D.C. District Court Calls FSOC’s Review of MetLife’s Status “Fatally Flawed”

The U.S. District Court for the District of Columbia (the “Court”) rescinded the Financial Stability Oversight Council (“FSOC”) designation of MetLife, Inc. (“MetLife”) as a so-called “systemically important financial institution.” The Court found “fundamental violations of established administrative law” in the FSOC designation.

The Court found: (i) that FSOC made unexplained “critical departures” from two standards outlined in the guidance that it issued years before the designation, and (ii) that FSOC “purposefully omitted any consideration of the cost of designation to MetLife.” The Court also noted that in assessing MetLife’s threat to U.S. financial stability, FSOC “hardly adhered to any standard.”

MetLife argued that FSOC violated its prior guidance by failing to assess MetLife’s “vulnerability to material financial distress” before addressing the potential effect of that distress. The Court found that FSOC conflated these issues in its conclusion. The Court rejected FSOC’s argument that any change in its method of analysis was sufficiently justified and explained.

MetLife also claimed that FSOC failed to abide by its prior assertion that a non-bank financial company could threaten U.S. financial stability only if there was “an impairment of financial intermediation or financial market functioning that would be sufficiently severe to inflict significant damage on the broader economy.” The Court agreed with MetLife’s allegations that FSOC’s determination failed to abide by its own standard because it never projected what the losses would be, or established any basis for finding that MetLife’s distress would “materially impair” counterparties. The Court stated it was unable to determine whether MetLife’s distress would cause severe impairment of financial intermediation or financial market functioning because FSOC “refused to undertake that analysis itself.”

The Court also maintained that FSOC’s omission of any consideration of the cost of designation to MetLife “was not by accident.” In its Exposure analysis, FSOC avoided accounting for collateral and other mitigating factors and instead posited that these factors would only worsen asset liquidation impact. By doing so, FSOC considered the upside benefits of designation but not the downside costs of its decision. The Court found that the impact of neither financial distress nor asset liquidation was actually quantified.

Lofchie Comment: Given how much discretion the Dodd-Frank Act affords FSOC to create its own rules, the Court’s finding that the FSOC failed to follow those rules is nothing less than embarrassing.

The decision casts doubt on whether FSOC and its closely related affiliate (also established by Dodd-Frank), the Office of Financial Research, (i) can provide any meaningful value and (ii) are really more political creatures than regulatory or academic entities. FSOC’s annual reports on the state of the financial markets seem to provide little in the way of worthwhile economic analyses. They do, however, make political sense as running defenses of the regulations adopted by Dodd-Frank.

If FSOC is to be saved (and nothing about its performance to date makes that goal seem remotely important), it should de-politicize its governing rules by amending them to require members of both political parties (and not just administration-appointed officials who are Democrats) to serve as FSOC members. This would prevent FSOC from issuing pronouncements that are not susceptible to internal challenge or debate. Conversely, if it is to continue to function as a one-party organization, whether Democrat or Republican, then the pretense that it is something other than the political instrument of the executive branch should be abandoned (seee.g., FSOC Voting Members Testify at Financial Services Committee Oversight Hearing).

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