By Ryan Tracy
WASHINGTON -- A U.S. District Judge challenged government
lawyers in a hearing on MetLife Inc.'s push to overturn its
designation as a "systemically important financial institution"--a
tag created by the 2010 Dodd-Frank law that comes with strict
federal oversight.
Judge Rosemary Collyer told Justice Department lawyers,
representing the Financial Stability Oversight Council, or FSOC,
that she was "trying to figure out" how their process for tagging
the company was reasonable. Her questions went to the heart of
criticism, raised by MetLife as well as lawmakers and other
companies, that U.S. regulators have swept companies in for
stricter regulation without sufficient cause or explanation.
She also expressed skepticism about some of MetLife's arguments,
however, stating that the legal standard Congress set for labeling
a company "systemically important" was a relatively low
bar--implying that policy makers didn't need to do much to justify
their actions.
Still, most of her fire was direct at the government.
A decision from the U.S. District Court for the District of
Columbia could take months and would likely be appealed by the
losing side, so the case could drag on for months without a final
resolution.
MetLife, the largest U.S. life insurer by assets, contends that
regulators erred when they declared the firm to be a so-called
systemically important financial institution, or SIFI, in December
2014. But the company is also mounting a broader legal attack that
could limit future actions by FSOC, the regulatory group created by
Dodd-Frank to identify firms for which failure could bring down the
entire economy.
MetLife sued the oversight council in January 2015 in an effort
to avoid what are expected to be tighter capital and other
requirements that come with the SIFI tag. The Federal Reserve,
which regulates SIFIs, hasn't published rules for insurance
companies yet. Still, MetLife recently announced plans to sell off
some of its core life insurance assets partly in response to the
coming regulations.
The SIFI tag was created in response to the 2008 financial
crisis, when large financial companies such as MetLife rival
American International Group Inc. that weren't tightly regulated at
the federal level got in trouble and helped precipitate a broad
financial panic.
"We are grateful for the opportunity to present our case to the
court and look forward to its decision," a MetLife spokesman said
after the hearing Wednesday. A spokesman for U.S. Treasury
Secretary Jacob Lew, who chairs the oversight council, had no
comment.
Judge Collyer had probing questions for both sides in a roughly
two-hour long hearing Wednesday. She questioned the oversight
council's process, in which the same council members both made the
decision about MetLife and heard the company's appeal of that
decision.
"I'm trying to figure out how this is a reasonable way for this
process to work," she said, referring to the fact that council
members decide on the appeal of their own decision. "There is
nobody neutral in this process."
Separately, she said the oversight council had first told the
public it would conduct an analysis of a company's vulnerability to
financial stress, but then didn't do so in the case of MetLife.
"That's what they said and that isn't the analysis that was used,"
she said.
At another point, she suggested that by assuming serious
financial distress at MetLife, the council created a scenario where
MetLife had almost no chance to convince regulators that the
company doesn't put the financial system at risk. "That is not a
risk analysis," she said. "That is assuming the worst of the
worst."
Eric Beckenhauer, the Justice Department lawyer representing
FSOC, responded that the council was following "Congress' explicit
instructions" to assess whether distress at MetLife could endanger
U.S. financial stability.
He said the council's structure, in which council members hear
appeals of their own decisions, is found in other administrative
agencies and has been upheld by the courts. He also said the
council hadn't changed its mind in laying out its decision-making
process. Nowhere in the council's public statements "does it say
that the council will attempt to calculate the likelihood of
distress," he said.
Judge Collyer also appeared dismissive of some arguments made by
MetLife, pushing each side's lawyers to move on to other arguments
during discussions about whether MetLife is a financial company
eligible for SIFI designation or whether it was provided full
access to the record behind FSOC's decision.
She asked MetLife's lawyer, Gibson Dunn & Crutcher LLP
partner Eugene Scalia, how his client could overcome the fact that
the Dodd-Frank law ordered regulators to assess whether distress at
the company "could" threaten financial stability. "It's in the
statute and it's not a very high bar," she said.
Mr. Scalia emphasized his arguments that FSOC had not followed
its own rules and had engaged in what he described as "unfettered
speculation."
"They kept changing the rules of the game and moving the bar so
that MetLife couldn't win," he said.
MetLife is the first and only SIFI to sue the oversight council.
But three other SIFIs--insurers AIG and Prudential Financial Inc.
and General Electric Co.'s financing arm, GE Capital--could file
similar lawsuits if MetLife prevails. Those firms have been facing
investor pressure to shrink in light of tighter SIFI regulation
Dodd-Frank also directed the Fed to adopt stricter rules for
large banks deemed possible sources of systemic risk, but those
firms were already under Fed regulation before the law.
An FSOC victory, on the other hand, would protect a major plank
of Dodd-Frank designed to extend tighter supervision to the
nation's largest financial firms.
Judge Collyer closed Wednesday's hearing by thanking the lawyers
and saying, "Now we will go figure it out."
Write to Ryan Tracy at ryan.tracy@wsj.com
(END) Dow Jones Newswires
February 10, 2016 15:42 ET (20:42 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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