The collapse of AIG during the financial crisis eight years ago hung over arguments in a federal appeals court Monday regarding the government’s designation of insurance giant MetLife as a “systemically important financial institution” — too big to fail, in laymen’s terms.
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That designation by the Financial Stability Oversight Council triggered increased government oversight and regulation for MetLife. The company went to court, arguing the council failed to follow federal law and its own guidelines. A U.S. district judge earlier this year agreed, prompting the government to take the case to the U.S. Court of Appeals for the D.C. Circuit.
One of MetLife’s main arguments is that the council should have considered MetLife’s actual vulnerability to financial distress, as opposed to jumping ahead to the consequences. During arguments on Monday, U.S. Department of Justice lawyer Mark Stern said that Congress didn’t intend for the council to predict whether or not a company would fail when it passed the Dodd-Frank financial reform package in the aftermath of the financial crisis.
Stern invoked AIG’s collapse, saying that back in 2005 only the few people who bet against the housing market could have predicted what would happen. (He referenced “The Big Short,” a book about those investors that was dramatized in an Oscar-winning 2015 movie.)
Guidance that the council published interpreting Dodd-Frank couldn’t be read to include a requirement that it consider the likelihood that a company would face financial distress, Stern said. Judge Sri Srinivasan said the government was taking the more “aggressive position.”
Judge Patricia Millett questioned MetLife’s lawyer, Eugene Scalia of Gibson, Dunn & Crutcher, about what language in Dodd-Frank compelled the council to consider MetLife’s likelihood of distress. Didn’t the law use conditional words and phrases such as “in the event of” and “could,” she asked.
MetLife is represented in these proceedings by Eugene Scalia, a partner in the Washington, D.C., office of the law firm Gibson Dunn LLP and son of late U.S. Supreme Court Associate Justice Antonin Scalia. (Photo: iStock)
Scalia said there wasn’t explicit language in the statute, but that it was unreasonable for the council not to do so. The council started with the assumption of a total failure by MetLife, he said, without any consideration for how it got there.
Scalia said the council also ignored evidence MetLife presented about how a failure by MetLife would affect other financial institutions. This evidence, Scalia said, showed that any losses by banks would be “minuscule” compared to losses that the Federal Reserve assumed in “stress tests” of banks’ resilience.