MET MetLife Inc

By Ryan Tracy and Leslie Scism 

WASHINGTON -- A judge who overruled the Obama administration's assertion of federal oversight of MetLife Inc. castigated the government for the way it reached its decision and broadly called into question the process it used to bring large insurers under the Federal Reserve's thumb.

U.S. District Judge Rosemary Collyer, who last week overturned regulators' determination that distress at MetLife could put the economy at risk, Thursday unsealed her written opinion in the case

She took regulators to task for what she called an "unreasonable" decision that didn't consider potential costs and relied on a process she said was "fatally flawed."

Judge Collyer said the government's findings included assumptions that weren't backed up by analysis of potential losses at MetLife and its counterparties. "Every possible effect of MetLife's imminent insolvency was summarily deemed grave enough to damage the economy," she wrote.

A spokesman for Treasury Secretary Jacob Lew, who heads the Financial Stability Oversight Council that made the MetLife determination, said late Thursday the administration would appeal the judge's ruling.

The findings by Judge Collyer amount to a broadside against one of the core fixes the Obama administration and Congress enacted in response to the 2008 financial crisis, when financial institutions that weren't subject to strict federal oversight put the economy at risk. Her opinion contradicts some of the top financial regulators who populate the FSOC and sets up a legal battle that will determine whether they continue to supervise some of the largest U.S. insurance companies.

Some observers don't expect the decision to survive an appeal. "I think the judge fundamentally misunderstands what the FSOC is required to do," said University of Michigan law professor Michael Barr, a former architect of the U.S. law that provided regulators with the authority to label firms as systemically important.

Others said the ruling may not be so dire and still allows U.S. regulators to redo their work and once again subject MetLife to federal oversight. The reason: Judge Collyer faulted the oversight council's process rather than its overall findings.

"We believe the court has left the door open for the Financial Stability Oversight Council to redesignate MetLife as a systemically important financial institution, though the process may be more time-consuming and complicated," Guggenheim Securities analyst Jaret Seiberg wrote in a note to clients Thursday.

Regulators also could use the decision as a sort of road map to defend their systemically important designations of MetLife rivals American International Group Inc. and Prudential Financial Inc. during annual reviews, some legal experts said. Thomas Vartanian, a partner with law firm Dechert LLP who helped author a brief in the case supportive of MetLife, said the oversight council "will now have to present compelling empirical arguments to support any future designations."

Those factors may have helped push down shares of the big insurers Thursday beyond the overall market. Shares of MetLife, AIG and Prudential all declined on Thursday. Prudential and MetLife dropped 2.5%, while AIG was down 1.8%, versus a 1% decline for the broader market.

AIG and Prudential declined to comment Thursday, but people familiar with the matter have said the firms are expected to review the MetLife case and consider their own legal challenges.

MetLife, which received the SIFI label by a 9-1 vote of the council in December 2014, is the only firm to challenge regulators' decision in court so far. But it is possible AIG and Prudential could follow with their own lawsuits if MetLife is ultimately successful, undoing one of the Obama administration's key post-financial crisis regulatory accomplishments.

"We remain pleased with the U.S. district court's decision," a spokesman for MetLife said.

Mr. Lew said the council wouldn't back down as a result of the judge's ruling. In a statement, he said: "We intend to continue defending vigorously the process and the integrity of FSOC's work and I am confident that we will prevail....This decision leaves one of the largest and most highly interconnected financial companies in the world subject to even less oversight than before the financial crisis."

The oversight council also includes the heads of the Federal Reserve, Securities and Exchange Commission and other regulators.

The 2010 Dodd-Frank financial-overhaul law gave the council authority to designate firms as systemically important if their failure or activities could threaten financial stability.

That label comes with tougher oversight from the Fed, including annual "stress tests" and limits on borrowing that are expected to go beyond those applied to other insurance companies, which are primarily regulated by the states.

In designating MetLife, regulators outlined a range of risks associated with the firm and described how, if the firm got in trouble, stress could spread quickly to other parts of the economy.

But in her 33-page ruling, Judge Collyer said the council made promises that regulators later abandoned without explanation, violating administrative law and rendering its decision arbitrary and capricious.

Specifically, she said FSOC had promised to assess MetLife's vulnerability to financial distress but didn't do so and that it changed its definition of what it means to threaten the financial stability of the U.S.

The oversight council has argued it didn't depart from its initial promises and was only required to assess the impact of MetLife's failure, not the likelihood of it.

Mr. Lew said in his statement that "the financial crisis showed direct and predictable counterparty losses are not often the means by which the failure of a financial company could destabilize markets and threaten the U.S. economy."

Judge Collyer also invoked a June 2015 Supreme Court decision on regulatory cost-benefit analysis, known as Michigan v. Environmental Protection Agency. The decision, written by the late Justice Antonin Scalia -- whose son Eugene is a partner at Gibson, Dunn & Crutcher LLP representing MetLife -- found the EPA acted unreasonably when it didn't consider cost in making a regulatory decision.

"Because FSOC refused to consider costs as part of its calculus, it is impossible to know whether its designation 'does significantly more harm than good,'" Judge Collyer wrote, quoting the Michigan decision.

Mr. Lew said Congress chose not to require the FSOC to conduct a formal cost-benefit analysis "for good reasons" because doing so would impair regulators' ability to address risk. He said crises are difficult to predict, but their damage can be far-reaching.

Write to Ryan Tracy at ryan.tracy@wsj.com

(END) Dow Jones Newswires

April 08, 2016 10:51 ET (14:51 GMT)

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