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Government's too-big-to-fail authority slammed by judge

NEW YORK-- In a major blow to the U.S. government's credibility overseeing too-big-to-fail financial institutions, a federal judge said a unit of the Treasury Department either "ignored" or "abandoned" its mandate when it ruled that insurance company MetLife posed a risk to the nation's financial stability. 

NEW YORK-- In a major blow to the U.S. government's credibility overseeing too-big-to-fail financial institutions, a federal judge said a unit of the Treasury Department either "ignored" or "abandoned" its mandate when it ruled that insurance company MetLife posed a risk to the nation's financial stability. 

The harsh language, by District of Columbia federal judge Rosemary Collyer, shed light on Judge Collyer's decision last week that the Financial Stability Oversight Council (FSOC) erred when it ruled that MetLife should be subject to stricter regulations to prevent another financial crisis.

While Collyer's ruling that FSOC overstepped its bounds was unleashed last week, the reasoning behind her ruling had been sealed — until now. 

Thursday's unsealed decision shows Collyer also blasted FSOC for failing to weigh both the costs and the benefits of designating MetLife a systemically important financial institution, or SIFI.  

"FSOC purposefully omitted any consideration of the cost of designation to MetLife," the judge said. "Thus, FSOC assumed the upside benefits of designation (even without specific standards from the Federal Reserve) but not the downside costs of its decision." 

She called such thinking "arbitrary and capricious under the latest Supreme Court precedent," echoing MetLife's 2015 complaint seeking to rid itself of the SIFI designation.  

FOSC ruled that MetLife could pose a threat to U.S. financial stability in December 2014, subjecting it to stricter oversight by the Federal Reserve, the U.S. central bank. One month later, MetLife sued saying the decision was "arbitrary and capricious" and that it conflicts with the organization's obligations under the Dodd-Frank Act of 2010, which established the agency in a bid to prevent another crisis.

Collyer's ruling, which could be appealed by the Obama Administration, is expected to prompt other companies to sue to get out from under FSOC's stricter regulations.

Last week, one day after Collyer's initial ruling, General Electric's banking unit requested that it, too, be removed as a too-big-to-fail institution, arguing that its GE Capital has dramatically slimmed down in size by shedding assets.

Insurance giants American International Group and Prudential Financial have also signaled that they could join MetLife and GE Capital in trying to shed their designations as threats to the U.S. financial system. 

Follow USA TODAY reporter Kaja Whitehouse on Twitter @kajawhitehouse

 

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