On December 18, 2014, the Financial Stability Oversight Council (“FSOC”), over the dissents of both its only voting member with expertise regarding the insurance industry and the nonvoting insurance commissioner representative on FSOC, issued a final determination that material distress at MetLife could pose a threat to U.S. financial stability. The effect of that determination is to subject MetLife to supervision by the Federal Reserve Board and subject it to bank regulatory prudential standards. In common parlance, FSOC determined that MetLife is a “systemically important financial institution” (“SIFI”). On January 13, MetLife sued FSOC in the U. S. District Court of the District of Columbia challenging that decision.
The designation was premised on FSOC’s conclusion that material financial distress at MetLife could lead to an impairment of financial intermediation or of financial market functioning that would be sufficiently severe to inflict significant damage on the broader economy. MetLife challenges that conclusion and the procedure upon which the conclusion was reached.
Among the critical errors assertedly made by FSOC are a misunderstanding of state insurance regulation; a disregard of statutory factors favorable to MetLife; reliance on vague standards, unsubstantiated speculation, and unreasonable assumptions that included disregard of Federal Reserve stress tests; and denial of MetLife access to data and material relied on by FSOC.
MetLife argues that it is not even a “U.S. nonbank financial company” over which FSOC has potential jurisdiction because more than 15% of MetLife’s revenues and assets relate to insurance activities in foreign markets.
It further argues that FSOC should have considered the alternative of imposing FRB supervision only on MetLife’s risky activities such as FSOC is currently considering with respect to asset managers, rather than subjecting the entire company to FRB supervision.
Metlife also questions whether FSOC conducted any threshold inquiry as to whether MetLife is vulnerable at all to material financial distress, instead employing “impossibly vague” concepts of “material financial distress,” “overall stress in the financial industry,” “weakness,” and “macroeconomic environment.” MetLife asserts that FSOC disregarded “overwhelming evidence” submitted by MetLife suggesting that material financial distress at MetLife is “extremely unlikely” and that there is no reasonable possibility that it would threaten U.S. financial stability. FSOC took the position that it need not evaluate the degree to which MetLife is actually vulnerable to “material financial distress,” but rather need only assume such distress and then determine whether that distress could have systemic effects. FSOC further assumed more serious financial problems at MetLife than mere “material financial distress,” assuming, instead, a total inability of MetLife to satisfy any of its debts, which, MetLife suggests, would more likely have systemic effects.
MetLife submitted a study from Oliver Wyman demonstrating that, in the event of distress at MetLife, it could liquidate assets without posing a threat to the U.S. economy, but FSOC conducted its own analysis that showed that asset sales by MetLife could disrupt financial markets. However, the FSOC analysis assumed that MetLife would sell assets in a randomized fashion, rather than in an orderly manner from most liquid to least liquid, which MetLife characterized as a “bizarre assumption.” Further, MetLife suggests that FSOC disregarded steps that MetLife would take to avoid a sudden massive asset liquidation and that is to invoke contractual rights to defer policyholder payments for up to six months. FSOC also assumed that state insurance regulator measures would be ineffective and would actually destabilize other insurers, this, despite evidence that MetLife submitted from Oliver Wyman that considered the handful of prior failures of large insurers (assets over $10 billion) around the world and that found no evidence of contagion (e.g. increase in surrenders or lapses of policies or a decline in new business) to other large insurers. The results of that study were confirmed by another study by the National Opinion Research Center at the University of Chicago.
MetLife also criticizes FSOC for failing to consider the costs that a SIFI designation would impose on it, its shareholders, and customers. Unfortunately that is not one of the statutory factors that FSOC is required to consider.
Finally, MetLife argues that the FSOC process is so opaque as to deny due process, reflecting criticisms to which even FSOC itself has begun to respond. MetLife notes that it was denied access to the full record on which FSOC acted. Indeed, the formal Explanation of its actions issued by FSOC contained new evidence and analyses to which MetLife never had an opportunity to respond. FSOC has not disclosed thresholds that trigger a SIFI designation or how the various statutory factors are balanced. Theoretically, had FSOC disclosed these things, MetLife not only could have made a more effective case for avoiding a SIFI designation, but also could have conformed its conduct to avoid a SIFI designation.
These assertions are the bases for MetLife’s claim that FSOC acted arbitrarily and capriciously in designating MetLife a SIFI.
Ironically, last September, one of the Federal Reserve Board’s Governors, Daniel Tarullo, testified before Congress to the effect that systemic importance focuses on “run” risk which is not normally present in traditional insurance activities. The Federal Reserve Board, of course, is represented on FSOC.