A U.S. District judge has struck down the assertion that insurer MetLife Inc is “too big to fail,” dealing a major blow to the federal government.

The insurer had been branded as systemically important to the U.S. financial system by the heads of the country’s financial regulatory agencies. MetLife argued that the Financial Stability Oversight Council (FSOC) used a flawed argument to determine that its collapse could devastate the financial system.

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MetLife wins important court victory against FSOC

MetLife accused the FSOC of using a secretive and flawed process to determine that its collapse would have as great an effect as that of a major bank like Citigroup. The opinion of district judge Rosemary Collyer is still sealed, but excerpts may be made public in April.

The decision served as a big boost to MetLife, which is the largest life insurer in the United States. The company had previously considered breaking up its business in order to get rid of the “too big to fail” moniker.

Shares in MetLife rose almost 8% on the news, to $45.84. They could close at a four-year peak. Other insurers with the designation also rose, including Prudential Financial Inc, which rose 2.8 percent, and American International Group Inc which went up 2.3 percent. Those companies would certainly like to get a similar ruling on the matter.

Indeed, Barclays analysts note in a report to clients:

In an unexpected victory, MET received a favorable ruling from the US District Court for the District of Columbia to overturn FSOC’s designation of the company as systemically important. MET argued (rightfully, in our view) that it already operated under a strict state regulatory system, that non-bank SIFI regulation creates an unlevel competitive situation, and the Fed should instead address specific systemic activities (similar to the asset management industry) regardless of the size of companies. We view this ruling as helping to remove a significant overhang on MET shares as well as being a favorable lateral development for other non-bank SIFI insurers Prudential and AIG.

Evercore states:

The government has not yet commented publicly on the decision. But since the District Court is the lowest level of the federal court system, the government can be expected to appeal the District Court’s ruling and fight for both the SIFI rules and the FSOC regime more generally. There are two remaining appeal levels — the US Court of Appeals for the DC Circuit and the US Supreme Court — meaning that appeals could go on for a year or more. Until then, the current FSOC regime is unlikely to change or be suspended.

Metlife
Chart via Cap IQ

Federal government forced to back down over designation

The case called into question the ability of government officials to designate non-banks as systemically important. After the Dodd-Frank Wall Street reform law was passed in 2010, U.S. authorities were able to designate banks as “systemically important.” AIG received a $182 billion from the government during the 2008 crisis.

MetLife sued the FSOC last year after alleging that its members had not followed guidance on how to designate a firm. It accused the council of bending the rules to ensure MetLife was designated.

Over the course of the hearing the government argued that its process had been fair. It said that a collapse of the insurer would hurt the financial system due to its financial ties, products and contracts.

There was no immediate response from MetLife or the Treasury Department following the ruling. The case could have major implications for other insurers.