MetLife's De-Designation, Pt. 2 (Apr. 1)

Mike & Co. —

Here at the end of a quiet recess, the dust is still settling following the D.C. Federal District Court ruling against the FSOC on Wednesday in the MetLife case, with regulators and businesses speculating about the case’s ultimate disposition, scope, and the implications for TBTF designations going forward. 
From a systemic risk perspective, does the MetLife ruling suggest that the prophylactic approach to TBTF of Dodd-Frank might not be workable?  Or it is a narrow and provisional decision that will enable the FSOC to refine its designation process and take account of differences among the biggest non-bank financials?

More on MetLife and TBTF below.  Next week, updates on the fiduciary rule, Puerto Rico, and relevant legislative activity as Congress returns — or on your suggestion regarding issues to cover. 

Good weekends all,

Dana

——–

The Ruling

For now, we await the April 6 deadline that District Court Judge Rosemary Collyer imposed on FSOC and MetLife to determine what parts, if any, of her full 23-page opinion will be released to the public.  (Presumably, the full text contains references to confidential financial or businesses information which MetLife would prefer stay secret and thus may be redacted.)

Some conclusions can be drawn from the two-page summary decision provided by the Court, however.   We know that Collyer ruled in MetLife’s favor, specifically funding that FSOC’s designation of MetLife was arbitrary and capricious and violated the Dodd-Frank Act, FSOC’s own regulations, and the APA because:

  •   FSOC failed to assess MetLife’s vulnerability to material financial distress
  •   It depended upon unsubstantiated, indefinite assumptions and speculation that failed to satisfy the statutory standards for designation and FSOC’s own interpretive guidance
  •   It failed to perform a cost/benefit analysis to consider the economic effects of designation on MetLife

The ruling hints what could be a sea change in the manner that regulators designate financial institutions as “systemically important.”  Going forward, regulators may need to conduct “practice regulation” — based on an analysis of the firm’s business lines and the riskiness of its business practices.

The Appeals Process

A ruling that at least partially strikes down the FSOC SIFI designation process presents an early and almost existential threat to the Council, created for the express purpose of making such determinations.  It’s clear that the Council will appeal this decision to the D.C. Court of Appeals.  The timeline for such an appeal is not known.  Most likely, the case will be eventually heard by a panel of three judges from among the eight (normally nine) on the Circuit.

Already, GE has filed a request with the FSOC that its designation as a nonbank SIFI be rescinded, citing the major downsizing of its US-based activities from $542 billion consolidated assets in 2012 to $265 billion today.  As a result, it says, it is “smaller, simpler and less interconnected with the US financial system,” and “does not pose any conceivable threat to US financial stability.”

Attacks on Dodd-Frank; But it’s Working

There’s no word yet from Prudential or AIG, the other two insurance non-banks designated SIFIs and on whether or how they intend to challenge their classification.  The institutions had a 30-day window to challenge FSOC’s ruling in court but decided instead to reorganize – if they choose to take FSOC to court now they will need to take a different route than MetLife did.

If MetLife had not filed this lawsuit, GE Capital would not have been cut nearly in half and the share price of not only MetLife but Prudential and AIG would not have risen sharply on yesterday’s news if Dodd-Frank’s impact on putatively Too Big to Fail firms were as illusory as its critics sometimes charge.

Both markets and businesses take DFA very seriously – the proof in this case lies in yesterday’s events, but evidence has stacked up in favor of the Act’s provisions for years now.  While FSOC may have one of the lowest standards for declaring a business “systemically important,” the process need to be defended on the grounds that the size of an institution is at least equally important compared to its inherent risk.

There exists a dissonance between the popular view of the effectiveness of DFA and the evidence of its affects.

Bottom Line

Some commenters are viewing the events of the week as a major step backward for regulators, but there is another way to view both Wednesday’s ruling and GE’s actions on Thursday.  In the first instance, there is some credence to the idea that MetLife’s activities are safer than those of investment banks and other “traditional” SIFIs, and that Collyer’s decision will only result in a rethink of the process that FSOC uses to designate nonbank SIFIs.  Secondly, GE’s request that its SIFI designation be rescinded is proof of the effectiveness of regulation – the reasoning behind GE’s request is that it has shed its most risky assets and simplified its portfolio.  The first is an evolutionary step toward better and clearer regulations while the second is proof positive that DFA has continued to make steady progress toward a safer and more stable financial industry.

None of this is to say that FSOC should not consider the relative size of a firm when making its SIFI ruling, but perhaps an analysis that is less monolithic and more nuanced is the way forward.  In this caseWednesday’s decision is an opportunity for the Council to seize.  As for commenters calling this the end of an era – Collyer’s ruling was almost certainly provisional, narrow in scope and size, and has more to do with MetLife itself than the concept of regulating large firms. If the result of the ruling is that FSOC makes more detailed and thorough analyses during its nonbank SIFI designation proceedings, then chalk it up to a win for the economy, not a loss for the administration.

Moving Forward

At first glance, it appears that DFA and TBTF initiatives took a hit this past week. However, upon closer examination, a few key ideas emerge.

