Court Hears MetLife’s Challenge to ‘Too-Big-to-Fail’ Designation This Week

For MetLife Inc. Chief Executive Officer Steve Kandarian, the scariest risk is being classified as risky.

MetLife lawyers go to court Wednesday seeking to overturn a too-big-to-fail designation in a lawsuit that could, if the insurer prevails, reduce the government’s ability to rein in large financial firms. If the company loses, Kandarian may face tougher oversight including harsher capital and leverage requirements, although final rules haven’t been written.

A U.S. panel has said a forced liquidation of MetLife could roil markets because of the insurer’s holdings of hard-to-sell securities and reliance on derivatives. Kandarian says the contracts actually help MetLife hedge risk and that insurers aren’t vulnerable to massive client withdrawals the way banks are. When asked by the Financial Stability Oversight Council, or FSOC, about his main worries, the CEO turned the tables on the group.

“The biggest risk to MetLife is being designated a SIFI and having bank rules applied to us,” Kandarian said at a November 2014 meeting, evoking laughter from the panel as he referred to the company’s status as a systemically important financial institution. The next largest challenge would be a 10-year Treasury yield “at 1 percent for 15 years.”

MetLife, the largest U.S. life insurer, said that FSOC relied on “unsubstantiated speculation” when declaring the company a non-bank SIFI. The council was created under the Dodd- Frank law in 2010 and includes officials such as Federal Reserve Chair Janet Yellen and Treasury Secretary Jacob J. Lew.

“It’s a careful calculation by any regulated business before you sue your regulator. It can be taken, in some cases, the wrong way by regulators,” Tom Dawson, who co-heads the insurance transactional and regulatory group at the law firm Drinker Biddle & Reath LLP, said in an interview. MetLife’s challenge “may not be business as usual because there just aren’t many precedents.”

Only three other firms have been declared non-bank SIFIs. Insurers Prudential Financial Inc. and American International Group Inc. opted not to fight the decision in court. General Electric Co.’s financial arm plans to apply to remove the tag after simplifying operations and shedding assets.

“If the court rules in favor of MET, then that’s certainly a positive for the other companies that have been designated non-bank SIFIs,” Sean Dargan, an analyst at Macquarie Group Ltd., said in an interview.

Kandarian told officials at the closed hearing in 2014 that he was weighing whether to break up the company to reduce regulation. Then he publicly announced a plan last month for the sale, spinoff or initial public offering of a U.S. retail operation that has about $240 billion in assets. The unit offers products like annuities, and Kandarian said it would be at a competitive disadvantage as part of a SIFI. Some passages from Kandarian’s 2014 remarks were released late last month, after previously being redacted.

FSOC, which is charged with monitoring potential threats to the financial system, spent more than a year deliberating before designating the insurer a SIFI in December 2014. That tag could subject the company to higher capital requirements.

The ruling may affect FSOC’s approach in considering companies for the risk tag, said Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics. The panel has been “bewilderingly cautious” about designations, she said.

If the judge rules broadly in favor of MetLife, FSOC will probably appeal because “their commitment is to continue the systemic-designation process, part of the Dodd-Frank legacy,” Petrou said in an interview.

Financial industry oversight is akin to nuclear power regulation, in that both are best left to experts, rather than judges, who tend to be generalists, said Cornell University banking law professor Robert Hockett. He predicted that U.S. District Judge Rosemary M. Collyer won’t second-guess the council’s decision and said that courts tend to be deferential to regulators.

“If they screw it up, the consequences are immense,” he said in a telephone interview. Hockett told a U.S. House panel in November that FSOC was acting within its powers.

However, FSOC’s penchant for operating behind closed doors renders it vulnerable to the MetLife challenge, said Ernest Patrikis, a partner at White & Case LLP who worked 30 years at the Federal Reserve Bank of New York and then became general counsel at AIG, departing in 2006.

FSOC is the “most secretive, closed organization I’ve encountered other than the three-letter agencies,” he said in a phone interview referring to the U.S. National Security Agency and Central Intelligence Agency. He also said that FSOC shouldn’t count on automatic deference from the judiciary.

“Courts are much more skeptical” than they used to be, he said, adding that he thinks government lawyers, in their principal court filing, didn’t justify the council’s conclusions about the insurer’s relative size and interconnectedness with the financial system.

Better Markets Inc., a group that supports tougher regulation, said in a court filing that rescinding MetLife’s designation would “halt a process designed to mitigate risks.” Rob Friedlander, a spokesman for the Treasury Department, declined to comment on the case. MetLife’s Randy Clerihue said the insurer is looking forward to the court’s decision.

Still, MetLife’s argument may prove challenging, according to Dawson.

“It’s a tough case for them to win,” Dawson said. For FSOC to be defeated, it “basically has to be shown that their decision was kind of without any foundation whatsoever, arbitrary, capricious. It’s a tough standard.”

The case is MetLife Inc. v. Financial Stability Oversight Council, 15-cv-45, U.S. District Court, District of Columbia (Washington).