An insurance giant just won the battle to have its "too big to fail" designation tossed out -- a decision which may give ammunition to lawmakers who say the Dodd-Frank Act is too restrictive
An insurance giant has won its battle to be deemed “not too big to fail” – a decision which may have implications for the mortgage world.
On Wednesday, a federal judge tossed out a designation by government regulators that the failure of insurance giant MetLife would pose a significant hazard to the financial system, according to a Washington Post report.
In 2014, the government’s Financial Stability Oversight Committee decided that the insurance giant was a "Systemically Important Financial Institution" (SIFI) and called for closer government scrutiny for the company, the Post reported. The “too big to fail” designation required the insurer to set aside a larger financial reserve and enact other processes to hedge against failure.
But MetLife argued that the requirements that came with the designation would force it to raise its prices, the Post reported. The insurer sued, and on Wednesday U.S. District Judge Rosemary M. Collyer threw out the designation.
“From the beginning, MetLife has said that its business model does not pose a threat to the financial stability of the United States,” Chairman and CEO Steven A. Kandarian said in a statement. “This decision is a win for MetLife’s customers, employees and shareholders.”
The decision may give ammunition to House Republicans who are trying to gut the Dodd-Frank Act. Republicans have long had serious reservations about the financial reform legislation – in particular the “too big to fail” designation.
House Financial Services Committee Chairman Jeb Hensarling praised the ruling and said House Republicans were working on less restrictive legislation to replace Dodd-Frank.
“Although I obviously wasn’t in the courtroom to hear the evidence, I am very encouraged by today’s ruling,” Hensarling said. “One of the greatest dangers facing hardworking taxpayers is the Financial Stability Oversight Council’s power to designate certain companies as so-called SIFIs, because today’s SIFI designations are just tomorrow’s taxpayer-funded bailouts. SIFI is Washington’s way of officially anointing these companies as too big to fail, despite promises that the Dodd-Frank Act would end too big to fail. Designation also ominously grants the Federal Reserve near de facto management authority over such institutions, thus allowing huge swaths of the economy to potentially be controlled by the federal government.
“Republicans on the House Financial Services Committee will soon introduce a plan that protects taxpayers by ending taxpayer-funded bailouts and Washington bureaucrats’ ability to anoint any business as too big to fail,” he added.
The Treasury Department, however, said it would continue to fight the decision.
“We strongly disagree with the court’s decision. We are confident that FSOC’s determination was lawful and will continue to defend the Council’s designations process vigorously,” a Treasury spokesman said in a statement.
In short, the ruling could force the FSOC to examine whether a firm is likely to fail before asking about the financial impact should it do so, V. Gerard Comizio, chair of Paul Hastings LLP's global banking practice, told Law360.
"This goes to the crux of the SIFI designation process and their ability to do that," Comizio said.
The judge's ruling is currently under seal, but during oral arguments she raised questions about why the FSOC opened their inquiry into MetLife assuming "the worst of the worst" about its potential to fail, Law360 reported. If that reasoning is included in the ruling, it could force the regulator to change the way it makes SIFI designations.
"That can certainly impact the way that FSOC looks at these issues going forward," Comizio said.
On Wednesday, a federal judge tossed out a designation by government regulators that the failure of insurance giant MetLife would pose a significant hazard to the financial system, according to a Washington Post report.
In 2014, the government’s Financial Stability Oversight Committee decided that the insurance giant was a "Systemically Important Financial Institution" (SIFI) and called for closer government scrutiny for the company, the Post reported. The “too big to fail” designation required the insurer to set aside a larger financial reserve and enact other processes to hedge against failure.
But MetLife argued that the requirements that came with the designation would force it to raise its prices, the Post reported. The insurer sued, and on Wednesday U.S. District Judge Rosemary M. Collyer threw out the designation.
“From the beginning, MetLife has said that its business model does not pose a threat to the financial stability of the United States,” Chairman and CEO Steven A. Kandarian said in a statement. “This decision is a win for MetLife’s customers, employees and shareholders.”
The decision may give ammunition to House Republicans who are trying to gut the Dodd-Frank Act. Republicans have long had serious reservations about the financial reform legislation – in particular the “too big to fail” designation.
House Financial Services Committee Chairman Jeb Hensarling praised the ruling and said House Republicans were working on less restrictive legislation to replace Dodd-Frank.
“Although I obviously wasn’t in the courtroom to hear the evidence, I am very encouraged by today’s ruling,” Hensarling said. “One of the greatest dangers facing hardworking taxpayers is the Financial Stability Oversight Council’s power to designate certain companies as so-called SIFIs, because today’s SIFI designations are just tomorrow’s taxpayer-funded bailouts. SIFI is Washington’s way of officially anointing these companies as too big to fail, despite promises that the Dodd-Frank Act would end too big to fail. Designation also ominously grants the Federal Reserve near de facto management authority over such institutions, thus allowing huge swaths of the economy to potentially be controlled by the federal government.
“Republicans on the House Financial Services Committee will soon introduce a plan that protects taxpayers by ending taxpayer-funded bailouts and Washington bureaucrats’ ability to anoint any business as too big to fail,” he added.
The Treasury Department, however, said it would continue to fight the decision.
“We strongly disagree with the court’s decision. We are confident that FSOC’s determination was lawful and will continue to defend the Council’s designations process vigorously,” a Treasury spokesman said in a statement.
Short-term impact
So what does the ruling mean for Dodd-Frank in the short term? Experts told Law360 that while Wednesday's decision could force regulators to rethink the process for placing a nonbank under increased scrutiny, it doesn't eliminate their power to do so.In short, the ruling could force the FSOC to examine whether a firm is likely to fail before asking about the financial impact should it do so, V. Gerard Comizio, chair of Paul Hastings LLP's global banking practice, told Law360.
"This goes to the crux of the SIFI designation process and their ability to do that," Comizio said.
The judge's ruling is currently under seal, but during oral arguments she raised questions about why the FSOC opened their inquiry into MetLife assuming "the worst of the worst" about its potential to fail, Law360 reported. If that reasoning is included in the ruling, it could force the regulator to change the way it makes SIFI designations.
"That can certainly impact the way that FSOC looks at these issues going forward," Comizio said.
