Court ruling lights up SIFI exit rampReprints
U.S. District Judge Rosemary M. Collyer made the right call when she ordered MetLife Inc. off the federal government's list of systemically important financial institutions. MetLife didn't belong there in the first place. In fact, it's hard to see how an insurer — even if it is American International Group Inc. — should be on that list.
In her opinion, Judge Collyer said that the Financial Stability Oversight Council, which decides which institutions should be designated as SIFIs and subject to heightened regulation by the Federal Reserve, didn't even follow its own rules when it slapped MetLife with the designation. She said the council, which is chaired by Treasury Secretary Jack Lew, looked only at the benefits of designating MetLife as a SIFI without taking the costs of doing so into consideration. She said the FSOC had acted in an “arbitrary and capricious” manner in its dealings with MetLife.
The U.S. Treasury Department wasted little time in announcing that it would appeal Judge Collyer's decision. That's a decision we wish the government hadn't made.
It's hard to see how any insurer presents the type of systemic risk — the kind of risk that can send shock waves through the national and even global economy if a financial institution fails — that a megabank or other noninsurance financial institution can. Insurers already are highly regulated at the state level; and by the very nature of their business, they don't have the interconnections with other types of financial institutions that a megabank would have.
Despite the role that AIG played in the financial crisis of the late 2000s, it's worth remembering that the problems had nothing to do with the company's core insurance operations. They stemmed from overexposure to mortgage-backed securities far removed from the business of insurance.
AIG and Prudential Insurance Co. are the only U.S. insurers other than MetLife to have been designated SIFIs, although MetLife was the only insurer to challenge the government in court.
Insurers have rightfully complained FSOC has provided no “exit ramp” from the designation, leaving SIFIs in a regulatory limbo from which escape is uncertain.
Judge Collyer has provided an exit for one insurer stuck in that limbo. That exit should now be legally illuminated brightly enough for others to follow.