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Case number 16-5086, MetLife Inc.

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versus Financial Stability Oversight Council Appellant.

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Mr. Stern for the appellant, Mr. Scalia for the appellee.

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May it please the court, Mark Stern for the Financial Stability Oversight Council.

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After an elaborate process that took about a year and a half, the Council determined that material financial distress at MetLife could threaten the nation's financial stability.

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It's undisputed that that is the relevant statutory standard.

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And it's also undisputed that MetLife considered each of the specified factors that are laid out in the statute to inform the Council's determination

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Now, when the district court set aside the collective determination of the nation's chief financial regulators, which probably is a non-delegable determination that has to be made by a two-thirds vote, the court cited two departures from the council's own guidance and one departure from what the court believed was required by the statute.

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And the departures from the guidance were the court's view that the council was required to determine the likelihood that, or at least consider rather, consider the likelihood that MedLife would experience, self-experience on material financial distress.

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And it also found that the Council had failed to predict with adequate specificity the ways in which material distress at MetLife could destabilize the economy.

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was a failure to do a cost-benefit analysis.

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Can we start with the first issue you raised about the departure from the guidance on the question of likelihood that the company would fall into financial distress?

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Is it your view that the guidance just cannot be read that way, or is it your view that the guidance need not be read that way, and the council later on fleshed out that it need not be read that way and wouldn't?

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We don't actually think that it can be read that way, and we think

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that there there's like a mention of vulnerability in the statute that the district court relied on but what the council specifically said was it wasn't adding any new factors that weren't set out in the statute itself and it explained that it

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that there were that this category that it described as being sort of related to vulnerability sort of indicated what the factors were.

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And then it's not controverted that it applied all of those factors.

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Now, the council... So if the argument is that it cannot be read that way, which is the more aggressive position, can I just ask you to address... There's versions of it, but in your brief, I guess there's an addendum that has the guidance in it.

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And if we look at the portion that talks about leverage, and it's the addendum, page 17, under the heading leverage,

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The first sentence is, leverage captures a company's exposure or risk in relation to its equity capital.

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Leverage amplifies a company's risk of financial distress in two ways.

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And then it goes on to discuss two ways, the subsequent two sentences.

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And then subsequently, it says leverage can also amplify the impact of a company's distress on other companies.

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So that part of it clearly is speaking to ripple effects for the broader economy.

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On the sentences before that, the first and the second, how do you read those sentences

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in support of your conclusion that the guidance cannot be read to speak to likelihood that a company will fall into distress.

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What the council is trying to determine is not whether but how distress will affect a institution in this case, MedLife, and how it's going to affect that institution is relevant because in turn, as Your Honor suggests, leverage

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you know, liquidity, maturity mismatch, all of those things are ultimately relevant to the determination that the council is required to make, which is if there is financial

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distress, material financial distress at a company, will that distress have a destabilizing, could that material financial distress have a destabilizing impact?

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That's the only ultimate question.

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That's definitely right, or it seems that you have the strongest position on that with respect to the sentence that follows first and second.

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And the sentences that are first and second, it sounds to me like what you're saying is,

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Those don't go to the likelihood that the company will fall into financial distress.

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Those go to the implications for the company if there is financial distress.

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Yes, that's how the Council has understood this throughout.

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It did it in its previous determinations.

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made clear throughout this process that that's what it was doing.

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It provided MetLife with a proposed designation which made clear how it was analyzing it.

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There's no sort of argument here that MetLife in some way was prejudiced by the Council's understanding of its

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of its guidance, got to make all the arguments, present all the evidence.

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It argued to the Council that the Council should consider its likelihood of material distress, and understood that that isn't what the Council was doing.

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The Council responded to that, and there's the discussion of it in its final determination.

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But that's consistent both with the overarching statute

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and everything that the council has ever done and there's a reason for that because the idea that you could predict

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I mean, among other things, the idea that you could predict the likelihood that a particular entity is going to experience material financial distress is not what Congress had in mind.

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Congress was reacting to events like the collapse of AIG.

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If you would have to scroll back to 2005 and predict whether it was likely that AIG was going to experience material financial distress,

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Probably the only people who would have said that were the guys in the big short who sort of were out ahead of everybody.

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Nobody else was thinking that.

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with any kind of specificity what losses would be and who would experience them.

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Again, AIG is instructive.

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I mean, AIG down to its last weekend was increasing its estimates of its liquidity shortfall by sort of repeatedly doubling over the course of days what it was so that the

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to make a prediction about the financial health.

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It did make a prediction.

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The prediction was there's 100% chance it's going to fail.

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And now this is, so we'll just take a look at what the consequences are.

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That's a prediction, isn't it?

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No, Your Honor.

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I mean, certainly the Council never predicted that there's 100% chance that my life is going to fail.

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What the Council took as an assumption

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And that's what the count, that's what the statute.

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That's what the assumption is?

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Well, the working assumption is that it's facing imminent insolvency.

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That's set out both in final determination and the guidance.

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So the question is, if you're in that position, how is that likely to affect you?

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And if you are a highly leveraged company, if you've got a mismatch between

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to liquidate your assets, if you engage in certain kinds of transactions, all of those things are going to make you more likely to have an effect on the broader market than if you are, you know, have a

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and are highly liquid.

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And then size and interconnectedness are, of course, crucial.

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These things are all related.

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Can I ask where you think in the Council's final determination are the best pages where it applied vulnerability in the way that you are describing it here?

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Oh gosh, the best pages.

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Because at least in the executive summary, to start, they lay out vulnerability, but then they seem to only talk about transmission, which I thought was the second half of the test.

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And so I'm trying to see where they're clearly embracing this understanding of vulnerability.

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I think a whole bunch of the, like, I mean, like the council talks about, like, leverage at JA554, and it talks about

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We'll just start on JA 390.

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So I'm just starting with the executive summary.

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They talk about vulnerability and then it's all about all these factors are relevant.

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And here they're talking about leverage, liquidity risk, and maturity mismatch.

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So your three vulnerability factors are relevant to assessment of whether and how material financial distress in life could be transmitted to other financial firms and markets.

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And that seemed to me the second half of this analysis, is first we see how bad it's going to affect you.

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What kind of wherewithal do you have as a company to survive this?

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And if it's not good, the second inquiry is what effect is whatever you're having to do going to have, how is it going to be transmitted?

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So that's why I'm confused.

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Yeah, no, I mean, I think that the thing is that they're both true.

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I mean, these are all, I mean, like, as the council explained, it was that these are all interrelated factors, and Congress understood them to be interrelated factors.

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So what, you know, your leverage

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you know, the kinds of businesses you engage in, go to your vulnerability, you know, in the sense that how is it, like what are you likely to do, you know, what problems will you be facing, and then those feed also directly into the questions of your size, your interconnectedness, who are you dealing with, you know, what it will be the impact

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But, you know, the council goes through.

