This article was originally published at the National Review on November 6, 2014.
One day while sitting on the roof of his doghouse, Snoopy supposedly penned a letter to our nation’s tax collectors that read, “Dear IRS: Please take me off your mailing list!” (The story’s provenance is a matter of debate, but it’s become a part of Snoopy lore.) Now, however, an arbitrary action by an unaccountable government entity may prompt MetLife’s longtime “spokesdog” to revise his apocryphal letter: “Dear FSOC: Please take MetLife off your too-big-to fail list.”
The Financial Stability Oversight Council (FSOC) is a secretive, unaccountable task force of financial bureaucrats of various agencies that was created by the Dodd-Frank “financial reform” bill that was rammed through a Democrat-controlled Congress in 2010. A few weeks ago, FSOC designated MetLife as a “systemically important financial institution” (SIFI). This means the federal government considers MetLife to be “too big to fail,” making it subject to the same Dodd-Frank bailout regime set up for big Wall Street banks like Goldman Sachs and JPMorgan Chase.
As my organization, the Competitive Enterprise Institute (CEI), argues in a legal challenge to the Dodd-Frank Act (including the FSOC’s role of identifying risk), the SIFI designation confers on a firm a strong competitive advantage, as investors and creditors know the government won’t let it fail. That’s why big banks and MetLife competitor American International Group (AIG), which have already received billions in taxpayer bailouts, have eagerly embraced their SIFI status.
But MetLife, to its credit, has publicly stated that it is not too big to fail and does not want the special privileges that come with SIFI status. MetLife chairman and CEO Steven A. Kandarian declared last year, “I do not believe that MetLife is a systemically important financial institution.” The insurance company, in fact, recently informed its shareholders that it may even sue the Obama administration to escape the “systemically important” designation that some competitors covet.
Unlike AIG and the big banks, MetLife has never taken a dime in taxpayer bailouts. It is asking not for a handout, but for the federal government to keep its hands off of the successful business model it has used to serve customers for over a century.
To use another “Peanuts” analogy, the FSOC’s designating MetLife a SIFI is like a bully’s taking Charlie Brown’s lunch money to subsidize Pigpen’s rolling in the dirt, because under Dodd-Frank, when one SIFI fails, all the other SIFIs pay its bailout costs. As my colleague Iain Murray explains:
[T]here are two classes of SIFIs — 1) the high-rolling institutions that may be tempted to take unreasonable risks with the money people have entrusted to them, and 2) the large stable firms that actually have the money (again, entrusted to them by clients) that can be expropriated by government to pay for the mistakes of the first class.
Given the fact that the FSOC did not publicly acknowledge its action or give any reason for it — news of the SIFI designation came from MetLife itself — it’s reasonable to conclude that the conservatively managed MetLife is in the second category. For MetLife customers, this will mean higher premiums and fewer services.
And that’s not the worst part. As I have written previously on NRO, under the Federal Reserve’s interpretation of Dodd-Frank’s Collins amendment, sponsored by liberal Republican senator Susan Collins (Me.), insurance companies with a small thrift operation — or even those, like MetLife, without any banking component but deemed “systemically important” by the FSOC — will face the same capital standards that banks do.
This is a practice that strikes even an arch-liberal lawmaker such as Senator Sherrod Brown (D., Ohio) as absurd. “I want strong capital standards, but they have to make sense,” Brown said recently. “Applying bank standards to insurers could make the financial system riskier, not safer.”
Imposing bank-capital standards on insurers would raise costs for life-insurance consumers by $5 billion to $8 billion, according to the economic consulting firm Oliver Wyman. These costs could hit policyholders through both higher premiums and reduced benefits. And some policies simply could become unavailable as insurers “exit certain product lines,” the Oliver Wyman study found.
Among the product lines that could disappear or become prohibitively expensive are variable annuities, an increasingly popular retirement option. MetLife CEO Kandarian remarked last year, “It is hard for me to see how life insurers living under [bank-centric rules] could remain in the variable-annuity business.”
And, perversely, such bank-like standards would probably heighten risks for insurers, according to risk-management professionals. In a June 5 letter to Congress, the American Academy of Actuaries warns that forcing insurers to follow bank-capital rules “assigns risks to insurers that are not necessarily significant to them” and “understates risks that may be more significant to insurers than to entities such as banks.”
Federal Reserve chairman Janet Yellen doesn’t seem to disagree with these assessments, but says the language of Dodd-Frank’s Collins amendment ties the Fed’s hands. “The Collins amendment does restrict what is possible for the Federal Reserve in designing an appropriate set of rules,” Yellen said at a Senate hearing.
For her part, Collins, one of three Senate Republicans to vote for Dodd-Frank, says her provision has been misinterpreted. “Since I am the author of the Collins amendment, since I am Senator Collins, I think I know what I meant,” she stated at a Senate hearing in March.
Yet there has been complete silence on this from Obama and his Treasury Department. Perhaps they are nodding their heads with this font of economic wisdom from Paul Krugman’s fawning Rolling Stone piece on the achievements of the administration. Krugman’s circular reasoning is that designating MetLife as a SIFI must be good because “MetLife is making an all-out effort to be kept off the SIFI list.” Therefore, Krugman explains,“this effort demonstrates that we’re talking about real regulation here, and that financial interests don’t like it.”
Fortunately, a piece of legislation is hovering around the Capitol that, like Snoopy the flying ace, could partially save the day. The Insurance Capital Standards Clarification Act of 2014 (S. 2270), which the Senate passed unanimously on June 3, would revise Dodd-Frank by clarifying that it was not Congress’s intent to apply bank-capital rules to insurers.
Now all the House has to do in the lame-duck session is pass an identical companion measure, the bipartisan H.R. 4510, and send it to President Obama’s desk. Obama will have the choice to either sign the bill or face veto-proof majorities in both houses. As I have written before, forcing Obama’s hand here will rightfully “erode much of what little luster there is from Dodd-Frank” and make it politically easier to repeal the law, or at the very least grant relief from other harmful parts of it.
But the main reason to pass this bill is to prevent the not-so-good grief among the insured that will occur if the FSOC is left unchecked. We have already seen what happened when the football was pulled away in the health-insurance market thanks to Obamacare.