Metlife Lesson: Get Out Before You’re Too Big to Fail

By Annie Dike, Esq.

For a financial company, it is a not a badge of honor. It’s a costly designation and one Metlife has been vigorously fighting for years. “We’re not too big to fail. We’re just big enough to hurt,” was essentially the argument Metlife made to a U.S. Appeals court in October in its effort to disown the government’s Dodd-Frank-forced label that it is “too big to fail.”

Metlife claimed the losses that would be suffered by banks if the company did break up—something it decided to do recently in the face of growing regulatory oversight—would be miniscule. A decision could come out this year on whether the government’s “too big to fail” imposition on Metlife was supported by the reform act or if the government’s actions were “arbitrary and capricious.”

If the court agrees with the government that Metlife was, in fact, too important to collapse, we have to wonder whether the thickening regulatory web over the financial industry will encourage other companies to follow suit and pull out before they, too, get “too big to fail” which, for Metlife, translated to “too costly to continue."

Too Big to Fail

What exactly does “too big to fail” mean? Basically, it’s the government’s determination that a collapse of the company could devastate the entire financial system, and it was one of the most significant reforms to come out of the financial crisis -  which spawned implementation of the Dodd-Frank act in 2010.

In 2014, the Financial Stability Oversight Council (FSOC), an agency comprised of the heads of U.S. financial regulators, deemed Metlife a “systemically important financial institute,” (translation, “too big to fail”) triggering tighter government regulation over the company and an immediate requirement that Metlife set aside sufficient capital to ensure it would not need a bailout in a crisis. This “too big to fail” determination is made before the company actually collapses and before a crisis. It’s kind of like forming a plan before going to war that will ensure your general is not exposed on the front lines. But under the Dodd-Frank act, he has to pay for the bunker.

While Metlife is fighting the designation, it appears what is really in question is the process the government used in reaching the decision to deem Metlife a systemically important financial institute. In March of this year, a U.S. District Court judge struck down the designation, finding the FSOC used an “arbitrary and capricious” process in assessing Metlife’s vulnerability to collapse.

Judge Collyer found the government failed to analyze costs and benefits to Metlife in reaching its decision and did not adequately assess whether Metlife would actually fail before jumping ahead to the consequences that might occur if it did. The ruling was a significant blow to the heavily-debated Dodd-Frank act, which was written primarily in response to the $182-billion-dollar bailout the government made to American International Group (AIG) during the 2008 financial crisis.

The act was easily one of the most significant pieces of legislation passed during President Barack Obama’s term and has been under attack by Republicans since. Two of the justices on the appellate panel that heard this case were appointed by Obama, so it will be very interesting to see how this shakes out.

The Dodd-Frank act was easily one of the most significant pieces of legislation passed during President Barack Obama's term and has been under attack by Republicans since.

Metlife claims the activities based approach is more cost-effective and better suited for assessing the risk level of insurance companies.

The Activities Based Approach

Rather than determining whether a particular company poses a risk for devastating failure, Metlife has argued the FSOC should have implemented an alternative process, known as the “activities-based approach,” where the agency identifies certain activities, as opposed to entities, which pose a risk and then regulate the activity across all companies. Metlife claims this process is more cost-effective and better suited for assessing the risk level of insurance companies, in particular.

While the government had claimed previously it did not have legal authority to designate an activity as risky under the statute, following Judge Collyer’s ruling in March, the FSOC began, in April, implementing an activities-based approach to assess risk in asset managers and mutual funds. Creative and seemingly questionable uses of the legislation such as this have caused Metlife and other companies to see the Dodd-Frank Act as manipulative and unfair. As a result, Metlife has pulled out, announcing it recently decided to break up the business in response to the regulatory environment.

We believe this may be the beginning of a trend. Since the crisis in 2008, the many bailouts, and the Dodd-Frank financial reform act, the financial industry has been laced with regulation after regulation and strict governmental oversight. Many financial companies are starting to feel choked out and may be looking to follow Metlife’s example. Have you seen any Dodd-Frank backlash in your practice and/or opposition to the government’s ability to designate companies as “too big to fail?”

Annie Dike, Esq.

Annie Dike, Esq.

As a former trial and litigation attorney, Annie Dike has a keen eye for expert evidentiary issues and a clear voice for practical solutions.  Annie is a published author of both fiction, non-fiction, and a comprehensive legal practitioner's guide to hourly billing published by LexisNexis. Annie graduated from the University of Alabama School of Law cum laude.  While in law school, she served as Vice President of both the Bench and Bar Legal Honor Society and the Farrah Law Society and was a member of the Alabama Trial Advocacy Competition Team as well as Lead Articles Editor of The Journal of the Legal Profession.  Ms. Dike has published articles in The Alabama Lawyer and DRI MedLaw Update and has spoken on numerous legal issues at various conferences nationwide.

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