Treasury Secretary Defends FSOC’s Designation of MetLife

Treasury Secretary Jacob Lew issued a statement arguing that the federal court’s decision to rescind the determination that MetLife was a so-called “systemically important financial institution” leaves one of the “largest and most highly interconnected financial companies in the world subject to even less oversight than before the financial crisis.”

Secretary Lew argued, among other things, that the court “imposed new requirements” that never have been enacted by Congress regarding SIFI designation, asserting that:

Congress chose not to require FSOC to conduct a formal cost-benefit analysis of designations for good reasons. Such a requirement would impair the Council’s ability to address the risks of a future financial crisis that could severely damage the financial system and the U.S. economy.

Secretary Lew stated that he will continue to “vigorously” defend the SIFI designation process and the integrity of FSOC’s work.

Taking the other side of the matter, American Council of Life Insurers (“ACLI”) President and CEO Dirk Kempthorne expressed satisfaction with the federal court’s decision, noting ACLI doesn’t “believe the facts support the conclusion that any life insurer presents a systemic risk to the nation’s economy.” Mr. Kempthorne further recommended that FSOC offer companies “a clear exit ramp” so they can understand and implement de-risking strategies they could use to be de-designated from SIFI oversight.

Lofchie Comment: The District Court’s harsh rejection of FSOC’s analysis of MetLife motivates a reexamination of that analysis and other commentary on it. One of the more detailed public reviews of FSOC’s analysis was produced by Peter Wallison (see “MetLife Calls the Regulators’ Bluff” published in The Wall Street Journal on July 7, 2015). His specific criticism of the FSOC analysis, e.g., with respect to securities lending, is a reasoned indictment of FSOC’s ability to understand the business lines it addressed in the analysis.

However harsh the District Court and Mr. Wallison were, there is nothing so damning to FSOC as FSOC’s own words. The report is frequently long on generalizations and short on specific analysis.  For example, reading the report’s analysis of MetLife’s securities lending business suggests that FSOC gave only a cursory overview of securities lending, generally, without much to suggest that MetLife’s business was particularly risky.  In fact, reading FSOC’s analysis, it seems clear that FSOC believes that all persons in the securities lending business should be prudentially regulated (which can’t possibly be true).

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