WASHINGTON Federal regulators' decision to designate insurer MetLife Inc (MET.N) as "too big to fail" was "arbitrary and capricious," the U.S. judge who struck down the determination last month wrote in an opinion that was unsealed on Thursday.
Commenting on the judge's decision, U.S. Treasury Secretary Jack Lew said the government will vigorously defend the work of the Financial Stability Oversight Council (FSOC), made up of the heads of the country's financial regulatory agencies, which designated MetLife as a systemically important financial institution in 2014.
"This decision leaves one of the largest and most highly interconnected financial companies in the world subject to even less oversight than before the financial crisis," Lew said in a statement. "I am confident that we will prevail.”
Obama administration sources familiar with the case said on Thursday they believe that a U.S. government appeal of the decision is likely.
MetLife had sued the U.S. government, saying FSOC used a secretive, flawed process in determining that it could hurt the U.S. financial system if it faces financial distress. On March 30, U.S. District Judge Rosemary Collyer rescinded the designation, but her opinion was put under seal until Thursday.
FSOC said in its designation that the insurer could cause significant damage to the U.S. economy "but never explained how it would result," Collyer wrote.
"That assumption reflected a change in policy, one that was neither acknowledged nor explained in the final determination, and which was therefore arbitrary and capricious," she wrote.
She added that during the designation process, FSOC ignored two of its own definitions of "material financial distress" and "threat to the financial stability of the United States."
"FSOC also focused exclusively on the presumed benefits of its designation and ignored the attendant costs, which is itself unreasonable," Collyer wrote. "FSOC’s unacknowledged departure from its guidance and express refusal to consider cost require the court to rescind the final determination."
Authority to designate nonbank firms as "too big to fail" is part of the Dodd-Frank Wall Street reform law passed after the 2008 financial crisis. Only four companies have been given the label. One, American International Group Inc (AIG.N), received a $182 billion U.S. government bailout to avoid collapse in the thick of the crisis.
The label can trigger requirements for stricter oversight and more capital, and it has prompted some of the companies, including MetLife, to consider reorganizing to pre-empt any increased regulation.
Lew said FSOC takes "a deliberative and data-driven approach, relying on a careful analysis of available information, including intensive engagement with each company" it designates.
"In overturning the conclusions of experienced financial regulators, the court imposed new requirements that Congress never enacted, and contradicted key policy lessons from the financial crisis," he added.
(Additional reporting by Sarah N. Lynch in Washington; Editing by Chizu Nomiyama and Matthew Lewis)