MetLife wins a legal battle to be deemed unimportant

An American court sides with a big insurer against a powerful new regulator

LIFE-INSURANCE companies usually go to inordinate lengths to demonstrate their dullness. That makes MetLife’s chief executive, Steven Kandarian, extraordinary. He did what the head of no other big American financial firm has dared to: challenge head-on the legitimacy of the business-shaping decisions made with increasing frequency by regulators in the wake of the financial crisis. More remarkable still, he won.
On March 30th a federal court ordered the Financial Stability Oversight Council (FSOC), a new regulatory committee, to rescind its designation of MetLife as a “strategically important financial institution”—a label that required it to have a bigger, and thus more expensive, cushion of capital.

MetLife is one of only four non-banks to have been declared a SIFI. Prudential Insurance, one of the other three, acceded after grumbling a bit. General Electric said little but has since dispensed with much of its financial operations. AIG, another insurer, seemed gleefully to accept the new status, perhaps because being a SIFI is seen as being synonymous with being too big to fail, and thus implies a government backstop. AIG’s implosion had been at the centre of the financial crisis: any inkling that the government stood behind it would do much to reassure customers debating whether to pay upfront for a product that will not be delivered for many years.

MetLife, however, had come through the financial crisis in good shape, earning the confidence of its customers. It judged that whatever additional reassurance they might glean from implicit government backing was outweighed by the costs, in terms both of using extra capital and of additional scrutiny from regulators. Moreover, it maintained that it was not sufficiently intertwined with other institutions to be considered systemic. Insurers, after all, make long-term investments, and are not normally subject to the sorts of panics and runs that afflict banks. The criteria for FSOC’s decision, MetLife argued, had been vague and arbitrary.

Initially, like other financial firms, it voiced these objections only privately. When that did not work, it complained publicly, again to no avail. The only member of FSOC with experience in the insurance business appeared sympathetic, but did not sway his colleagues. In frustration, MetLife turned to the courts.

“From the beginning, MetLife has said that its business model does not pose a threat to the financial stability of the United States,” Mr Kandarian said in a statement. “This decision is a win for MetLife’s customers, employees and shareholders.” Jack Lew, the treasury secretary, who chairs FSOC, released a statement saying it strongly disagreed and would defend its “designation process”, without specifying whether it would appeal. The court has not yet released its reasoning, which will presumably only add to the pressure on FSOC to clarify its procedures.

The ruling only applies to MetLife; no similar cases are pending. Yet the ramifications are enormous. The following day GE asked FSOC to rescind its SIFI label, given its recent restructuring. Until now, other financial firms felt they had little recourse against regulatory decisions, regardless of how much they disagreed. Rather than resort to the courts, they hired lobbyists in the hope of persuading the government to go easy. This may now change. 

Ironically, the decision comes a little too late for MetLife itself, which is spinning off its American life-insurance business, in part to ward off FSOC. Mr Kandarian says this divestment will still go ahead. But MetLife’s victory may give other financial firms the luxury of a little more breathing-room before making such decisions. 

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