to fail, it wouldn't bring down any other companies. Mr.
Kandarian has expressed concern that the additional U.S. oversight
will result in an unnecessarily fat capital cushion that could
drive up product prices and put MetLife at a competitive
disadvantage to insurers that won't be held to the same,
yet-to-be-determined standards.
"MetLife has always supported robust regulation of the
life-insurance industry and has operated under a stringent
regulatory system for decades," he said in the release. "However,
adding a new federal standard for just the largest life insurers
and retaining a different standard for everyone else will drive up
the cost of financial protection for consumers without making the
financial system any safer."
The government, he added, "should preserve a level playing field
in the life insurance industry."
Still, the company's fate as a so-called SIFI has long been
predicted. FSOC was created in part over concerns that insurers --
particularly American International Group Inc.-- had fallen into a
regulatory abyss and weren't being watched closely enough by the
federal government.
AIG got deeply involved in exotic financial instruments that
brought it to the brink of collapse during the financial crisis,
activity that went unnoticed and unaddressed by the firm's multiple
regulators. FSOC designated AIG a SIFI in 2013, along with GE
Capital. Regulators tapped another life insurer, Prudential
Financial Inc. later that year. None of those firms decided to
bring a lawsuit testing the accuracy of the council's
assessment.
When the council voted 9-1 last month to apply the label to
MetLife, which operates in 50 countries and has about $900 billion
in assets, it cited MetLife's size, complexity, links to other
financial firms and reliance on complex products. Treasury
Secretary Jacob Lew, who chairs FSOC, said in December the decision
came "after a year and a half of extensive and in-depth analysis"
as well as "significant engagement with the company."
Winning won't be easy for MetLife, which must show that
regulators were "arbitrary and capricious" in applying the systemic
label to the firm. The high bar stems from a 1987 Supreme Court
decision that ruled courts should defer to a governmental agency's
interpretation of a statute, legal experts said.
A Treasury spokeswoman said: "We have been notified of MetLife's
complaint. The Council's decision to designate a nonbank financial
company is reached only after a thorough analysis and extensive
engagement with the company, both of which occurred in this case.
We are confident in the Council's work."
The threat of litigation has prompted FSOC to proceed cautiously
and slowly with its designation powers. The council crafted a
multi-step review process, seeking public comment on its approach,
even though Dodd-Frank did not require the council to do so. The
law requires only that regulators give a firm 30 days to respond.
FSOC's process instead gives firms multiple opportunities to engage
with regulators and present evidence as to why a designation is not
warranted.
Still, MetLife's legal quest is being cheered on by FSOC's many
Republican critics in Congress.
"With every reckless designation of a nonbank company as a SIFI,
FSOC makes our economy more dangerous and unstable," said Rep.
Scott Garrett (R., N.J.), a member of the House Financial Services
Committee who has argued that designation amounts to labeling a
firm as "too big to fail," or a signal to markets that the
government is likely to rescue the firm the next time crisis
strikes. "Regardless of the outcome, Congress will continue to make
FSOC oversight and reform a top priority in the 114th
Congress."
Mr. Garrett and others plan legislation that would subject FSOC
generally to more outside scrutiny and change the SIFI designation
process. In the face of criticism, the council has launched its own
review of how it can improve the process for firms, though its
efforts are unlikely to satisfy congressional critics.
The criteria for the designation came from the 2010 Dodd-Frank
financial-overhaul legislation that put new clamps on big firms in
the wake of the 2008 crisis. The legislation allows any firm
labeled as systemically important to challenge that determination
in federal court.
The council's conclusion rested partly on concerns that
MetLife--were it in financial distress and facing demands from
customers to cash in certain products--might have to dump
substantial bondholdings from its investment portfolio at fire-sale
prices. That could destabilize capital markets and hurt other
companies and investors, according to the council's summary of its
decision.
The lone dissenter, former Kentucky Insurance Commissioner and
insurance lawyer S. Roy Woodall, filed a written objection arguing
that other council members relied on "implausible, contrived
scenarios" and failed "to appreciate fundamental aspects" of
MetLife's products and regulatory controls, he said.
Write to Victoria McGrane at victoria.mcgrane@wsj.com and Leslie
Scism at leslie.scism@wsj.com
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