1)   The ruling is preliminary.  As noted above, there is almost definitely going to be an appeal to the district court’s decision. Moreover, we have yet to hear from other major insurance firms on the issue. It is too soon to attribute anything overly meaningful to it.

2)   It doesn’t contradict the facts.   Dodd-Frank is doing precisely what is supposed to do in ending TFTB, just at a gradual pace.  One of the most telling indicators of this:  bond spreads and those tell us that the largest banks are shrinking.  An Oliver Wyman study of financial firms in 2009 and the years following.  Its findings are significant — in 2009, globally significant banks (GSIBs) had a bond spread advantage of 137 bps, that fell to 57 bps in 2011, and became statistically insignificant in 2013.   It suggests that policy changes to reduce the TBTF premium have been enormously successful.

The borrowing cost advantage enjoyed by large firms, the so called TBTF premium or subsidy has decreased dramatically, but commenters and politicians are still heard to claim that Dodd-Frank codifies TBTF by designating members of the TBTF club — or that it hasn’t done enough to quash them.

One last note — there has been a popular misapprehension fostered by Republicans that DFA enshrines TBTF in a negative way, but the reality is the opposite.  Why else would the stock prices MetLife, AIG, and Prudential all leap at the prospect of de-listing, as they did Wednesday?  This viewpoint also discounts DFA’s well-documented quantifiable and effective impact.

 

 

 

34 thoughts on “MetLife's De-Designation, Pt. 2 (Apr. 1)”

  1. I am glad for writing to make you know what a notable encounter my wife’s girl had studying your web site. She mastered several pieces, which include what it’s like to possess an awesome helping nature to let other individuals with ease know precisely some problematic subject matter. You truly exceeded people’s expectations. Thank you for producing these practical, trusted, informative and in addition fun tips about this topic to Kate.

  2. I am also commenting to let you know of the helpful encounter my friend’s daughter found reading through your web page. She figured out numerous issues, not to mention what it’s like to have an amazing giving mood to have most people really easily know selected impossible subject areas. You really exceeded our own expectations. Many thanks for imparting the invaluable, safe, explanatory and even easy thoughts on the topic to Janet.

  3. I am just writing to make you understand what a notable experience my wife’s girl had using your web site. She mastered so many pieces, which included what it is like to possess an excellent helping nature to let other people with ease learn some problematic things. You truly surpassed people’s expected results. Thank you for producing these precious, trusted, informative and in addition fun tips about this topic to Lizeth.

  4. Thanks for your own work on this website. My mum takes pleasure in setting aside time for research and it is simple to grasp why. We notice all relating to the powerful way you provide very important tips and hints via your website and in addition invigorate response from the others on the situation then our favorite princess is truly starting to learn a whole lot. Take advantage of the rest of the year. You have been doing a stunning job.

  5. Dzięki za sugestii dotyczących naprawy kredytu na temat tego konkretnego sieci -teren. Rzeczy i chciałbym zaoferować jako rada ludziom oznacza zwykle zrezygnować z tej mentalności że w tym momencie i rozwidź później. Being a as be a} społeczeństwo {my|my wszyscy|my wszyscy|wielu z nas|większość z nas|większość ludzi} ma tendencję do {robienia tego|robienia tamtego|próbowania tego|zdarzyć się|powtórz to} dla wielu {rzeczy|problemów|czynników}. Obejmuje to {wakacje|wakacje|wypady|wyjazdy wakacyjne|wycieczki|rodzinne wakacje}, meble, {i|jak również|a także|wraz z|oprócz|plus} przedmiotów {chcemy|chcielibyśmy|życzymy|chcielibyśmy|naprawdę chcielibyśmy to mieć}. Jednak {musisz|musisz|powinieneś|powinieneś chcieć|wskazane jest, aby|musisz} oddzielić {swoje|swoje|to|twoje obecne|swoje|osoby} chcą {od wszystkich|z potrzeb|z}. {Kiedy jesteś|Kiedy jesteś|Kiedy jesteś|Jeśli jesteś|Tak długo, jak jesteś|Kiedy} pracujesz, aby {poprawić swój kredyt|poprawić swoją zdolność kredytową|zwiększyć swój kredyt|zwiększyć swój kredyt|podnieś swój ranking kredytowy|popraw swój kredyt} wynik {musisz zrobić|zrobić|faktycznie potrzebujesz|naprawdę musisz} dokonać kilku {poświęceń|kompromisów}. Na przykład {możesz|możesz|możesz|możesz|będziesz mógł|| możesz|prawdopodobnie możesz} robić zakupy online {aby zaoszczędzić pieniądze|aby zaoszczędzić pieniądze|aby zaoszczędzić} lub {możesz przejść do|może się zwrócić|może odwiedzić|może obejrzeć|może sprawdzić|może kliknąć} używane {sklepy|sklepy|detaliści|sprzedawcy|punkty sprzedaży|dostawcy} zamiast {drogie|drogie|drogie|drogie|drogie|drogich} domów towarowych {dla|w odniesieniu do|dotyczących|odnoszących się do|przeznaczonych dla|do zdobycia} odzieży {strzykawki insulinowe 1ml|strzykawki tuberkulinowe|strzykawki|strzykawka|strzykawki insulinowe|strzykawki do insuliny|strzykawki trzyczęściowe tuberkulinowe|strzykawka tuberkulinowa|strzykawka insulinowa|strzykawka do insuliny|strzykawka trzyczęściowe tuberkulinowa} {strzykawki insulinowe 1ml|strzykawki tuberkulinowe|strzykawki|strzykawka|strzykawki insulinowe|strzykawki do insuliny|strzykawki trzyczęściowe tuberkulinowe|strzykawka tuberkulinowa|strzykawka insulinowa|strzykawka do insuliny|strzykawka trzyczęściowe tuberkulinowa}.

