MetLife wins ‘too big to fail’ court battle

MetLife has secured a victory in its battle against US regulators that deemed it ‘too big to fail’, a legal ruling that may have far-reaching implications for the country’s financial system.

In a blow to the Obama administration, a court in Washington on Wednesday found it had acted unlawfully by deciding the insurance group deserved tougher regulation as a “systemically important” financial institution (Sifi). The government can appeal.

The ruling will shake an important pillar of the Dodd-Frank legislative reforms drawn up after the financial crisis and could encourage legal challenges from the other insurers deemed to be Sifis — American International Group and Prudential Financial.

The banks already classed as systemically important have less chance of escaping via the courts because the criteria for their designation — unlike that of non-banks — is written directly into the law.

Members of the Financial Stability Oversight Council (FSOC) had voted nine to one in favour of designating MetLife a Sifi, a label that leads to additional regulatory scrutiny and higher capital requirements.

FSOC’s members include Janet Yellen, Fed chair, and Jack Lew, treasury secretary.

A Treasury spokesman said: “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.”

But the district court found FSOC had acted unlawfully, giving MetLife an amnesty.

The decision pushed up shares in MetLife — the largest US insurer by assets — 5.2 per cent on Wednesday. It is an important breakthrough for Steven Kandarian, the MetLife chief executive who took on the authorities a year ago.

“Today’s ruling validates MetLife’s decision to seek judicial review,” he said in a statement. “From the beginning, MetLife has said that its business model does not pose a threat to the financial stability of the United States.”

Eugene Scalia, the son of the late Supreme Court Justice Antonin and a lawyer who represented MetLife in court, had argued the process that led to MetLife being deemed a Sifi was a “black box”.

MetLife challenged the decision even though the consequences of designation were unclear. The regime has yet to take effect, with regulators yet to quantify the additional capital requirements.

Today’s ruling validates MetLife’s decision to seek judicial review. From the beginning, MetLife has said that its business model does not pose a threat to the financial stability of the United States

– Steven Kandarian, MetLife chief executive

Government lawyers had come under tough questioning from Rosemary Collyer, the district judge in Washington, earlier this year as they sought to defend their deliberations.

The full legal judgment was not immediately available.

Despite the ruling in its favour, MetLife is expected to press ahead with plans to sell off a big slice of its business — for which part of the rationale was to reduce the burden from being designated a Sifi.

People familiar with the matter acknowledged the government’s scope to appeal could drag the process on for months or years. They also pointed out that there were other business reasons for a split.

Weston Bloomer, analyst at FBR Capital Markets, said most investors had expected the government to win the case. “The final ruling is still up in the air, but this is a clear positive and gives them [MetLife] a fighting chance.”

Steve Myrow, a former US Treasury official now at Beacon Policy Advisors, said: “It’s more of a political black eye for the Obama administration than anything else. It will play into the broader theme of the administration overstepping its executive authority.”

MetLife is planning to float or sell part of its retail division in a deal expected to be worth about $10bn.

AIG has come under pressure from activist investors to split into smaller companies in large part because of its Sifi designation.