WASHINGTON (CN) – MetLife escaped its “too big to fail” designation because the Financial Stability Oversight Council ignored its own guidelines and did not consider the cost the tag would have on the giant insurer, a federal judge explained.
Unsealing her March 31 opinion one week after she announced it, U.S. District Judge Rosemary Collyer struck down the Financial Stability Oversight Council’s 2014 designation of MetLife as a systematically important financial institution, handing the company a victory it had been seeking for more than a year.
The Treasury Department vowed Thursday to appeal, with Secretary Jack Lew saying he disagrees “strongly” with the court’s ruling. “This decision leaves one of the largest and most highly interconnected financial companies in the world subject to even less oversight than before the financial crisis,” Lew said in a statement.
MetLife claimed the designation, which subjected it to more stringent supervision by the Federal Reserve, was an unnecessary burden that violated the Dodd-Frank Act.
In its January 2015 lawsuit, MetLife claimed the Financial Stability Oversight Council (FSOC) relied on “unsupported guesswork” fixated on MetLife’s size, used “vague standards,” and applied standards meant to regulate banking rather than the insurance industry.
Collyer said she did not need to consider some of MetLife’s arguments, as the FSOC’s departure from its guidelines and unwillingness to consider the costs the “too big to fail” moniker would have on MetLife were enough to throw out the determination as arbitrary and capricious.
“The court will rescind the final determination on two grounds,” Collyer wrote. “First, FSOC made critical departures from two of the standards it adopted in its guidance, never explaining such departures or even recognizing them as such. That alone renders FSOC’s determination process fatally flawed. Additionally, FSOC purposefully omitted any consideration of the cost of designation to MetLife.
Treasury Secretary Lew meanwhile slammed Collyer for not deferring to the experts. “In overturning the conclusions of experienced financial regulators, the court imposed new requirements that Congress never enacted, and contradicted key policy lessons from the financial crisis,” Lew said in a statement.
The agency denied the allegation that it changed course on its guidelines, but Collyer disagreed, saying the FSOC “misstates its guidance in consequential fashion.”
The agency’s guidance divided six analytical categories into groups, the first to determine how much the company being analyzed would affect the economy were it to suffer financial distress, and the second to determine the company’s vulnerability to distress.
But in the final determination the FSOC pushed these two categories together, saying all six were meant solely to “assess the potential effects of a company’s material financial distress,” Collyer wrote. She called this reasoning “undeniably inconsistent.”
In oral arguments the agency claimed that even if it did deviate from its guidance, it gave sufficient explanation of why it did so.
But Collyer noted that the agency’s insistence that it did not change its guidance at all invalidates its argument that it gave sufficient explanation.
“FSOC was wrong then and is wrong now; the final determination changed policies,” Collyer wrote.
Even if the argument were valid, Collyer said, the FSOC did not do enough to justify its shift away from its own guidelines.
“There was no acknowledgment of FSOC’s departure from the guidance, and certainly no explanation for it,” Collyer wrote.
Nor did FSOC sufficiently analyze how MetLife’s distress would affect the economy as a whole: by projecting losses, which financial institutions would be affected and how the market could be destabilized, Collyer ruled.
“This court cannot affirm a finding that MetLife’s distress would cause severe impairment of financial intermediation or of financial market functioning – even on arbitrary-and-capricious review – when FSOC refused to undertake that analysis itself,” Collyer wrote. “Predictive judgment must be based on reasoned predictions; a summary of exposures and assets is not a prediction.”
Collyer determined the FSOC failed to consider the costs the too-big-to-fail designation would have on MetLife, citing the Supreme Court’s ruling in Michigan v. Environmental Protection Agency, which invalidated parts of the Clean Air Act.
In that case, the Supreme Court “easily concluded” that cost is an important consideration in the administrative process, Collyer said, rebuffing the FSOC’s claim that the Dodd-Frank Bill did not compel it to consider cost.
“FSOC, too, has made the decision to regulate – by designating MetLife,” Collyer wrote. “That decision intentionally refused to consider the cost of regulation, a consideration that is essential to reasoned rulemaking.”
She granted in part MetLife’s cross motion for summary judgment, denied FSOC’s request for dismissal or summary judgment, ordered FSOC’s final determination rescinded, and directed the to meet, confer, and notify the court whether any part of her opinion should remain under seal.
Treasury Secretary Lew had stern words for any “opponents of financial reform” who hail the court’s decision as a win.
“This is wrong and dangerously ignores the lessons of the financial crisis,” Lew said. “FSOC’s authority to designate nonbank financial companies is a critical tool to address potential threats to financial stability, and it has made our financial system safer and more resilient. We intend to continue defending vigorously the process and the integrity of FSOC’s work, and I am confident that we will prevail.”
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