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I mean, it's indicated what... I think... I thought what Judge Milas was getting at is that there's a sequence.

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The sequence is...

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Distress could come up along three points in the continuum.

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The first would be likelihood that the company is going to fall into distress.

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And your, the MetLife's position is that has to be considered.

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Your position is no, that doesn't have to be considered.

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In fact, the guidance doesn't talk about considering that at all.

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The second step is

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In conditions of distress, how does it affect the company?

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And then the third is, if it affects the company, then what are the outward ripple effects of that for the broader market?

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So on the second part of that continuum, the question is, where in the executive summary is that second part addressed?

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And that I would have to look back to see what I can tell you is that

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There's no dispute that MetLife, the brother of the council, considered all the factors that it deemed relevant, that it sort of grouped as being sort of the more inward looking.

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And it looks at those factors not because it's trying to predict

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whether any institution is going to fail under certain circumstances.

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I mean, there may be lots of institutions that are going to fail, and that could be very unfortunate for the stockholders of those institutions.

[00:13:22] Speaker 01:
Well, how do you read this, then, because on that same page in that paragraph, the one that Judge Mallett's looking at on JA 390, there's a, after a semicolon,

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It talks about what Section 4.3.3 is going to describe.

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Section 4.3.3 describes how less securities lending activities result in liquidity risk and a maturity mismatch that could cause the company to rapidly liquidate invested collateral to produce the necessary liquidity to return cash collateral to securities lending counterparties.

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And when it talks about the company, do you read that to mean likelihood that the company is going to fall into distress?

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Do you read it to mean likelihood or consequences for the company in conditions of distress?

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Or do you read it to go to the third part, which is implications for the broader market?

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Well, what it's saying is that if you have like leverage and

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that and if people can demand money from you sort of based on all sorts of financial instruments and particularly if you have you know 100 billion dollars you know just in or 90 billion just in the capital you know markets alone that look fall into that category then

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When you are in trouble, what you may do is to try to liquidate your assets, and then that in turn flows into the way you're going to affect the broader market.

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But it's so that there's an inquiry.

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you the sort of company that will need to liquidate assets?

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Is the way you're doing business getting you there?

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Then what will the result be?

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If you're an enormous interconnected company, well, that's going to have a big effect on the broader market.

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If you're not like that, you may be in trouble, but it's not going to have enormous reverberations throughout the entire economy.

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I see that my time is up.

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Thank you.

[00:16:00] Speaker 02:
Good morning.

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I'm pleased to quote Eugene Scalia, representing Medlife.

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All MetLife asks in this case is that FSOC be held to the standards articulated by the Supreme Court in the State Farm decision and applied by this court for decades, including that it adhere to its own standards, that it base its decision on evidence and applied expertise rather than implausible speculation in Ipsedixit, that it respond to significant evidence and argument in the record,

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and that it considered the impact of its actions, including superior alternatives to that course of action, and finally, that it accorded due process.

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On the topic of its standards, let me begin with vulnerability, but also talk about how it also departed from its own standards when it came to the exposure analysis.

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First, Judge Sirvasan, in addition to those passages that you pointed out in the

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final interpretive guidance that seemed to be concerned about the occurrence of financial distress.

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I would also mention, and I don't have the same pagination as you do, but later there are references, for example, to how well the company, quote, is matching the repricing and maturity of its assets and liabilities.

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Is matching.

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How is it doing it currently?

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because maturity mismatch is one potential onset of financial distress in a generally bad economic environment.

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It also talks – this is page 26 in our appendix – also discusses whether there is regular reporting to state regulators.

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Well, that naturally goes to the question of whether the state regulators are on the job and able to discern conditions that could be

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indications of the likely onset of distress.

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Whether there are reporting obligations is going to be far less helpful once a company already is there.

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Even more importantly though, if I can emphasize the dog that doesn't bark, the premise, the starting point of this final designation is, as Judge Randolph said, total failure.

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That was an easy thing to say in the final rule of interpretive guidance.

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We are going to assume

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at onset of absolutely totally debilitating financial distress.

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It's actually remarkable that Mr. Stern has cited you to join appendix 454 because at that page there's an assumption actually of deep insolvency and on the same page FSOC goes on to assume something even worse than a deep insolvency.

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Judge Millett, this is in part relevant to some of the questions that you had, because they actually never even do their own made for litigation inquiry regarding vulnerability to vulnerability.

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They just plunge MetLife to whatever depths are necessary without any serious examination of how it got there.

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And again, on the question of what was said in the final rule and interpretive guidance, they said they were going to look at two things.

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And some of your questions picked up on this, transmission to third parties,

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vulnerability of MetLife.

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But on those pages that we were looking at, 390 to 391, those were conflated.

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And all they talk about is three different times they talk about transmission to third parties or impact on third parties.

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That second prong, vulnerability of MetLife, is just gone from that analysis.

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I also want to note that what APSOC did was it told state regulators it was going to examine MetLife's vulnerability to financial distress.

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on that basis sought thousands of pages of documents from it that went to mentalize stability and soundness, such as stress tests going back to 2007.

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What happened?

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Can I ask you something?

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Is your view that the statute itself requires the council to find an actual likelihood of falling into financial distress or that that's entirely a product of the guidance?

[00:19:42] Speaker 00:
uh... we believe that that's the best interpretation of the statute uh... but uh... what's statutory okay so can you help me with the statutory language because i'll just flag a couple things for you uh... one is in uh... fifty three twenty two when they set out the purposes and duties of the council uh... in a one h i think that's correct they phrase it as terms of

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Companies that may pose risks in the event of their financial distress or failure, and then obviously the money language most folks are talking about in 5323A1, emphasis is on could pose.

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Neither of those are

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Posing a threat to the financial stability because of their material financial distress, it's all in the event of, or could it pose in hypothesizing language like that, which doesn't seem to me as a textual matter in the statute, put aside the guidance right now, in the statute itself to command a specific finding that they are likely to fall into financial distress, let alone the repercussions of it.

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The Council read the statutes we do.

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When you look at the statutory factors, several of them go to the likelihood of the onset of financial distress.

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If you're highly leveraged in a bad market, you're more likely to experience financial distress.

[00:21:11] Speaker 00:
That could go either way.

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It could go both, but it certainly doesn't go to that.

[00:21:15] Speaker 00:
It depends on what question.

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Looking at leverage itself,

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doesn't, at least to me, answer the question of are we asking, are they really leveraged so that they are likely to go into stress, or if bad economic times come, what kind of internal financial wherewithal do they have to withstand that in a way that doesn't take others down with it?

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And so what in the text compels, because I thought you said the statute requires them to do it.

[00:21:43] Speaker 02:
I wouldn't say there's an explicit statutory compulsion.

