Quick, who’s the chief executive of MetLife? That the name Steve Kandarian doesn’t roll off the tongue for almost anyone who isn’t deeply steeped in the insurance business is probably a good thing for his shareholders. How he handles his company’s inevitable designation later this week as a systemic threat to the financial industry could change that. A Jamie Dimon-style public spat with regulators would be foolish. Better to speak softly, and keep the CEO’s relative anonymity intact.
It’s understandable that MetLife objects to being labeled a systemically important financial institution, or SIFI. At a minimum, it imposes a higher level of oversight from regulators. It also would probably force the insurer to submit to cumbersome stress tests. More ominously, it could require MetLife, with its $890 billion of assets, to set aside a lot more capital, potentially lowering returns or forcing it to exit certain businesses. The precise rules on how insurers will be treated haven’t been worked out, however.
Insurers do not obviously pose the level of systemic harm that investment banks and other financial institutions do, a fact conceded even by Barney Frank, whose name adorns America’s post-crisis financial reform.
For starters, their liabilities, which are effectively the claims of the insured, are matched with corresponding assets. The disparity of long-term investments funded by short-term money befell many banks during the last crisis. Moreover, insurers are not at the same risk of a run as banks by their depositors. And, strictly speaking, there are few historical instances of pure insurance businesses creating system-wide ruin.
It is not, however, without precedent. In 1973, Equity Funding Corp of America created something of a storm in the financial markets after it collapsed following revelations of widespread accounting fraud. The book written about the affair two years later proclaimed it “the fraud of the century.”
And then there is the American International Group saga. The insurer’s financial products division, whose implosion necessitated a $180 billion U.S. government bailout, was separate from the core insurance business, where it was overseen by the feckless Office of Thrift Supervision. AIG nevertheless maintained all the while that the credit default swaps the unit underwrote were just another form of insurance. That makes it hard to argue that broader oversight would not have helped prevent its failure.
The arguments for including mega-insurers in the systemically important bucket are similarly qualitative. They’re big players in global markets. Their massive derivative books are definitely interconnected. And regulators could glean insights valuable to broader supervision of the entire financial complex by installing eyes and ears inside the biggest insurance companies.
In the end, though, the most decisive reason will be the political aspect of the exercise. Call it the “AIG effect.” That extraordinary rescue now makes it incumbent upon the Fed to reassure the public that it is taking every conceivable measure to avoid a repeat occurrence. And, in fairness, it can’t just target one insurer. That’s why Prudential, and now MetLife, make good company.
So how should an unknown actuary like Kandarian respond when the Justice League of U.S. regulators, aka the Financial Stability Oversight Council, names MetLife to the SIFI brigade as soon as this week? MetLife has said no options are “off the table,” leaving open the right to appeal the designation in the courts. Though Uncle Sam would almost certainly prevail, a lawsuit could buy MetLife time.
There is some merit to fighting the Fed if it helps resolve the lack of clarity around the imposition of bank capital standards. The Senate passed an amendment sponsored by Maine Republican Susan Collins to the Dodd-Frank Act earlier this month that would have done precisely that. Whether a variation can get through the dysfunctional House as midterm campaigning kicks off is unclear. So maybe kicking the can down the road, at least until a new Congress arrives, could make sense.
And yet, public disputes with watchdogs are never advisable. Ask Dimon. The JPMorgan chief chastised regulators in full daylight as the 2008 panic receded, and financial reform took shape. He used his annual letter to shareholders to rail against provisions of Dodd-Frank. Dimon even took then-Fed Chairman Ben Bernanke to task with the cameras rolling.
That approach boomeranged when JPMorgan subsequently suffered a $6 billion trading loss that revealed flaws with the bank’s internal controls. The CEO’s antagonistic behavior arguably contributed to escalating the price tag for a variety of settlements with government agencies that have cost the bank’s shareholders more than $20 billion.
Over the past five years, MetLife shares have managed to moderately outperform those of JPMorgan. They’re different companies, of course, but it’s hard not to believe the relative obscurity of the insurer and its chieftain has been of some help. It’s probably best for Kandarian to keep it that way.