MetLife, the insurance giant that in 1985 secured the rights to use Snoopy in its company logo, has won a major victory, allowing it to avoid more strict federal scrutiny.
Despite being the nation’s largest life insurer, it convinced federal judge Rosemary Collver to rule last week that it is not a systematically important financial institution, or SIFI, otherwise known as a company that is “too big to fail.”
The federal government introduced the SIFI designation — describing a company that is so important to the financial system that its failure would do significant damage — as part of the Dodd-Frank Act. The government imposes special rules on SIFI in order to keep the financial system safe.
The government plans to appeal.
For MetLife, removing the label means less government scrutiny and lower reserve minimums.
“Today’s ruling validates MetLife’s decision to seek judicial review of our SIFI designation,” Steven Kandarian, MetLife CEO, said in a news release. “From the beginning, MetLife has said that its business model does not pose a threat to the financial stability of the United States.”
The SIFI designation was first applied to MetLife in December 2014. The Financial Stability Oversight Council, which was established as a consequence of the 2008 financial crisis, ruled that a MetLife failure could pose a threat to U.S. financial stability and that, therefore, the Federal Reserve should subject the company to stricter oversight.
This year, MetLife unveiled a spinoff of part of its businesses, such as guaranteed annuities, in part to avoid the SIFI designation. MetLife said at the time that the risk of increased capital requirements “contributed to our decision.” This suggested other factors were involved. Because of low interest rates, guaranteed annuities had generated unsatisfactory profit margins.
MetLife’s success in having its “systemically important” label removed was quickly followed by General Electric Co.’s request Thursday for the Financial Stability Oversight Council to remove the SIFI designation from its giant finance arm, GE Capital. It, too, has been selling off parts of the company. It recently sold its asset-management business to State Street and spun off Synchrony Financial, the largest provider of private-label credit cards in the U.S.
Too expensive to be big?
Increasingly, the operative question for the country’s largest financial firms is whether the government has made it too expensive to be big.
While the U.S. government has not acquiesced to populist calls to “break up” the nation’s largest financial firms, these companies understand that they are operating in the proverbial doghouse. Banks are getting out of or reducing exposure to risky businesses such as operating hedge funds. They also are drastically reducing their trading operations.
In all fairness, the government had a strong case for its argument that MetLife is a significant financial organization.
MetLife has $2.5 trillion in policies written, $350 billion in assets under management and more than 12 million customers in the United States. It serves 90 of the largest Fortune 500 companies.
While insurance companies have avoided the stigma of the nation’s banks, they are not immune to greed and can make horrendous miscalculations.
In 2008 — the same week Lehman Brothers filed for bankruptcy — the government provided AIG with a $180 billion bailout because of its asinine derivative bets. AIG’s failure could have led to another Great Depression because it would have worsened the liquidity crisis stemming from Lehman Brothers’ failure.
But the issue is not size, per se. Rather it is the capital risk associated with an activity. If MetLife can quantify the potential downside of each of its far-reaching subsidiaries, the government might withdraw its plans to impose a SIFI label on it.
A compromise might be possible between the government and MetLife that will serve all parties. Perhaps the government can specify what businesses MetLife can operate that will exempt it from SIFI designation.
But Snoopy or no Snoopy, MetLife is a Great Dane, not a Beagle.
Originally published in the Sarasota Herald-Tribune
