(Bloomberg) — 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.”
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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.