Metlife battles ‘too big to fail’ designation

Metlife on Monday argued the government should not designate it as “too big to fail” because it is not systemically important to financial markets.

In testimony to the U.S. Court of Appeals for the District of Columbia Circuit, MetLife, Inc. attorney Eugene Scalia of Gibson Dunn LLP said that the Financial Stability Oversight Council (FSOC) disregarded critical information when it designated the company as a systemically important financial institution (SIFI).

Entities with the SIFI designation are required to hold higher levels of capital and comply with a series of costly regulations, which could weaken MetLife and make it more susceptible to failure, Scalia said. 

Regulators gave MetLife a SIFI designation in December 2014, but MetLife won its lawsuit last March when Judge Rosemary Collyer of the U.S. District Court of the District of Columbia rescinded the designation.

The FSOC, made up of 10 voting members including Treasury Secretary Jack Lew and Federal Reserve Chairwoman Janet Yellen, quickly appealed the decision. 

Collyer was nominated by President George W. Bush. The judges hearing arguments on Monday included fellow Bush appointee A. Raymond Randolph and two appointed by President Obama.

MetLife produced a number of tests to demonstrate it is not systemically important to financial markets, Scalia said. The insurance giant conducted studies to determine the effects of a MetLife failure on bank health and found it would have 1/73 the adverse effect that major banks withstood under stress tests. 

In addition, MetLife argued the FSOC chose to “disregard insurance expertise” when it designated MetLife a SIFI. State regulators oversee insurance companies, and MetLife’s attorney said state regulators submitted 10 letters to the FSOC on MetLife’s behalf, but their concerns were never addressed, Scalia said. 

The FSOC grouped insurance companies with banks under the SIFI label, but the two entities are inherently different, Scalia said. Banks are far more susceptible to runs. In a financial panic, people don’t immediately cash out their insurance policies. Further, banks are far more intertwined with capital markets than are insurance companies.

In his three-minute retort, U.S. attorney Mark Stern said the decision to evaluate the systemic significance of insurance companies has less to do with its main business of issuing policies than with whether the entity “delves heavily into capital markets.”

The argument is not whether one company goes under or the impact of MetLife’s failure on one major bank, but the degree to which an entity like MetLife can contribute to a massive economic downturn, he said.

Prudential and American International Group are the other two insurers who have been given SIFI designations. AIG required an $85 billion federal government bailout in 2008 because of its role insuring many large institutional investors against default on certain products, including those that underpinned the mortgage markets. 

The FSOC, which was created by the Dodd-Frank Act to identify potential threats in the financial sector to economy, said it relied on its two-pronged approach — evaluating the entity’s exposure transmission and asset liquidation channels — to determine MetLife was systemically important.  

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