By Ryan Tracy and Leslie Scism
WASHINGTON -- A judge invoked broad legal grounds to rescind
federal oversight of MetLife Inc., calling into question the
process the Obama administration has used to bring other 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 an "unreasonable" decision that
didn't consider potential costs and relied on a process that was
"fatally flawed."
The administration is expected to appeal the ruling in the
coming weeks, but hasn't said explicitly that it will do so. One
administration official said Thursday he believes an appeal is
likely.
"We intend to continue defending vigorously the process and the
integrity of [the Financial Stability Oversight Council's] work,
and I am confident that we will prevail," said U.S. Treasury
Secretary Jacob Lew, who heads the oversight council, in a
statement Thursday. "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."
MetLife shares were down 2.6% late Thursday afternoon, versus a
decline of about 1% for the broader market.
The findings by Judge Collyer amount to a broadside against one
of the core overhauls the Obama administration and Congress enacted
in response to the 2008 financial crisis, when financial
institutions that fell outside federal oversight put the economy at
risk. Her opinion contradicts some of the top federal financial
regulators and sets up a legal battle that will determine whether
they continue to supervise some of the largest U.S. insurance
companies.
In the 33-page document, Judge Collyer blasted the FSOC's
process for tagging MetLife as "systemically important financial
institutions" under the 2010 Dodd-Frank law, implicitly also
criticizing a similar process that was used to tag MetLife's two
biggest rivals -- American International Group Inc. and Prudential
Financial Inc. -- as SIFIs. The oversight council includes the
heads of the Federal Reserve, Securities and Exchange Commission,
and other regulators.
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.
By faulting the oversight council's process rather than its
overall findings, Judge Collyer may have left the door open for the
group to redo its work and once again subject MetLife to federal
oversight.
"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.
Mr. Seiberg also said that MetLife is undertaking a separate
initiative to shed some assets in a way that could make the company
appear less worrisome to regulators in the future.
Dodd-Frank gives regulators the authority to designate firms as
SIFIs if their failure or activities could threaten financial
stability. The SIFI 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.
Judge Collyer said those 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.
Mr. Lew's statement said "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."
The judge also faulted regulators for process fouls.
In April 2012, the council issued a final rule interpreting its
authority under Dodd Frank. She said that document made promises
that the oversight council later abandoned without explanation,
violating administrative law and rendering its decision arbitrary
and capricious. Specifically, she said the 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 required to assess only the impact of
MetLife's failure, not the likelihood of it.
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.
University of Michigan law professor Michael Barr, who was an
architect of the Dodd-Frank law during a stint at the Treasury
Department, said he thinks the decision will be overturned on
appeal.
"I think the judge fundamentally misunderstands what the FSOC is
required to do.... I think the judge is wrong."
Write to Ryan Tracy at ryan.tracy@wsj.com
(END) Dow Jones Newswires
April 08, 2016 02:15 ET (06:15 GMT)
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