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And I admit it would be a closer question, but we think it's unreasonable under Chevron Step 2 for this agency to embark on the process of designating a company and settling with an enormous cost if there's no real foreseeable possibility that it will experience financial distress in the horizon over which they have the opportunity to review.

[00:22:04] Speaker 00:
But do you agree we're all in Chevron Step 2 language on what this... I don't think there's an explicit statutory command that directly states it, but I think there's no permissible... So I think that means you agree we're in Chevron Step 2.

[00:22:13] Speaker 02:
I agree that I would say that red as a whole, it is unreasonable to view the statute.

[00:22:20] Speaker 02:
And red as a whole, the clear statutory command is you need to consider whether this company is reasonably likely.

[00:22:27] Speaker 02:
So is that Chevron step one and two?

[00:22:28] Speaker 02:
I would characterize it as Chevron step one on balance, but certainly Chevron step two.

[00:22:33] Speaker 02:
It's just totally unreasonable to send an agency on a fool's errand.

[00:22:36] Speaker 00:
What do you do in the event of language?

[00:22:38] Speaker 02:
I think it still begs the question, is that event going to come about?

[00:22:43] Speaker 02:
The language at 5323 is the more specific to this enterprise, and I think it's stronger for us.

[00:22:50] Speaker 02:
But if I could also mention, if I could turn to the other respect in which they departed from their standards, which is their exposure analysis.

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Because there, they departed from their own standards not only as stated in the final rule of interpretive guidance, where they said they would consider whether exposures were significant enough to materially impair.

[00:23:08] Speaker 02:
They restated that standard in the designation itself, and yet never applied their own test.

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Life came forward with expert evidence that its third party's exposures were not significant enough to materially pair.

[00:23:22] Speaker 01:
For example, we now- They did incant that language in the conclusion.

[00:23:27] Speaker 01:
They incanted it.

[00:23:28] Speaker 01:
Exactly.

[00:23:28] Speaker 01:
On both, with respect to both of the routes.

[00:23:31] Speaker 02:
And wherever they cite it in the brief, that's exactly what they're doing.

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They're invoking a term.

[00:23:36] Speaker 02:
But they never applied the test, and they simply paid no heed to evidence.

[00:23:41] Speaker 02:
We showed that there wouldn't be material impairment.

[00:23:44] Speaker 02:
I want to talk for a moment just about the stress testing.

[00:23:46] Speaker 02:
What we did was we said, let's look at other federal models that some of these member agencies use to test the fortitude of a company.

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And we showed that the impact of a med life failure on the major banks, and the major banks are central.

[00:24:00] Speaker 02:
to their analysis.

[00:24:01] Speaker 02:
We said the impact of a MetLife failure on the major banks, even assuming virtually a total loss, would be, for example, 173rd of the impact of an adverse economic event that they withstood under the stress test.

[00:24:15] Speaker 02:
So we said to FSOC, if this bank can withstand the stress test, surely it won't be materially impaired by

[00:24:23] Speaker 01:
Can I just ask you a question, a context setting question about this.

[00:24:27] Speaker 01:
So this deals with the way that the FSOC in the guidance defined how it was going to apply the threat standard.

[00:24:36] Speaker 01:
And it says that a threat to the financial stability exists if there would be an impairment of financial intermediation or of financial market functioning that would be sufficiently severe to inflict significant damage on the broader economy.

[00:24:47] Speaker 01:
So we're talking about the application of that verbiage.

[00:24:49] Speaker 02:
Although there's other verbiage throughout both the final interpretive guidance and the designation decision that talks about impacts on the counterparties.

[00:24:59] Speaker 02:
The theory is domino effect.

[00:25:01] Speaker 02:
And they never applied the domino theory.

[00:25:03] Speaker 02:
They just added up, said, well, that's a lot of exposure without taking account of federal stress test rules, which showed there wouldn't be a significant impact, without taking account of federal rules regarding collateral.

[00:25:15] Speaker 02:
We tried to explain to them, just context.

[00:25:19] Speaker 02:
The CEO of this company told the council this was the biggest threat to the company in its history, getting designated.

[00:25:25] Speaker 02:
And so one thing we said, look at your federal banking rules regarding collateral.

[00:25:30] Speaker 02:
Treat collateral in the same way here as you treat it on the federal banking rules, and our exposures drop by $30 billion.

[00:25:37] Speaker 02:
But F-stock said, we're not going to use.

[00:25:39] Speaker 02:
federal rules regarding how collateral is treated.

[00:25:41] Speaker 02:
So Mr. Stern talked about how hard the task before FSOC was.

[00:25:45] Speaker 02:
But when a task is hard, you use these expert federal models that existed elsewhere.

[00:25:51] Speaker 02:
You certainly respond to the evidence on stress testing, on the analogy that we drew to fines the government imposed and how much larger they were.

[00:25:59] Speaker 02:
It's not that the government had a bad argument.

[00:26:03] Speaker 02:
It ignored us.

[00:26:04] Speaker 01:
So is your argument that it's arbitrary and capricious, for example, on stress tests, not to conduct the stress test analysis that you put forward, it's arbitrary and capricious because it conflicts with the guidance, or is your argument that it's just arbitrary and capricious not to take that into account because it's an obvious thing that should have been taken into account?

[00:26:21] Speaker 02:
state farm, significant evidence, argument in the record that they didn't acknowledge or respond to it.

[00:26:30] Speaker 02:
They just ignored it.

[00:26:32] Speaker 02:
And that was just garden variety, arbitrary, capricious, particularly in a context where it's federal rules.

[00:26:38] Speaker 02:
and where they said, you know, we need guidance.

[00:26:42] Speaker 02:
Another place that they did it was with respect to simply their treatment of the state insurance expertise that Congress placed on that body.

[00:26:50] Speaker 02:
The independent state insurance experts on FSOC said they

[00:26:55] Speaker 02:
dissented.

[00:26:56] Speaker 02:
They said this is totally improbable.

[00:26:59] Speaker 02:
And they laid out in detail why it was that state regulators would intervene, how they always do that.

[00:27:06] Speaker 02:
And FSOC ignored that again.

[00:27:10] Speaker 00:
So it's claiming deference to expertise, but it ignored... Can I just ask you one thing on the stress tests?

[00:27:17] Speaker 00:
How do stress tests measure impact on others as opposed to

[00:27:22] Speaker 00:
the ability of the company itself, again, to its own internal wherewithal.

[00:27:28] Speaker 02:
The stress test that is conducted by the Fed against the banks hypothesizes an economic impact on a bank and hits it really hard, a severely adverse scenario, and says, how did that bank withstand it?

[00:27:43] Speaker 02:
What we did was we said, let's

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impose, let's look at how the impact on that bank of a MetLife failure compares to the adverse economic impact the Fed found that bank withstood.

