MetLife may be next to lose ‘too big to fail’ label

WASHINGTON — After the Financial Stability Oversight Council voted to rescind its systemic designation for insurance giant American International Group, observers are wondering why the interagency council is continuing to appeal a ruling overturning MetLife’s designation.

Some say there is little question that the council could simply ask the Department of Justice to drop its appeal of a District Court opinion from 2016 that found that the FSOC had overstepped its bounds in designating MetLife as a systemically important financial institution.

“FSOC would have to ask the [Justice Department], which represents it in the suit," and the Justice Department "could simply ask that the appeal be dropped,” said Alex Pollock, a distinguished senior fellow at the R Street Institute and critic of the FSOC’s designation process. “Then, the opinion — which I think was a very good opinion — would simply stand.”

Andrew Harrer/Bloomberg

The FSOC was created by the Dodd-Frank Act to identify and address sources of systemic risk across federal agencies’ jurisdictions in order to replace the isolated regulatory silos that failed to identify the housing bubble with a more coordinated approach. The council is empowered with the ability to designate nonbank firms and activities as SIFIs and subject those firms to heightened prudential requirements as defined by the Federal Reserve.

But to date the council has only designated four companies — AIG, Prudential, MetLife and GE Capital — with the label, and of those both GE Capital and now AIG have had their label rescinded. MetLife sued the FSOC to have its designation struck down, and only Prudential remains a SIFI.

Neither MetLife nor the Treasury Department immediately returned requests for comment.

Treasury Secretary Steven Mnuchin, who chairs the oversight council, said in a statement following the vote Friday that the council “has worked diligently to thoroughly reevaluate whether AIG poses a risk to financial stability” and that the council will “act decisively to remove any designation” if a company does not pose such a threat.

Whether the council needs to vote to drop its appeal of the MetLife ruling is a source of some debate, and the case is currently being held in abeyance pending the release of the Treasury’s report on the FSOC designation process. The court will hear motions of how to proceed with the case on Nov. 17 or 30 days after the report is released, whichever comes first.

If Mnuchin is waiting for an affirmative FSOC vote to drop the suit, the AIG dedesignation vote may shed some light on how that could play out.

Ian Katz, a partner at Alpha Capital Partners, said in a client note that the council seemed to take a “flexible” approach to its dedesignation authority, since the statute requires that “two thirds of members then serving” be required to take such an action. Securities and Exchange Commission Chair Jay Clayton recused himself from the case and Federal Reserve Chair Janet Yellen voted in favor, making the council vote 6-3 in favor of de-designation.

“We would think most people would interpret ‘then serving’ to include a member recusing himself from a specific issue,” Katz said. “Under that interpretation, the FSOC would have needed seven votes of the 10 principal members, and it wouldn’t have had enough to rescind the AIG designation. But the council decided that Clayton didn’t count, so six was enough.”

That might suggest that Yellen would similarly vote for dropping the MetLife appeal. AIG and MetLife both made changes to their businesses since being designated; AIG sold off a significant mortgage insurance business last year, and MetLife announced plans to spin off several of its business lines as early as January 2016.

Karen Shaw Petrou, managing partner at Federal Financial Analytics, said that Yellen’s vote for AIG dedesignation reflects a broader acknowledgment that the designation process, while cathartic in the wake of the financial crisis, was not a tenable long-term strategy.

“The global regulatory consensus of people like chair Yellen has, I think rightly, moved away from the initial decision to designate SIFIs to a framework of activity and practice regulation,” Petrou said. “They have come to recognize that targeting one or another company leaves everybody else unscathed, even if they’re correct that a target is particularly systemic."

That may not mean a “yes” vote from Yellen when it comes to dropping the MetLife appeal, she said, but the timing and process of rescinding the designations of Prudential and MetLife is less important than what comes next.

“Even if there is some remaining standout designee in the U.S., which I doubt, the general inclination is to try to go to activity and practice rules,” Petrou said. “The next question is ‘What are they?’ And those are I think going to be determined over the next two or three years as Treasury gets its reports together and Trump gets his team in place.”

Pollock said one viable course would be to designate some new SIFIs, but instead of the insurance industry, have the FSOC target Fannie Mae, Freddie Mac and Ginnie Mae.

“You should designate them as the SIFIs they so obviously are,” Pollock said. “That would be the next step I would recommend.”