  6. It’s a shame you don’t have a donate button! I’d without a
    doubt donate to this brilliant blog! I suppose for now i’ll settle for book-marking
    and adding your RSS feed to my Google account.
    I look forward to fresh updates and will talk about this
    site with my Facebook group. Chat soon! asmr 0mniartist

  7. This is really interesting, You are a very skilled blogger.
    I’ve joined your rss feed and look forward to seeking more of your great post.
    Also, I have shared your site in my social networks!

    0mniartist asmr

  8. whoah this weblog is magnificent i really like studying your articles.
    Stay up the good work! You recognize, a lot of individuals are looking around for this information, you can aid them
    greatly.

  9. Hey there! Someone in my Myspace group shared this website with us so I came
    to give it a look. I’m definitely enjoying the information. I’m book-marking and
    will be tweeting this to my followers! Superb
    blog and amazing style and design.

  10. Hello would you mind stating which blog platform
    you’re working with? I’m planning to start my own blog soon but I’m having a difficult time choosing
    between BlogEngine/Wordpress/B2evolution and Drupal.
    The reason I ask is because your layout seems different then most blogs and I’m looking
    for something unique. P.S Apologies for being off-topic but I had to ask!

  11. Heya i’m for the first time here. I found this board and I find It truly useful & it helped me out much.
    I hope to give something back and help others like you aided me.

  12. Hi, i believe that i noticed you visited my site thus i came to return the favor?.I’m attempting to to find issues to improve my website!I assume its adequate to make use of a few of your ideas!!

  13. My developer is trying to persuade me to move to .net from PHP.

    I have always disliked the idea because of the expenses. But he’s tryiong none the less.

    I’ve been using Movable-type on a variety of websites for about a year
    and am concerned about switching to another platform.
    I have heard great things about blogengine.net. Is there a way I can transfer
    all my wordpress content into it? Any help would be really appreciated!

  14. I simply could not go away your web site prior to suggesting that I really loved the usual info a person supply for your guests?

    Is going to be again steadily to check out new posts

  15. scoliosis
    naturally like your web-site however you need to test the spelling on quite a few of your posts.
    Several of them are rife with spelling problems and I to find
    it very bothersome to tell the reality on the other
    hand I will definitely come again again. scoliosis

  16. scoliosis
    I was very pleased to uncover this website. I wanted to thank you for ones time for this particularly wonderful read!!
    I definitely enjoyed every bit of it and I have you book marked
    to look at new stuff in your website. scoliosis

  17. scoliosis
    Thanks , I’ve just been searching for information about this topic for ages
    and yours is the greatest I have discovered so far.
    However, what about the conclusion? Are you sure in regards
    to the supply? scoliosis

  18. Does your website have a contact page? I’m having a tough time locating it but, I’d like to shoot you an email.

    I’ve got some suggestions for your blog you might be interested in hearing.
    Either way, great blog and I look forward to seeing it grow over time.

  19. Thanks for another excellent article. Where else may just anyone get that type of information in such
    a perfect means of writing? I’ve a presentation next week, and I am at the look
    for such information.

  20. I just like the helpful info you provide on your articles.
    I’ll bookmark your blog and take a look at once
    more here frequently. I’m somewhat sure I’ll learn a lot of
    new stuff proper right here! Good luck for the following!

  21. Hey I know this is off topic but I was wondering if you knew
    of any widgets I could add to my blog that automatically tweet my newest
    twitter updates. I’ve been looking for a plug-in like this for quite some time and was hoping maybe you
    would have some experience with something like this.

    Please let me know if you run into anything. I truly enjoy reading your blog and I look forward to your new updates.

  22. Hey there! Someone in my Myspace group shared this site
    with us so I came to look it over. I’m definitely loving the information. I’m book-marking
    and will be tweeting this to my followers! Outstanding blog and outstanding style
    and design.

  23. Greetings from Ohio! I’m bored to tears at work
    so I decided to check out your website on my iphone during lunch break.
    I really like the information you present here and can’t wait to take a look when I get home.
    I’m surprised at how quick your blog loaded on my phone ..
    I’m not even using WIFI, just 3G .. Anyways, fantastic blog!

Leave a Comment

Your email address will not be published. Required fields are marked *