Designation of MetLife as SIFI 'arbitrary and capricious': Federal judge

The Financial Stability Oversight Council ignored its own standards and made an “arbitrary and capricious” decision when it designated MetLife Inc. as a systemically important financial institution, according to a ruling by a federal judge.

In an opinion issued late last month but not unsealed until Thursday, U.S. District Judge Rosemary M. Collyer in the District of Columbia rescinded MetLife's designation as a SIFI, saying the FSOC's determination was “fatally flawed.”

Two other insurers — American International Group Inc. and Prudential Insurance Co. — also have been designated as SIFIs subject to heightened reporting and stress test requirements, but MetLife was the only one to challenge the designation in court.

SIFIs also are subject to “enhanced supervision” and “prudential standards,” but the Federal Reserve has yet to announce what that supervision and standards will be.

“The Financial Stability Oversight Council has determined that 'material financial distress' at MetLife Inc. could 'pose a threat to the financial stability of the United States,'” Judge Collyer wrote, adding that the phrases stem from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which created FSOC, and were defined by FSOC in formal guidance issued years before MetLife's designation.

“During the designation process, two of FSOC's definitions were ignored or, at least, abandoned,” Judge Collyer wrote. “Although an agency can change its statutory interpretation when it explains why, FSOC insists that it changed nothing. But clearly it did so. FSOC reversed itself on whether MetLife's vulnerability to financial distress would be considered and on what it means to threaten the financial stability of the United States.”

She said FSOC also focused exclusively on the presumed benefits of its designation and ignored the potential costs.

“While MetLife advances many other arguments against its designation, FSOC's unacknowledged departure from its guidance and express refusal to consider cost(s) require the court to rescind the final determination” that MetLife be designated a SIFI.

Judge Collyer said she did not rule on MetLife's other arguments.

“Having found fundamental violations of established administrative law, the court does not reach those arguments. For the reasons explained above, this court finds that the final determination was arbitrary and capricious,” Judge Collyer wrote.

“I strongly disagree with the court's ruling,” said U.S. Treasury Secretary Jacob J. Lew, who chairs the FSOC, in a statement issued Thursday. “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.”

“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,” said Mr. Lew. “We intend to continue defending vigorously the process and the integrity of FSOC's work, and I am confident that we will prevail.”