(Bloomberg) -- MetLife Inc. beat back a U.S. attempt to label it too big to fail, which would’ve put America’s biggest life insurer under tougher government scrutiny and could have forced it to put more money in reserves.
A federal judge in Washington struck down the designation on Wednesday in a decision that could shake up the financial regulatory reform implemented following the 2008 recession. The ruling might give ammunition to Republican lawmakers who’ve argued that regulators have abused their authority under the Dodd-Frank Act.
“One of the centerpieces of the Dodd-Frank Act has been called into question,” Isaac Boltansky, an analyst with Compass Point Research & Trading in Washington, said in a phone interview. “Depending on what the court’s reasoning was, I think it’s fair to believe that there could be a more aggressive push to curtail the FSOC’s authority in the next Congress depending on the election outcome in November.”
U.S. District Judge Rosemary Collyer rejected the Financial Stability Oversight Council’s rationale for classifying MetLife as a systemically important financial institution. The reasons for the ruling were sealed by the judge, although she did offer a glimpse of her rationale, siding with MetLife that the designation didn’t take into account the economic effect on the insurer.
The ruling undercuts the foundation of the Obama administration’s plan to more heavily regulate four non-bank businesses that were determined to have the potential to destabilize the American financial system. MetLife had called the designation arbitrary and unjustified. Chief Executive Officer Steve Kandarian said earlier this year that his New York-based company will shed much of its domestic retail business because SIFI put it at a “significant competitive disadvantage.”
“Most in the market would have had MET not prevailing in this case. This should probably send the stock ripping,” David Havens, a debt analyst at Imperial Capital, wrote in a note. “As for the bonds, the story is more neutral, to actually marginally negative. An extra layer of capital blubber and oversight has appeal to credit investors.”
MetLife jumped 5 percent to $44.58 at 1:38 p.m. in New York trading. Prudential Financial Inc., which is the second-largest U.S. life insurer and was also named a non-bank SIFI, advanced 1.6 percent to $72.61.
The ruling validates MetLife’s decision to fight the SIFI designation, Kandarian said in a statement Wednesday.
“From the beginning, MetLife has said that its business model does not pose a threat to the financial stability of the United States,” Kandarian said. “This decision is a win for MetLife’s customers, employees and shareholders.”
The government disagreed.
After a rigorous analysis, the FSOC “determined that material financial distress at MetLife could pose a threat to the financial system,” U.S. Treasury spokesman Adam Hodge, said in an e-mailed statement. “We firmly believe that FSOC acted well within its legal authority to protect the entire global economy.”
Prudential spokesman Scot Hoffman declined to comment. American International Group Inc. spokesman Jon Diat also declined to comment.
A public version of the judge’s reasons should be available after April 6. That was the deadline Collyer gave lawyers to submit any proposals on keeping parts of the opinion sealed or any redactions they wanted.
Collyer’s two-page order rescinded the FSOC’s determination and said a judgment was to be entered in favor of MetLife.
The insurer’s lawyers argued that the council failed to assess MetLife’s vulnerabilities to financial distress and that it failed to consider the economic effects of the designation on the company. The judge ruled in MetLife’s favor on those points.
Filed last year, the MetLife suit was the biggest challenge yet to the council that includes Federal Reserve Chair Janet Yellen and Treasury Secretary Jacob Lew. Other non-banks bearing its SIFI designation are AIG and Prudential, neither of which have brought challenges. General Electric Co. has agreed to sell more than $160 billion of assets since April under a plan to shed the bulk of its GE Capital finance operations. GE has said it intends to submit an application to regulators this quarter to drop the label.
The details in the judge’s opinion will be important to determine the wider impact of the ruling, said Deepak Gupta, a lawyer for a group of insurance regulation scholars who backed the FSOC.
"I understand the market has already responded" but "it could be a very narrow decision," Gupta said. "This could be a minor setback or a really serious blow to the Dodd-Frank Act’s systemic reform and we just don’t know."
At a February hearing, Collyer sharply questioned Justice Department attorney Eric Beckenhauer, asking why the council said it would conduct a “vulnerability analysis” of MetLife before making its determination, then failed to do so.
She also asked the government’s lawyer why FSOC assumed that MetLife would be at the brink of collapse. in the event of a fiscal crisis.
“That’s not risk analysis,” she said. “That’s assuming the worst of the worst of the worst.”
Beckenhauer said it’s the nature of such crises to be unanticipated. MetLife is asking her to override the “considered judgment” of the heads of nine major financial regulators, he said.
The government lawyer also said the council was acting upon its congressionally granted authority to assess which nonbank financial companies pose a possible risk to the broader economy. He focused on MetLife’s ties to other firms around the world -- its interconnectedness -- a factor that was crucial in the 2008 financial crisis.
MetLife’s lawyer Eugene Scalia, son of the late Supreme Court Justice Antonin Scalia, has filed several lawsuits seeking to overturn Dodd-Frank regulations. He said the designation process was “clouded in mystery.”
In January, Kandarian announced MetLife plans to pursue a spinoff, sale or public offering of much of its U.S. retail business, which sells variable annuities and life insurance policies and could be subjected to higher capital rules although they’ve not yet been finalized.
While the insurer hasn’t outlined a precise plan, it struck a deal in February to sell a distribution network with 4,000 financial advisers to Massachusetts Mutual Life Insurance Co.
The case is MetLife Inc. v. Financial Stability Oversight Council, 15-cv-00045, U.S. District Court, District of Columbia (Washington).