MetLife Ruling On SIFI Status Analyzed

MetLife Ruling On SIFI Status Analyzed
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MetLife Ruling On SIFI Status Analyzed

There are a few moving parts here. The full marked up pdf is linked to below for those who want to read the decision.

The judge ruled for $MET based on the FSOC’s ruling being “arbitrary and capricious”

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  1. She rejected metlife’s argument they were not even eligible for consideration as a sifi because they were not a “financial company”
  2. Ruled for metlife saying the FSOC ignored two standards it adopted in the guidance for determining a non-bank sifi
  3. Ruled for metlife in that the FSOC intentionally refused to consider the costs of the designation in their analysis which is “essential to reasoned rulemaking”


Metlife attempted to make the argument that designation aside, there were no even a “financial” company and that made them ineligible for even consideration for the designation.  This is on its face laughable and the judge rightly discarded it.  One has to remember that in 2000 $MET sought registration as a financial  holding co. stating “the vast majority of activities are financial in nature”.  Case closed on that argument

Now to the FSOC:

The judge held that not only is the FSOC tasked with determining the “potential effects” of $MET’s financial distress on the wider financial system, but the probability of it.  The FSOC’s guidance states:

The remaining three categories—leverage, liquidity risk and maturity mismatch, and existing regulatory scrutiny of the nonbank financial company—seek to assess the vulnerability of a nonbank financial company to financial distress. Nonbank financial companies that are highly leveraged, have a high degree of liquidity risk or maturity mismatch, and are under little or no regulatory scrutiny are more likely to be more vulnerable to financial distress.

The FSOC still maintains the guidance does not say what it does:

Responding to MetLife’s arguments before it, FSOC declared in the Final Determination—and maintains now—that the Guidance neither “requires [n]or states that [FSOC] will evaluate the probability or likelihood of material financial distress at a nonbank financial company.”

In the second case, the guidance of the FSOC states:

a nonbank financial company could only threaten U.S. financial stability “if there would be an impairment of financial intermediation or of financial market functioning that would be sufficiently severe to inflict significant damage on the broader economy.”

Met argued that the FSCO simply stated that financial distress at MET would pose a threat but never offered any analysis at all. The judge ruled:

Indeed, the Final Determination hardly adhered to any standard when it came to assessing MetLife’s threat to U.S. financial stability. The Exposure channel analysis merely summed gross potential market exposures, without regard to collateral or other mitigating factors. For example: “In the event that MetLife were to experience material financial distress, the holders of its $30.6 billion in [Funding Agreement Backed Securities (FABS)], including investment funds and large banking organizations, could sustain losses.” JA 420-21.20 From that point, FSOC assumed that any such losses would affect the market in a manner that “would be sufficiently severe to inflict significant damage on the broader economy.” 12 C.F.R. § 1310 App. A.II.a. These kinds of assumptions pervade the analysis; every possible effect of MetLife’s imminent insolvency was summarily deemed grave enough to damage the economy. For example, FSOC posited that “contagion can result when relatively modest direct, individual losses cause financial institutions with widely dispersed exposures to actively manage their balance sheets in a way that destabilizes markets.” JA 478. But FSOC never projected what the losses would be, which financial institutions would have to actively manage their balance sheets, or how the market would destabilize as a result. This Court cannot affirm a finding that MetLife’s distress would cause severe impairment of financial intermediation or of financial market functioning—even on arbitrary-and-capricious review—when FSOC refused to undertake that analysis itself. Predictive judgment must be based on reasoned predictions; a summary of exposures and assets is not a prediction.

Both of those actions run counter to their own stated guidance and the deviation from them without explanation is “arbitrary”.  Aside from the judges not, one has to be alarmed that a company can be declared a sifi without a detailed analysis of not only the odds of it collapsing but the actual effects of that happening.

The judge then ruled that regulators must not only consider the benefits of regulation but the costs of it (she uses the US Supreme Court ruling in Michigan v EPS from last term as guidance).

This is a gray area for me. Bank regulators are given more leeway in regulation when it comes to considering the “costs” of their actions. At the same time,  MET is clearly not a bank, even the FSOC admits this as they are calling it a “non bank”. So, for me this puts Met in between the Michigan v EPS decision and current bank regulations.  However, even if we exclude this part of the ruling, the other two above still hold the the designation should be tossed.

Remember, on appeal the judges will be ruling whether or not the judge her erred and the plaintiffs will not be allowed to make “new” arguments. The fact the FSOC still does not think they need to consider the “likelihood” of stress in their analysis or quantify the fallout of the possible Met failure on the broader economy can only make their determination seem to me to be arbitrary. They may get past this  “cost benefit” hurdle on appeal but I think will have a tough time on the first one.

metlife ruling in PDF below

MET decision

Updated on

Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.
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