[00:27:57] Speaker 02:
So we didn't suggest that a stress test be done on MetLife.

[00:28:00] Speaker 02:
We said, let's compare the impacts and the survivability.

[00:28:03] Speaker 02:
And we said, MetLife's impact is minuscule compared to what you, the federal government, said that bank could withstand.

[00:28:09] Speaker 02:
How could you now turn around and tell us that we're a threat to materially impair that very same bank?

[00:28:15] Speaker 00:
Isn't the question that's asked the impact of a MetLife failure or near failure at a time of already a severe downturn in the economy as opposed to a healthy economy?

[00:28:31] Speaker 00:
So it's not just that MetLife is an island unto itself facing financial distress and everyone else is having rosy days.

[00:28:38] Speaker 00:
The assumption for the analysis here is we kind of have to assume things are really going badly and MetLife is at least on the brink of insolvency or severe financial.

[00:28:51] Speaker 00:
failings and the rest of their partners or those that they interconnect with are themselves facing, maybe not as far down the road as MetLife is hypothesized to be, but facing a severe economic downturn.

[00:29:04] Speaker 00:
And so how does a stress test capture that sort of double whammy?

[00:29:09] Speaker 02:
Well, they certainly did set the stage to make it much easier for themselves by drawing all those adverse assumptions.

[00:29:16] Speaker 02:
But the short answer, Your Honor, is they just never responded to the analogies that we drew to assess what... Did your stress test your analogy, your evidence?

[00:29:25] Speaker 00:
analyze it on those terms or did it look at stress tests in ordinary financial times and in that context, for some reason a single failure of MetLife with everything else going along normally, what impact it would have?

[00:29:41] Speaker 02:
We did not, what we compared was a total

[00:29:45] Speaker 02:
loss of net-life exposure, which was unreasonable for reasons we elsewhere explained, with an adverse economic environment that was severely adverse that the banks could withstand.

[00:29:56] Speaker 02:
We didn't put another context around the net-life impact on the counterparty.

[00:30:00] Speaker 02:
On the other hand, they never even considered the evidence.

[00:30:02] Speaker 02:
They didn't respond in any way.

[00:30:04] Speaker 02:
Under Shannery, they're just out on that issue.

[00:30:06] Speaker 02:
Another issue they're out on that I do want to speak before I sit down is the asset liquidation scenario.

[00:30:12] Speaker 02:
Those 84 pages of the designation can be put aside for a simple reason.

[00:30:16] Speaker 02:
They all assume, the entire asset liquidation scenario assumes that MetLife won't act to stop and that the states won't act to stop the return of shareholder, the return of policies.

[00:30:29] Speaker 02:
The scenario they hypothesized was that MetLife was in such terrible shape that millions of policyholders were demanding their policies back.

[00:30:37] Speaker 00:
And yet, nonetheless... It's not just policyholders, right?

[00:30:40] Speaker 00:
There's a lot of people that hold debt the way MetLife system is set up.

[00:30:44] Speaker 00:
A lot of people hold a lot of money on MetLife.

[00:30:47] Speaker 00:
It's not just life insurance policies that are going to get turned in.

[00:30:50] Speaker 00:
I don't think that's quite fair to their analysis.

[00:30:53] Speaker 00:
It was much more comprehensive, given the sort of short-term debt that MetLife holds.

[00:30:57] Speaker 02:
Those enormous numbers they generated for the asset liquidation were predominantly from insurance liabilities.

[00:31:08] Speaker 02:
It disregards the state regulatory system.

[00:31:12] Speaker 02:
We didn't disregard it.

[00:31:14] Speaker 00:
They analyzed it, and they said, look, no one state regulator

[00:31:17] Speaker 00:
The whole point is that they're doing their own little pockets of what these businesses do and that there's nobody looking at MetLife as a whole and what that impact is going to be.

[00:31:29] Speaker 02:
But, Your Honor, MetLife also had its deferral authority that would have enabled it to stop the outflow.

[00:31:35] Speaker 02:
And what FSOC said was that MetLife might not exercise that because it would send a negative signal.

[00:31:42] Speaker 02:
which is a preposterous response.

[00:31:44] Speaker 02:
The deferral of power is required by state law.

[00:31:48] Speaker 02:
If your policyholders are coming to you by the millions demanding their policies by, you're not going to be worried about sending them in.

[00:31:54] Speaker 00:
What if it's not policyholders?

[00:31:55] Speaker 00:
What if it's people who hold debt?

[00:31:57] Speaker 02:
But, Your Honor, I'm getting at a slightly different point, which is how irrational it was for them to assume that MetLife wouldn't defer because it didn't want to send a negative signal.

[00:32:06] Speaker 02:
A death knell had already been sent.

[00:32:08] Speaker 02:
Under the Scenario 3, which MetLife told them was totally implausible, MetLife was not writing business anymore.

[00:32:16] Speaker 02:
If you called and tried to get a MetLife policy, they'd say, we don't do that anymore.

[00:32:19] Speaker 02:
And again, the average Joe policyholder is banging down the doors to return his life insurance policy.

[00:32:28] Speaker 02:
FSOC said that in that circumstance, MetLife wouldn't exercise deferral, even though MetLife said we would have a fiduciary duty to do so.

[00:32:35] Speaker 02:
In every other insurance failure that's been examined, either there was deferral exercised or state intervention, and Judge Millett, with respect to the efficacy of state intervention, with all respect, it wasn't FSOC that had the expertise on that.

[00:32:49] Speaker 02:
It was the state insurance regulators, and there were about 10 different letters submitted by state insurance regulators who said, we do this regularly, and it works very well.

[00:32:59] Speaker 02:
And the non-insurance experts on FSOC just speculate that maybe it wouldn't work here.

[00:33:05] Speaker 02:
But that's not grounded in expertise.

[00:33:07] Speaker 02:
They essentially engaged in a flight from the expertise that Congress put on that body.

[00:33:13] Speaker 01:
Can I ask you to address a broader question, which is the statute has provisions that deal with banks, bank holding companies, and then has provisions that deal with non-financial companies.

[00:33:24] Speaker 01:
And as to the former, it occasions the Federal Reserve's authority any time there's $50 billion in assets, period.

[00:33:34] Speaker 01:
without worrying about a lot of the things that we've been talking about this morning.

[00:33:40] Speaker 01:
And because it assumes that there's an interconnectedness and ripple effects and things of that nature that justify the added regulatory burden.

[00:33:48] Speaker 01:
If the FSOC goes through the analysis and determines that a company like MetLife has a similar scale of interconnectedness and it's similarly significant in the overall economy, then doesn't the fact that the statute speaks in terms of 50 billion automatically occasioning Federal Reserve authorities suggest that a lot of the things we've been talking about this morning may be things that the FSOC could have looked at, but that they weren't out of bounds for not looking at them?

