photo by David Boyle
MetLife, Inc. is not a financial institution in the usual sense of that phrase. The company, best known for its life insurance, is a fairly boring and straightforward business, albeit a very large one.
Despite its size, MetLife is also not systemically important to the U.S. or global financial systems. As MetLife goes, so goes... MetLife.
Yet these facts did not prevent federal regulators from doing what they were born to do – namely, to regulate. So they designated MetLife a systemically important financial institution, or SIFI, despite the company being neither one of those things. The classification was based on criteria that regulators made up as they went along, and those criteria changed when it turned out MetLife didn’t fit well enough.
This designation is not simply a matter of labels. Businesses saddled with the SIFI classification face stepped-up government scrutiny and stricter capital requirements than non-SIFI competitors.
MetLife appealed the decision, calling it arbitrary and unjustified. But under the Dodd-Frank legislation that created SIFI regulation in the first place, the company’s appeal was heard by the Financial Stability Oversight Council. Unfortunately for MetLife, this council was the same group of people who designated MetLife a SIFI in the first place. Not surprisingly, they affirmed their own decision.
Fortunately, a federal judge has stepped in to put a stop to this Alice-in-Wonderland nonsense. In a strongly worded albeit brief order, U.S. District Judge Rosemary Collyer rejected the council’s rationale for MetLife’s classification. The Obama administration and its regulators (chief among them Treasury Secretary Jack Lew) strongly disagree with Collyer’s order. An appeal may very well be forthcoming.
For now, the details of Collyer’s reasoning remains unavailable to the public, but they will eventually determine whether the decision is mainly a victory for MetLife or a sharp rebuke to Dodd-Frank overreach in general. A public version may become available sometime this week.
In the meantime, the victory was more moral than practical for MetLife. The company has already announced that it will break itself up to avoid some of the regulatory costs that come with being a large corporate target in the post-financial-crisis environment. In late January, CEO Steve Kandarian said that MetLife will discard much of its U.S. retail business due to the regulatory burden it now creates.
General Electric Co. serves as another example of how overregulation can shrink a company. Rather than appeal its SIFI designation outright, as MetLife did, GE proactively shrank its financial business to a shadow of its former self and continues seeking to sell off pieces of what remains. Last week the company formally asked to be released from Federal Reserve scrutiny on the basis that it no longer poses a systemic threat to the financial system, assuming it did in the first place. That application went to – you guessed it – the Financial Stability Oversight Council that labeled GE a SIFI in the first place.
Does the new, stripped-down GE meet the criteria to exit the program? Nobody knows, because of course the criteria have not yet been invented. The council has simply said that it will look for “material changes” at a firm that applies for a change in SIFI designation. The way the process seems to work is that the regulators will decide whether they want to let GE out of the enhanced regulatory regime they created, and then they will establish criteria to support their predetermined decision.
So if a systemically important financial institution need not be a financial institution nor systemically important, then what, exactly, is a SIFI? The only explanation I can find came from the late Supreme Court Justice Potter Stewart more than a half-century ago. Sure, that was long before the financial crisis, Dodd-Frank and SIFI existed, even in a regulatory fever dream. Instead Stewart was writing in what became a famous concurrence in the case of Jacobellis v. Ohio, which dealt with pornography. His definition was simply, “I know it when I see it.” Regulators determining what makes a company a SIFI seem to proceed the same way.