MetLife (MET) won a huge victory today, as a federal district judge struck down an argument by the nation's financial regulators that MetLife was too big to fail and should therefore keep a larger chunk of capital on hand.
The Financial Stability Oversight Council (FSOC), a collection of U.S. financial regulatory agencies, had designated MetLife as a Systemically Important Financial Institution (SIFI). Such a designation characterized MetLife as too big to fail and triggered a need to hold more capital.
Translation: MetLife is not too big to fail.
The FSOC designated MetLife as a SIFI on Dec. 18, 2014, making it the fourth non-bank -- along with American International Group (AIG), GE Capital (GE) and Prudential Financial (PRU) -- to be designated as systemically important. So, MetLife and Prudential were the only two major U.S. insurance companies to be designated as "too big to fail" and obviously forced to compete in the fragmented insurance markets against many companies that don't wear the SIFI designation.
To this point, Prudential has not fought its designation, earned on Oct. 13, 2013, but today's decision shows that conflict-aversion was a miscalculation, and perhaps Prudential will reconsider. The matter is still somewhat open, given the FSOC could appeal Judge Rosemary Collyer's decision. But today's ruling, nonetheless, is a huge victory for the private sector.
Whatever the final outcome, it's clear that the FSOC is just another useless part of one of the worst pieces of legislation ever to grace the halls of the U.S. Congress: Dodd-Frank Act. Instead of letting the markets properly re-value risk assets as they always do, it would be like letting the villagers get together with their pitchforks and start making up ridiculous designations for financial companies.
The FSOC is entirely composed of Beltway mandarins -- Lew, Yellen, Mary Jo White, Mel Watt, Richard Cordray -- and while the names should be familiar to those who follow the financial regulatory climate, it is worth noting that not a single one of the FSOC members was elected by the public to his or her non-FSOC "day job."
It's just rankling to hear these regulators continuously play into the hands of moronic, faux-populist politicians and their anti-Wall Street rhetoric.
Let's just state one thing for the record: bigger is not worse.
Was Lehman Brothers big? Well, I worked there in the 1990s, a much simpler time when Glass-Steagall was still in effect, and I can tell you concretely that Lehman Brothers was always in the shadows of Goldman, JPMorgan, Citi and Morgan Stanley, especially on the equities side.
One could actually make the argument that Lehman wasn't big enough to survive balance sheet implosion and that was certainly the case with Bear Stearns.
Lehman, it must be noted, also was not a bank. Only Dick Fuld and Erin Callan can explain why an investment bank would want to carry such a large asset base, but, again, prior to the repeal of Glass-Steagall -- a repeal that was signed into law by a certain Presidential candidate's husband -- there's no way that balance sheet build-up could have happened no matter how incompetent Lehman's top management might have been.
Insurance companies are regulated extraordinarily tightly, especially at the state level. In that game, bigger is usually better. It's simple math. When your business is calculating risk, you want to have a large pool of assets over which to spread that risk. That also allows for much more data on loss rates, which leads to efficient pricing.
Bottom line: MetLife and Prudential aren't too big.
The companies have, however, been having a dickens of a time making decent income on their investments given the flat yield curve conditions that prevail in the bond markets. That is why both companies' stocks are down by double-digits. Prudential is down 10.1% and MetLife has given up 11% in a 12-month period, while the S&P 500 has actually eked out a small gain.
Judge Collyer's decision won't help MetLife and Prudential with their struggles to earn fair returns on their assets, but removal of the SIFI sword from over their heads, assuming Prudential decides to fight its designation, could be a nice tailwind for the stocks.