[00:34:16] Speaker 02:
I agree there were other ways that this agency could have approached the designation of a non-bank CFI.

[00:34:25] Speaker 02:
We're not asking you to ordain that there was one specific way that it could be done.

[00:34:30] Speaker 02:
What we're asking you to rule is that they set about doing it in a particular way, and then they did it in an unreasonable way.

[00:34:36] Speaker 02:
The disregarded evidence didn't even respond to really important evidence, for example.

[00:34:41] Speaker 02:
With respect to your question more broadly, banks and insurance companies are different.

[00:34:45] Speaker 02:
And that's precisely why having assets significantly in excess of $50 billion when you're not a bank doesn't pose the same kinds of concerns that might in the bank.

[00:34:58] Speaker 02:
And briefly, banks are much more connected within the financial system, and they're very prone to runs.

[00:35:04] Speaker 02:
One of the difficulties, Judge Malik, that we had with this run scenario they hypothesized is that it's a creature of the banking world.

[00:35:11] Speaker 02:
where people have their money in a bank because they want ready access to their money, whereas you buy a life insurance policy for a completely different reason.

[00:35:21] Speaker 02:
MetLife hired a firm to examine historical insurance failures, and they reflected an extremely different pattern than the failure of a bank.

[00:35:30] Speaker 02:
And in these analyses that Oliver Wyman did, the expert firm, it actually significantly increased the distress at MetLife

[00:35:40] Speaker 02:
and the asset sales that were going on far beyond any historical model.

[00:35:45] Speaker 02:
For example, there, Oliver Wyman's scenario to was a G, which is a highly publicly observed failure that took over place over several months before the federal government intervened.

[00:35:58] Speaker 02:
That was scenario to nobody thinks

[00:36:00] Speaker 02:
scenario two would adversely affect broader markets.

[00:36:04] Speaker 02:
Scenario three, if you look at Joint Appendix 1187, you'll see the pace of asset sales, which MetLife told FSOC, was totally implausible.

[00:36:13] Speaker 02:
It's far faster than had ever been seen from an insurance company.

[00:36:15] Speaker 02:
So we were willing to give some margin, some benefit of the doubt, to be protective.

[00:36:22] Speaker 02:
That Oliver Wyman scenario three analysis still showed that MetLife could meet this totally unreasonable demand on its assets and still not adversely affect the economy.

[00:36:33] Speaker 02:
Remembering again that if the state regulators do what they said they would do, what they historically do, what they're required by law to do, you would never be in that asset liquidation scenario.

[00:36:45] Speaker 04:
Can I ask you?

[00:36:45] Speaker 04:
Before you sit down, one of the points you made, as I understand it, is that the council never considered the impact of designation on MetLife.

[00:36:58] Speaker 04:
The amicus brief filed by the academic experts points out that there is an executive order outstanding issued by President Clinton requiring the cost of regulation to be considered.

[00:37:13] Speaker 04:
My question is, does that executive order apply to this council, which is made up of various individuals?

[00:37:20] Speaker 02:
I don't know if it applies by its terms.

[00:37:23] Speaker 02:
It is an unusual body.

[00:37:25] Speaker 04:
It's not executive officers.

[00:37:27] Speaker 02:
It does.

[00:37:28] Speaker 02:
I believe the majority of its voting members are indeed executive officers.

[00:37:32] Speaker 02:
Now, some of them are independent agencies.

[00:37:34] Speaker 02:
So you have a difference there when it comes to the executive order.

[00:37:37] Speaker 02:
But what I would like to emphasize about that is, first of all, again, the Cheney doctrine, which is so fatal to so much of what FSOC would like to argue now.

[00:37:47] Speaker 02:
They gave one reason.

[00:37:49] Speaker 02:
for not considering the impact on that life in the broader economy of what the CEO stood before these powerful regulators and said was the biggest threat in the company's history.

[00:37:57] Speaker 02:
They gave one reason, and here's what it was.

[00:37:59] Speaker 02:
They sort of, well, statutory sections A through J are the mandatory factors to consider.

[00:38:06] Speaker 02:
You're asking us to consider the adverse effects on that life in the broader economy under the catch-all at K. They said, well, we're not going to consider it under the catch-all at K because it's not one of the mandatory factors at A through J. I mean, that's just a quintessence.

[00:38:19] Speaker 00:
I don't think that's what they said.

[00:38:20] Speaker 00:
I think they said it's not looking at the same concerns.

[00:38:23] Speaker 00:
It was sort of the...

[00:38:24] Speaker 00:
you know, words known by the company it keeps, and so that they wanted to make sure that when they talked about other risk-related factors down there, that it would have the same face, it would face the same types of risks as the factors that were before it.

[00:38:38] Speaker 00:
Isn't that exactly how they did it?

[00:38:40] Speaker 02:
That's their position now.

[00:38:41] Speaker 00:
They didn't say it wasn't one of those other factors.

[00:38:44] Speaker 02:
They did.

[00:38:45] Speaker 02:
When you read that paragraph, they gave

[00:38:50] Speaker 02:
I don't have that immediate page in front of me.

[00:38:53] Speaker 02:
I apologize, but I could find it quickly.

[00:38:56] Speaker 02:
They gave this all of one paragraph.

[00:38:59] Speaker 02:
And in it, their emphasis was on what the statute required.

[00:39:04] Speaker 02:
And they said because it wasn't statutorily required, they weren't going to examine it.

[00:39:09] Speaker 02:
And again, that makes hash out of a catch-all.

[00:39:12] Speaker 02:
I also want to emphasize that we were not asking for a quantitative cost-benefit analysis in the manner even of the executive order, Judge Redolf.

[00:39:21] Speaker 02:
All we were saying was, because this statute is meant to be protective of designated companies, you ought to consider whether this will be protective or harmful

[00:39:29] Speaker 02:
And they said, well, it's not a staturally mandated factor, so we're not going to want to consider it.

[00:39:33] Speaker 01:
Is MetLife's argument on that score that the designation itself will enhance the possibility that MetLife will go into financial distress?

[00:39:42] Speaker 02:
What we explained was that it would make MetLife less profitable, weaker.

[00:39:47] Speaker 02:
It would harm the company.

[00:39:49] Speaker 02:
And we didn't say it would drive it to bankruptcy.

[00:39:51] Speaker 00:
The designation or the prudential standards that the board would impose?

[00:39:57] Speaker 02:
At the time we were before FSOC until literally the last day, they were required to apply capital standards that were the same as those applied to banks.

[00:40:06] Speaker 02:
And that's what we analyzed it under.

[00:40:08] Speaker 02:
And those capital standards are extremely adverse for an insurance company.

[00:40:11] Speaker 00:
When you say they, are you talking about the board or the council?

