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Financial Planning > Behavioral Finance

FSOC defends MetLife designation

By Arthur D. Postal

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WASHINGTON — The Financial Stability Oversight Council “properly determined” that financial distress at MetLife could indeed pose a threat to U.S. financial stability, the government says in a brief submitted to an appeals court Friday.

Related: Government brief rips into recent MetLife ruling

The brief was filed in the U.S. Court of Appeals for the D.C. Circuit by lawyers from the Department of Justice. The DOJ is handling the government’s appeal of a lower court decision in March that held that the FSOC’s designation of MetLife as a systemically important financial institution (SIFI) was arbitrary and capricious.

The case is MetLife v. FSOC, No. 16-5086.

The brief is the last to be filed in the case. Oral arguments were scheduled by the court for Oct. 24. None of the members of the three-judge panel that will hear the case have been designated by the Court yet.

Ryan Schoen, an analyst at Washington Analysis, said that in most cases, judges are named to hear a case approximately 30 days before oral arguments are held. That means judges in this case could be named as early as next week.

The government brief was in reply to MetLife’s Aug. 15 filing. In that brief, MetLife challenged the basis for the FSOC’s designation of the company as systemically important, arguing that the FSOC ignored its guidance in designating MetLife.

Related: FSOC seeks prompt arguments in MetLife case

MetLife also argued in its August brief asking to sustain the lower court decision that in designating MetLife as a SIFI, the FSOC failed to “adhere to its own regulatory standards and the basic precepts of reasoned agency decision-making.”

In reply, the FSOC contends that the bulk of MetLife’s brief argues that the Council acted arbitrarily and capriciously by departing from its interpretive guidance, failing to address material submitted by MetLife, and “employing palpably false assumptions in its analysis.”

But, the government contends in its latest brief, “Even a cursory review of the record demonstrates that these claims are without basis.”

The government brief contends that MetLife “does not come to grips” with the central underpinnings of the analysis the FSOC used in determining to designate MetLife.

For example, the government said in its brief, MetLife has over $900 billion in assets and 359 subsidiaries in 50 countries; “there is no precedent for the resolution of an insurance organization even remotely close to this size, scope, and complexity.” 

The brief also addressed MetLife’s arguments that state regulators have a system for dealing with insurers facing financial distress. “While regulation of MetLife’s insurance subsidiaries by state insurance regulators may mitigate some risks, the FSOC explained at length that it leaves a variety of concerns unaddressed,” the brief said.

The FSOC “exhaustively examined” the risks that material financial distress at MetLife could pose to U.S. financial stability, the brief argues.

It says MetLife “accuses” the FSOC of ignoring issues that the FSOC, “in fact, analyzed in detail.”

Moreover, the government’s brief said, MetLife’s “scatter-shot arguments cast no doubt” on the FSOC’s analysis or conclusions.  

The brief argues that, although MetLife describes itself as a “traditional” life insurance group, “it engages extensively in complex financial transactions that boost its leverage, heighten its reliance on short-term funding, and increase the exposures of its counterparties.”

The brief contends that MetLife’s counterparties “face significant risks” if the company defaults on its obligations, including its $56 billion in outstanding debt.

“In response to the company’s distress, these counterparties could seek to reduce their exposures by refusing to renew short term loans to MetLife, or by terminating existing arrangements and demanding the return of cash or other liquid assets,” the brief argues. “MetLife asks the Court to disregard these facts on the ground that they are “post hoc rationalizations.”

The government brief also contends that MetLife’s arguments “also disregards the lessons of the 2008-2009 financial crisis, when the economy was shaken by the sudden and unexpected failure or near-failure of apparently healthy institutions.”

The brief also said that, in mandating more effective regulatory safeguards, Congress did not direct the FSOC to predict the likelihood of a future crisis or the fortunes of individual companies in the indefinite future.  “It charged the FSOC, instead, with addressing the risks that a company’s financial distress (should it occur) could pose to financial stability,” the brief said.

The decision by Judge Rosemary Collyer March 30 had declared the government’s decision arbitrary and capricious, and had not taken into consideration the additional costs MetLife will bear as a SIFI.

The government also replied to the cost argument.

“MetLife asserts that the statute required the FSOC to consider whether the cost of regulation and Federal Reserve supervision would undermine the statute’s purpose of reducing risk to the economy,” the government brief said.

However, the government brief continues, “The FSOC correctly concluded that designation is proper when a nonbank financial company meets the criteria established by the statute.

“Dodd-Frank does not invite the FSOC to second-guess the legislature’s judgment and dispense with the regulatory protections that Congress believed crucial,’ the government brief argued.

See also:

Dodd-Frank drafters rip MetLife ruling

Treasury Secretary of MetLife: We have a strong SIFI case

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