MetLife doesn’t think it’s too big to fail, and the top U.S. life insurer is asking a federal judge to reverse the government’s recent decision to label it a systemically important financial institution (SIFI). But in its complaint to the U.S. District Court for the District of Columbia, New York–based MetLife also raises critical issues for big asset managers worried that regulators will designate them as systemically important, raising their costs of doing business with rules that include higher capital requirements.
“If you’re a large asset manager, a logical question is who will be the next SIFI,” says Jay Baris, New York–based chair of law firm Morrison & Foerster’s investment management practice. At the same time, Baris notes, even though the MetLife complaint is from an insurance company, it gives asset managers plenty of ammunition to fight back if regulators come after them.
The Financial Stability Oversight Council, which made the MetLife decision, was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The SIFI label was intended to identify financial institutions — until now, primarily banks — that could pose a risk to the economy if they collapsed.
In late December the FSOC told MetLife, which has $4.3 trillion worth of life insurance in force worldwide, of the SIFI designation; on January 13, MetLife filed its complaint to overturn the decision. The suit calls the FSOC’s move premature because the council didn’t assess the consequences for MetLife, the economy and the company’s shareholders. MetLife also says it didn’t have an opportunity to review the information that the government used to make its judgment.
“The decision is also essentially vague and speculative and at odds with the actual evidence before the FSOC and basic economics,” said Eugene Scalia, partner at Washington-based law firm Gibson, Dunn & Crutcher, MetLife’s outside counsel, during a legal briefing call after the complaint was filed. “For example, it rests heavily on a theory that if MetLife failed, it would cause so-called contagion in the insurance markets.” There is no evidence that any past failures of insurance companies have caused such problems, Scalia added.
Although a possible SIFI designation for firms like BlackRock, Fidelity Investments and State Street Corp. has been discussed since 2008, many believed that the FSOC had decided that other rules could be more effective in curbing potential risks to the market from asset managers. But in late December the council asked for input from the industry on the threats that asset managers might present to financial stability. Baris believes the move was intended to mollify mounting criticism and help justify the FSOC’s desire to further regulate.
Among other questions, the FSOC asks whether investors are more likely to cash out of pooled funds — because of their promises of daily liquidity — than unload shares they hold directly outside the asset management industry; whether asset managers that use leverage increase instability in the markets; if firms that experience big redemptions might pose risks; and how asset managers that fail might affect the markets or the broader economy.
“The FSOC was born to regulate, and now they have a tool to regulate a nonbank holding company as if it were a bank holding company,” attorney Baris says. “But asset managers or insurance companies are not banks and involve different considerations.”
Asset managers are fundamentally different from banks. For starters, a bank takes short-term customer deposits and lends that money out in 30-year mortgages. If everybody wanted their money at the same time, it couldn’t honor those requests, creating a classic run on the bank. In its complaint, MetLife argues that it isn’t subject to these so-called run risks because it doesn’t depend on short-term deposits.
Laurence Fink, chairman and CEO of $4.3 trillion BlackRock, has pointed out that money managers oversee funds for many different types of clients, including mainstream investors and sovereign wealth funds. Those investors decide how their money should be divvied up among different kinds of assets. BlackRock doesn’t make the decision to redeem or move billions into high-yield bonds, for instance.
MetLife counsel Scalia believes it will take from nine months to a year before the complaint will be heard and the FSOC’s decision possibly reversed. Morrison & Foerster’s Baris says that in the meantime this kind of regulation will drive costs up for buyers of insurance as MetLife, like any business, passes its higher expenses on to consumers. As for asset management, more rules could push the business offshore and will raise compliance costs, according to Baris.
“Dodd-Frank has resulted in a dramatic shift in the way that new regulatory requirements can arise,” he says. “With its sweeping power to designate systemically important financial institutions, the FSOC can subject nonbank financial institutions to banklike regulation by the Federal Reserve Board.”
