By Victoria McGrane And Leslie Scism
MetLife Inc.'s legal challenge to its designation as
"systemically important" to the U.S. financial system sets up the
biggest test yet of the 2010 Dodd-Frank law.
The move comes as Republicans, now in control of both houses of
Congress, plan legislation that would subject the government's
Financial Stability Oversight Council generally to more outside
scrutiny and change the designation process.
The lawsuit pits the nation's largest life insurer by assets
against the 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 the council, is the first company to legally challenge
that conclusion. In a finding late last year, the council
determined that MetLife poses significant risks and should be drawn
in for tougher oversight.
The fight comes amid a larger battle over Dodd-Frank, as
lawmakers in recent months have mounted several successful attempts
to roll back or change portions of the law, including eliminating a
requirement big banks put certain trading activities into separate
affiliates. Additional efforts by Republicans are expected in
coming months. Liberal Democrats, led by Massachusetts Sen.
Elizabeth Warren, are mounting a campaign to derail even minor
changes.
The lawsuit, filed Tuesday in the U.S. District Court for the
District of Columbia, will be a test of the council'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, because the
rules governing insurers aren't yet written. MetLife Chairman and
Chief Executive Steven Kandarian said in a statement the council
"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 also 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. "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 said, "should preserve a level playing field
in the life insurance industry."
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 criteria for the designation came from the Dodd-Frank
financial-overhaul legislation that put 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.
MetLife's legal quest is being cheered by Republicans.
"With every reckless designation of a nonbank company as
[systemically important], 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 hold the
oversight council to outside scrutiny. The council has launched its
own review of how it can improve the process for firms.
The oversight council 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 some 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. The council designated AIG as systemically important in
2013, along with General Electric Co.'s finance unit, GE Capital.
Regulators tapped another life insurer, Prudential Financial Inc.,
later that year. None of those firms decided to bring a lawsuit
testing 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 is chairman of the council, said in
December that the decision came "after a year and a half of
extensive and in-depth analysis" as well as "significant engagement
with the company."
Winning the lawsuit 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 specialists 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 the oversight council to
proceed cautiously and slowly with its designation powers. The
council crafted a multistep review process, seeking public comment
on its approach, even though Dodd-Frank didn't require the council
to do so. The law requires only that regulators give a firm 30 days
to respond. The council's process instead gives firms multiple
opportunities to engage with regulators and present evidence as to
why a designation isn't warranted.
Write to Victoria McGrane at victoria.mcgrane@wsj.com and Leslie
Scism at leslie.scism@wsj.com
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