[00:40:14] Speaker 02:
The Fed.

[00:40:16] Speaker 02:
But under any regime, the capital standards applied to FSOC are required to be

[00:40:26] Speaker 02:
higher than those otherwise applied, which means as a matter of law, once you're designated, you have to have capital standards higher than the great majority of your competitors.

[00:40:35] Speaker 00:
My understanding is that the board, once someone is designated, then makes an individualized, and it's okay if you don't need to hunt for it, that's fine, I don't want to distract you.

[00:40:47] Speaker 00:
The board then makes an individualized study and it may well, you're probably right in predicting there's certainly a good chance that it will impose these same requirements that it has out there.

[00:40:59] Speaker 00:
My question to you is more a procedural one.

[00:41:01] Speaker 00:
If the problem is the consequences of the regulations themselves,

[00:41:07] Speaker 00:
Do you have an opportunity, my assumption is you do, have an opportunity to challenge whatever regulatory plan the board devises for MetLife and if so,

[00:41:22] Speaker 00:
I assume you'd be perfectly free to raise this cost argument there once we have an actual regulatory program in front of us to look at.

[00:41:31] Speaker 02:
A two-part answer.

[00:41:33] Speaker 02:
As the law is now, because there was a congressional amendment that very day,

[00:41:38] Speaker 02:
As the law is now, once you're designated, you must have higher capital standards, which automatically makes you less profitable.

[00:41:46] Speaker 02:
As the law was, until literally the day of designation, those capital standards also had to be the heightened standards applicable to a bank.

[00:41:53] Speaker 02:
There are other things that follow immediately.

[00:41:55] Speaker 02:
from designation.

[00:41:57] Speaker 02:
You were subject to Fed oversight, which is among the most intrusive forms of regulation in the federal government.

[00:42:03] Speaker 02:
When we prevailed in this case before the district court, it resulted in approximately a dozen federal bank examiners who had been on our property for months to have to leave.

[00:42:12] Speaker 02:
And yet, remarkably, the federal government argues in its brief that our constitutional interests weren't even implicated in this case.

[00:42:18] Speaker 02:
So a number of things that fall from designation.

[00:42:21] Speaker 02:
Your Honor, it's JA 391.

[00:42:24] Speaker 02:
I'm sorry.

[00:42:25] Speaker 00:
I'm sorry to have distracted you.

[00:42:27] Speaker 02:
I also want to briefly mention.

[00:42:29] Speaker 00:
So that was the executive summary where they did that.

[00:42:32] Speaker 02:
Your Honor, that's what's disturbing about it.

[00:42:34] Speaker 02:
They gave one paragraph to our argument that you are going to harm this company.

[00:42:39] Speaker 02:
The CEO stood before these very powerful federal regulators and said, this is one of the greatest threats we face.

[00:42:45] Speaker 02:
And they said that the impact of their actions was not of their concern, which is so extraordinary for a regulator to say,

[00:42:53] Speaker 02:
We're not really going to worry ourselves with whether we adversely affect you or whether we even further the purposes of the statute.

[00:42:59] Speaker 02:
That's just garden variety, arbitrary and capricious.

[00:43:02] Speaker 01:
On that part of it, whether it furthers the purposes of the statute, I guess

[00:43:05] Speaker 01:
As I understand it, what's going on is to the extent that your argument is that designation occasions consequences that are adverse to the company, Congress viewed designation to be part of the cure.

[00:43:19] Speaker 01:
And it seems a bit odd to say that the cure that Congress deemed warranted actually occasions the harm that Congress was trying to avert.

[00:43:29] Speaker 01:
Because Congress already decided what should happen.

[00:43:32] Speaker 01:
It might have been wrong, or it might have been short-sighted, but from the agency's perspective, isn't the agency stuck with what Congress says should happen in these circumstances?

[00:43:39] Speaker 02:
Well, Your Honor, suppose I'm right.

[00:43:41] Speaker 02:
Suppose I'm right in an even more severe case where designation will indeed cause deep financial distress, cause failure, radiate out, and adversely affect the economy.

[00:43:52] Speaker 02:
Would Congress have wanted the Council to consider that?

[00:43:55] Speaker 02:
Absolutely.

[00:43:56] Speaker 02:
But their answer was, it's none of our business.

[00:43:57] Speaker 02:
It's none of our business concern ourselves with the impact of our action, which is wrong.

[00:44:01] Speaker 02:
A related point, one of the reasons you look at impact and you look at cost is in order to consider better alternatives.

[00:44:08] Speaker 02:
And we got the same kind of answer on alternatives.

[00:44:10] Speaker 02:
And this was just a couple of sentences, and you might ask me where, and I might have to look, and I apologize.

[00:44:15] Speaker 02:
But it's hard to find, suffice it to say.

[00:44:18] Speaker 02:
I mean, this is, again, just heartland state farm.

[00:44:20] Speaker 02:
You consider the impacts to assess whether alternatives are superior.

[00:44:24] Speaker 02:
And one of MetLife's repeated points to FSOC was for asset managers who manage trillions more in assets, $5 trillion, $3 trillion, we said you're taking this activities-based approach.

[00:44:37] Speaker 02:
We'd ask that you take this activities-based approach for us.

[00:44:41] Speaker 02:
And in fact,

[00:44:42] Speaker 02:
Initially, FSOC had been looking at company-by-company designation for asset managers, but now it's shifted toward an activities-based approach, and that, like I said, we'd like the same.

[00:44:52] Speaker 02:
And FSOC just said, well, we're not going to consider that for you because we're not considering that for you.

[00:44:57] Speaker 02:
That was their response.

[00:44:59] Speaker 02:
which is just heartland, arbitrary, capricious.

[00:45:02] Speaker 02:
That sprang, in turn, from a process where the same people who had investigated and were now prosecuting the case against us were also involved in adjudicating it, which in turn manifested itself, and I think... Were they involved in the formulation of the regulations and the guidance, too?

[00:45:19] Speaker 02:
They were.

[00:45:19] Speaker 02:
This staff.

[00:45:21] Speaker 04:
Is that argument a due process argument or a separation of powers?

[00:45:25] Speaker 02:
It's both, Your Honor.

[00:45:26] Speaker 02:
The cases tend to focus a bit more on due process.

[00:45:28] Speaker 04:
I notice that the government, or not the government, the council invokes a state court decision of the Supreme Court of the United States, that Winthrop case, which I take it has nothing to do with separation of powers.

[00:45:42] Speaker 02:
That's correct, Your Honor.

[00:45:45] Speaker 02:
And there are other important differences from Winthrop

[00:45:48] Speaker 02:
All Withros said was you look at whether there's a risk of bias and some mixing and blending by itself isn't enough, but we have more here.

