Coverage: MetLIfe sues over “Too Big To Fail” designation

The designation as systemically important, or too big to fail, is coming under fire from the companies who have to deal with the designation.

Victoria McGrane and Leslie Scism had these details in their story for The Wall Street Journal:

MetLife Inc. is challenging the federal government’s decision to subject the insurer to stricter oversight, setting up the biggest test yet for regulators responsible for protecting the U.S. financial system from another crisis.

The move comes as Republicans, now in control of both houses of Congress, plan changes that would roll back some elements of the 2010 Dodd-Frank financial-overhaul law, the signature piece of legislation introduced after the housing bust.

The lawsuit pits the nation’s largest life insurer by assets against the Financial Stability Oversight Council, a group of top financial regulators created by Dodd-Frank and given authority to identify companies that could threaten the U.S. economy in a crisis. MetLife, the fourth nonbank to be designated as “systemically important” by the council, is the first company to legally challenge that conclusion. The label means that MetLife could pose significant risks to the U.S. financial system should it collapse and warrants tougher oversight, which could crimp its ability to raise dividends and buy back shares.

MetLife said it doesn’t pose such risks, and the government used flawed metrics in arriving at its decision.

The New York Times story by Mary Williams Walsh pointed out that MetLife didn’t believe the rules were being applied fairly:

The insurer seemed to leave open the possibility that it would accept being designated a “systemically important financial institution,” or SIFI, in the future, once those rules are known. It also suggested that it might accept the designation if it were applied to certain activities common to all insurers, rather than the current approach, which singles out a few big companies for stricter oversight, but leaves everyone else to do business as usual.

“We don’t think that we are systemically important,” MetLife’s chief executive, Steven A. Kandarian, said in an interview on Tuesday. “We are simply not that interconnected to other organizations.” For example, Mr. Kandarian said, even if MetLife were in such serious trouble that it defaulted on all its obligations to its largest business partner — a global bank — the total loss would approximate just 2 percent of that bank’s equity. He declined to name the bank, but said it was a SIFI (pronounced SIH-fee) that MetLife had obligations to including debts, derivatives contracts and securities-lending deals, among others.

Currently, banks are designated systemically important on the basis of size. But for insurers and other financial institutions, the council has been reviewing other criteria, such as a company’s activity in the capital markets, the extent to which it does business with other financial firms, and how it is currently regulated. Being “systemically important” does not mean the institution is operating in a hazardous manner, but that in the event of a crisis, its far-flung relationships could set off a cascade.

Bloomberg’s Zachary Tracer, Andrew Zajac and Ian Katz had this reaction from investors and others in the financial community:

“It’s not wise to begin your new relationship with a federal regulator by suing them,” Isaac Boltansky, an analyst at Compass Point Research & Trading LLC, said by phone before MetLife announced the suit. “I don’t think it’s in their best interest.”

U.S. lawmakers voted in December to give the Fed more flexibility in how it tailors the rules after insurers said they shouldn’t be subject to standards designed for banks. That change reduced the need for MetLife to sue, Boltansky said. By mounting the legal challenge, the insurer may be limiting its ability to influence how the rules are written, he said.

Gloria Vogel, an analyst at Drexel Hamilton LLC, said a SIFI designation could cut MetLife’s return on equity, and limit buybacks, dividends and acquisitions. The insurer’s stock price already reflects those expectations, she said.

“It probably reduces the ROE a little bit because you’ve got to keep more capital,” she said by phone. “The market’s already assuming they’re a SIFI.”

Writing for Reuters, Douwe Miedema said many others in the industry will be watching for the outcome of the lawsuit:

The lawsuit is also important for large asset managers such as BlackRock Inc (BLK.N) and Fidelity Investments that could be added to the list of risky firms, though they have aggressively campaigned to avoid the FSOC designation.

Lawmakers and companies alike have complained that the designation process is opaque and that the risks are not sufficient to warrant the tighter rules.

“This is the first real challenge to the FSOC’s deeply flawed … designation authority,” said U.S. Representative Patrick McHenry, a Republican from North Carolina. “It is my hope this case will begin to shed some light on what metrics – if any – are used in the arbitrary and opaque FSOC review process.”

Treasury Secretary Jack Lew, who chairs FSOC, said last year the council may tweak its procedures. The council, comprised of the top U.S. regulators, plans to discuss potential reforms this month, a person familiar with the matter said.

MetLife’s timing is likely good. Some in the new Congress are looking to overhaul the Dodd-Frank financial rules, and this could make a good test case for why they should be changed. The point that the rules aren’t applied evenly to all insurance companies is a good one, but it is applicable to banks and other financial firms. Many will be watching to see the outcome and if MetLife can successfully argue its systemically important designation.