Metlife.2016.jpgParagon's Erik Raper shares an overview and perspective on insurer MetLife's "too-big-to-fail" designation removal and why authors of the landmark Dodd-Frank Wall Street reform law strongly disagree.

By now news of a federal court's March 2016 decision to remove the “too big to fail” label from insurance giant MetLife is old news.

What is now making headlines across the country is an all-star roster of financial-crisis heavyweights who have jumped into the legal battle between the federal government and MetLife, urging an appeals court to allow regulators to boost oversight of the insurance giant. 

The Wall Street Journal article Bernanke, Volcker, Dodd, Frank Join MetLife Regulation Fight stated that, separate briefs filed June 23, 2016, former Federal Reserve Chairmen Ben Bernanke and Paul Volcker, as well as former lawmakers Chris Dodd and Barney Frank — co-authors of the landmark Dodd-Frank financial overhaul legislation — backed a government appeal of a March ruling by a federal judge nullifying strict new federal regulation of MetLife. 

Why is this significant? All four men played leading roles in creating the regulatory regime created after the 2008 financial crisis, including rules that extended banklike oversight to large nonbanks deemed “systemically important financial institutions,” or SIFI.

In fact, according to Reuters - Dodd, Frank blast ruling that MetLife not too big to fail, former Senator Chris Dodd, former Representative Barney Frank and 18 other heavyweight Democrats including Representative Nancy Pelosi contend the decision could make it difficult to prevent another calamitous financial meltdown. 

What's more, on June 27, the SEC announced adoption rules for resource extration issuers under the Dodd-Frank Act and, two days later, GE Capital shed its ‘Systemically Important’ label

Metlife.Dodd.Frank.2016.jpgWhat's this all about?
Here's a quick timeline!

  • As the Wall Street Journal reports, the fight revolves around the 2014 decision by the Financial Stability Oversight Council (FSOC), a committee of major federal financial regulators created under the 2010 law, to designate MetLife a SIFI, a decision that subjected the firm to more oversight and federal capital requirements.
  • MetLife took the decision to court, and on March 30, 2016, U.S. District Judge Rosemary Collyer blocked the FSOC move, calling it an “unreasonable” decision that didn’t consider potential costs, and relied on a process that was “fatally flawed.” 
  • The decision was viewed by many as a blow to the FSOC, established by the Dodd-Frank regulatory reform law. The council’s job is to identify and defuse systemic risks to the economy from nonbank financial firms, including insurance companies and finance companies. The absence of such oversight let Lehman Brothers, American International Group and GE Capital run amok before the financial crisis of 2008, among other disastrous and interlocking developments, as expressed by the New York Times in the editorial, MetLife and the Threat to Dodd-Frank.
  • During 2015, MetLife provided substantial and compelling evidence demonstrating it is not systemically important under the Dodd-Frank Act criteria. According to a MetLife press release, the company felt such designation would harm competition among life insurers and negatively impact availability and affordability of financial protection for consumers. MetLife readily shares updates regarding its SIFI designation, Information Regarding MetLife's SIFI Designation - where the following Amicus Briefs in Support of MetLife are viewable.
  • In the brief filed June 23, 2016, the argument asserts that if the courts let the MetLife victory stand, it could have significant repercussions for regulators seeking to designate other firms as systemically important, and could encourage other firms to appeal their designations. In addition to MetLife, FSOC also designated as SIFIs two other insurers, American International Group. and Prudential Financial.

“We had hoped to avoid litigation after we presented substantial and compelling evidence to FSOC demonstrating that MetLife is not systemically important,” MetLife Chairman, President and CEO Steven A. Kandarian reported publicly in a statement released during January 2015. “MetLife has always supported robust regulation of the life insurance industry and has operated under a stringent state regulatory system for decades; however; adding a new federal standard for just the largest life insurers and retaining a different standard for everyone else will drive up the cost of financial protection for consumers without making the financial system any safer. The government should preserve a level playing field in the life insurance industry - it is not enough to designate companies as SIFIs merely because they are big."  

Digital.Transformation.eArchive.Trends.2016-2.jpgViewpoint & Verdict

While one massively debated viewpoint is that the Dodd-Frank reforms need defending and strengthening, not weakening, another viewpoint rests that, to reduce the risk of another financial crisis, champions such as MetLife must make a stand. 

As stated by Bernanke and Volcker in their June 23 brief: We are concerned about the implications of the District Court decision. There can be no question that MetLife…could, under stress, affect the stability of financial markets more generally.” Stay tuned for more debate, speculation and political posturing as MetLife's Dodd-Frank journey continues.

In my opinion, when Judge Collyer determined that the regulatory council fell short in its designation process in several areas, everything MetLife needed to champion its cause went into motion.

Why? Chiefly because the Dodd-Frank Act provides regulators with two standards for determining whether a firm is “systemically important,” and while regulators chose to invoke the first standard — that “material financial distress” at a firm “could pose a threat to the financial stability of the United States” — against MetLife, its reasoning did not hold up. In fact, under that standard, the Judge Collyer found that the council failed to assess the likelihood of MetLife finding itself on the brink of bankruptcy and concluded that analysts did not go far enough in explaining how the company’s hypothetical distress would undermine the financial system as a whole.

In Dodd-Frank (Section 113(h), “Judicial Review”), Congress specifically provided that any company designated as a SIFI may petition the federal courts for an order “requiring that the final determination be rescinded.” In taking the unusual step of providing for judicial review, Congress recognized that the implications of a designation were potentially so negative that independent review by the courts should be available.

According to the National Association of Insurance Commissioners, an insurance company must hold capital greater than the minimum regulatory capital levels to continue in business; but financial regulation extends beyond just capital requirements. U.S. commissioners can order conservation, rehabilitation or liquidation on numerous statutory grounds ranging from financial insolvency to unsuitable management and operations. The Insurer Receivership Model Act (NAIC model law #555) includes the following grounds for regulatory action (among others):

  • Impairment, insolvency or hazardous financial condition.
  • Improperly disposed property or concealed, altered or destroyed financial books.
  • Best interest of policyholders, creditors or the public.
  • Dishonest, improperly experienced or incapable person in control.
Bottom line: MetLife is already regulated. MetLife is already meeting its requirement to maintain specified levels of capital in order to continue to conduct business. 

Generally, regulators judge financial condition based on the company’s financial reporting, accompanying audits and actuarial opinions, supplemented with additional information about the company. In addition, there are numerous financial analysis tools and resources that highlight red flags. These tools are possible because of the detailed, validated and uniform financial reporting, which allows for the identification of risk concentrations and anomalies. MetLife is wisely fighting Dodd-Frank, as is GE - take notice. 

Dodd-Frank presents a serious compliance
challenge to the Financial Services industry.