[00:45:56] Speaker 02:
We have the fact that the record was withheld from that life, so there were secret evidence that we didn't even get to see until we... That's what I asked one predicate question.

[00:46:05] Speaker 00:
That sure sounds like a due process argument that you're making now, not a separation of powers one.

[00:46:10] Speaker 00:
What is the protected property interest?

[00:46:12] Speaker 02:
Well, and they, gentlemen, they argue there's not.

[00:46:16] Speaker 02:
It's manyfold.

[00:46:17] Speaker 02:
MetLife has paid millions in assessments to the government as a designated entity.

[00:46:23] Speaker 02:
That's required, I believe it's under Section 5330.

[00:46:27] Speaker 02:
As I mentioned, it immediately became subject to Fed supervision.

[00:46:30] Speaker 02:
There were about a dozen federal bank examiners on its premises for months or maybe a year after it got designated.

[00:46:36] Speaker 02:
That is obviously a direct constitutional interest.

[00:46:38] Speaker 02:
To me, it's remarkable.

[00:46:40] Speaker 02:
the government would have told you that we had no constitutional interest in avoiding paying millions in assessments, in avoiding being subject to federal supervision, in avoiding having banking centers on its property.

[00:46:51] Speaker 02:
But again, that comes to how cavalier FSOC was toward the consequences of what it was doing to this great American company.

[00:47:02] Speaker 02:
They also withheld from us their own precedents.

[00:47:05] Speaker 02:
They would not give us the pro-designation decision

[00:47:09] Speaker 02:
or the AIG decision, even though obviously we would have wanted to pour over those to see how we could better frame our arguments.

[00:47:16] Speaker 02:
And yet, when it came to litigation in the district court, they very quickly provided their decision against us to their amici so their amici could file briefs.

[00:47:26] Speaker 02:
That's not fair.

[00:47:27] Speaker 02:
And it reflects this prejudice, this lack of balance that was an outgrowth of the kinds of concerns that Withrow recognized are indeed very substantial.

[00:47:39] Speaker 00:
Your separation of powers argument, I understand that there's statutory requirements that were imposed upon you once there was designation.

[00:47:49] Speaker 00:
Those weren't imposed by the council.

[00:47:52] Speaker 00:
Did the council impose

[00:47:55] Speaker 00:
any regulations on you through its designation, distinct from what the statute already put in place?

[00:48:02] Speaker 02:
What the Council did, Your Honor, is triggered.

[00:48:06] Speaker 02:
duties and burdens that occur as a matter of law through designation.

[00:48:12] Speaker 00:
Congress said when they made a designation, these things followed, and indeed they did.

[00:48:16] Speaker 00:
The things that followed were imposed by Congress.

[00:48:20] Speaker 02:
But they were direct impacts on that life.

[00:48:23] Speaker 02:
It certainly implicated its constitutional interests in not having to pay assessments and not having to yield some of its property to the bevy of bank examiners and the like.

[00:48:34] Speaker 02:
So I was talking about due process, and simply my point there is that Withrow talks about something more than just this mixing.

[00:48:42] Speaker 02:
You certainly had something more in this case.

[00:48:45] Speaker 02:
Unless there are any further questions, I just would like to emphasize again, we're in the heartland of State Farm, arbitrary and capricious review.

[00:48:52] Speaker 02:
You've heard from Mr. Stern that these are challenging decisions to make.

[00:48:55] Speaker 02:
All the more reason to call upon existing federal rules, which would have informed what they were doing, like rules about collateral.

[00:49:04] Speaker 02:
All the more reason to give weight to the insurance expertise that Congress put on this body.

[00:49:12] Speaker 02:
FSOC cannot disregard the insurance expertise that Congress put on this body and then turn around and claim deference to judgments it made that were primarily about the insurance industry.

[00:49:22] Speaker 02:
Finally, what FSOC did was conducted this assessment in a manner that was not even-handed, so that measures that ordinarily are protective and are recognized as such both by the federal government and the states were suddenly turned into risk factors, including when the states intervene or when MetLife exercises deferral authority.

[00:49:42] Speaker 00:
I'm sorry, just to clarify one thing going out of here.

[00:49:46] Speaker 00:
For all the reasons you've given, do you say that they all are both Chevron step one, reading the statute in a way that I guess you would say is reasonable and workable, or is this all your State Farm Chevron step two and it's just a failure of appropriate analysis?

[00:50:05] Speaker 02:
virtually all state farm Chevron step to your honor.

[00:50:09] Speaker 02:
We are not here making a tall claim that no insurance companies can be designated.

[00:50:13] Speaker 02:
We're simply saying that in this case, they made some very rudimentary errors that time and again, this court have recognized would result in vacating.

[00:50:24] Speaker 02:
And importantly, under the national fuel gas supply decision of this court, the failure of

[00:50:30] Speaker 02:
any part of their analysis is sufficient to dune the hole because they said they were relying on all parts and not resting on different components alternatively.

[00:50:39] Speaker 02:
Thank you.

[00:50:39] Speaker 02:
Thank you.

[00:50:54] Speaker 01:
Mr. Stern will give you back three minutes to start and we'll

[00:50:58] Speaker 03:
Thank you, Your Honor.

[00:51:01] Speaker 03:
There are a lot of things said.

[00:51:02] Speaker 03:
A lot of those are addressed point by point in our reply brief, sort of in probably more detail than I could hope to accomplish now.

[00:51:12] Speaker 04:
Your reply brief doesn't deal with the, I mentioned to Mr. Scalia, the academic experts in this brief.

[00:51:22] Speaker 04:
Your reply breach doesn't deal with that at all, does it?

[00:51:28] Speaker 03:
I'm sorry, Your Honor.

[00:51:29] Speaker 03:
Was this the point about the requirement to take the cost benefit?

[00:51:34] Speaker 04:
Well, it's also that risk regulation necessarily involves an evaluation of the likelihood of the risk occurring.

[00:51:45] Speaker 03:
Your Honor, that's not what the risk is.

[00:51:47] Speaker 04:
And the ample authorities, they cite Federal Reserve rules, they cite other agency rules that take that into account.

[00:51:55] Speaker 03:
I mean, Your Honor, nobody thinks that all the 30 banks that are subject to Federal Reserve regulation under Dodd-Frank are all likely to fail.

[00:52:05] Speaker 03:
I mean, that's not why we have these regulations.

[00:52:08] Speaker 04:
That's not the question.

[00:52:08] Speaker 04:
The question is whether they can take into account the likelihood of failure.

[00:52:13] Speaker 03:
Your Honor, that's whether they could take it into account or whether they needed to take it into account.

[00:52:19] Speaker 03:
And again, if you look at AIG,

[00:52:22] Speaker 03:
which is really, I think, the sort of quintessential example of what Congress had in mind was it recognized that there were institutions that dealt heavily in the capital markets that nobody had predicted were going.

[00:52:37] Speaker 04:
Yeah, why not?

[00:52:38] Speaker 04:
You made that argument.

[00:52:39] Speaker 04:
But the reason I said could is because I understood your opening argument to mean or to say that it was impossible to do any kind of predictive judgment.

[00:52:49] Speaker 03:
I do think that it's very, very hard.

[00:52:52] Speaker 04:
Did the council ever say that?

[00:52:55] Speaker 03:
Yeah.

[00:52:56] Speaker 03:
The Council does talk about that, and it talks about 2008, and it cites all of, I mean, and it explains the background of this and says that once a financial crisis develops, how it's going to proceed is extremely difficult to predict.

[00:53:14] Speaker 03:
And what the Council did was not to say, this for sure will happen one way or the other.

[00:53:20] Speaker 03:
I mean, nobody can, like, do that.

[00:53:23] Speaker 03:
Like, what it said is, these are the ways in which things could happen, and this is an institution that, you know, we can, like, there's a dispute about whether there's $183 billion of exposure.

[00:53:37] Speaker 03:
MedLife says, no, that's $90 billion of exposure because there would be, like, recovery rates, to which the Council said, look, we're not saying that there's going to be

[00:53:50] Speaker 03:
$83 billion of losses on the part of your counterparties.

[00:53:55] Speaker 03:
What we're saying is this is a measure of how large and interconnected you are, and if you think that $90 billion of losses is the right figure, that's an extraordinarily high figure.

[00:54:07] Speaker 03:
I mean, it's hard to know who, like, other than, like, I mean, MetLife is the quintessential

[00:54:17] Speaker 03:
in mind when it passed Doc Frank.

[00:54:21] Speaker 03:
You know, this is it.

[00:54:24] Speaker 00:
Can you address some of their concerns about, at least in the exposure transmission channel, and that part of the analysis, the lack of, as they say, concrete analysis of what the impact is going to be on other companies, such as using stress tests, or such as using what they call CCAR testing, those types of things.

[00:54:47] Speaker 00:
There wasn't much, it's very big,

[00:54:54] Speaker 00:
And it reaches into an awful lot of industries with an awful lot of money on the line.

[00:55:02] Speaker 00:
And so therefore, it's going to satisfy the exposure channel.

[00:55:07] Speaker 00:
Does that make anything more concrete?

[00:55:08] Speaker 03:
I mean, the council's discussion is a whole lot more specific

[00:55:11] Speaker 03:
I mean, I know that the length of the decision alone doesn't tell you whether it's a good and comprehensive decision, but I've actually read through these 341 pages a few times, and it is really useful.

[00:55:28] Speaker 00:
pages, which I've also read, there isn't a lot of concreteness there about the impact.

[00:55:34] Speaker 00:
It seems to be a determination, maybe this is defensible or not, that's what I'm asking you, that look, this is so big, so much money, and their exposure sort of tentacles reach in so many different, so deep and so far, in so many places with so much money, that we just conclude that there's bound to be the type of impact that would cause severe financial

[00:55:57] Speaker 00:
distress on the economy.

[00:55:59] Speaker 00:
Is that what they need to do or do they need to, they make a reasonable enough sounding argument that you can't just say we're really big and we're in a lot of areas.

[00:56:10] Speaker 00:
You really have to look at how it's going to impact the companies and when you look at the companies by companies that they're interacting with, they can withstand it.

[00:56:18] Speaker 03:
Well, but the issue isn't whether any one company would go under.

[00:56:23] Speaker 03:
I mean, we discussed in our reply brief that the problem with AIG was not, as we know, that its specific counterparties were going to necessarily fail if AIG went under.

[00:56:36] Speaker 03:
It was the extent to which AIG was going to contribute

[00:56:40] Speaker 03:
to like the failure of AIG was going to contribute to like a really scary economic situation and you don't have to.

[00:56:51] Speaker 00:
But you've already baked into the question you're asking in the first place, a pretty scary economic situation, and that is that everybody in the economy is facing a severe downturn and that MetLife, a company of that size, is on the brink of insolvency.

[00:57:04] Speaker 00:
So I don't think

[00:57:05] Speaker 00:
taking that assumption and trying to analyze its consequences, in analyzing those consequences, you're not specific enough when you say, well, it's really, really a bad situation here, so we assume bad things are going to happen.

[00:57:17] Speaker 03:
I mean, I just, I'd refer the court to, I mean, we give a lot of sites, particularly in our reply brief, and I mean, in the end, the determination has to speak for itself.

[00:57:27] Speaker 03:
And we think that the determination goes into, like, doesn't just say you're in a lot of places, you've got tentacles.

[00:57:35] Speaker 03:
It describes in detail the kinds of transactions, the securities lending program, the guaranteed investment contracts.

[00:57:45] Speaker 03:
multiple other financial instruments in the capital markets.

[00:57:49] Speaker 03:
It talks about who, like, counterparties are.

[00:57:53] Speaker 03:
I mean, it sort of walks through.

[00:57:55] Speaker 01:
So what about the kind of testing that they point out could have been done but wasn't done?

[00:58:00] Speaker 01:
Is your response to that kind of testing, including the stress tests, is your response to that that it would have been counterproductive to do it and there was a problem?

[00:58:08] Speaker 01:
Or is it just that we could have done it and maybe it would have been illuminating, but we just didn't have to?

[00:58:14] Speaker 03:
Well, I mean, I think there are a couple of answers.

[00:58:17] Speaker 03:
We note in our reply group that the Council did conduct some tests that, like, are sort of analogous to stress tests.

[00:58:24] Speaker 03:
But again, the point of the stress test is to predict just, like, are you going – I mean, it sort of takes us full circle.

[00:58:32] Speaker 03:
I mean, the point of the stress test is, are you going to fail?

[00:58:36] Speaker 01:
I thought the point of the stress test was to assess what happens in the event that the failure comes about.

[00:58:45] Speaker 01:
Doesn't it go to the way that the institution reacts in that situation also?

[00:58:51] Speaker 03:
Well, I think that there are two different arguments that were being made.

[00:58:55] Speaker 03:
One is that the council should have conducted a stress test.

[00:58:59] Speaker 03:
And the other is that there were stress tests done on banks, and that the banks wouldn't fail.

[00:59:07] Speaker 03:
And even banks that did a lot of business with Medlife weren't failing the stress test.

[00:59:16] Speaker 03:
And again, the point is not whether any one institution would fail.

[00:59:21] Speaker 03:
And under that theory, what you would have is since only one bank in the June stress tests came away with anything less than a total clean bill of health, what that's telling you is essentially, is that the council couldn't designate anybody.

[00:59:39] Speaker 03:
And that's, you know, it's sort of an apples and oranges kind of question.

[00:59:45] Speaker 03:
We aren't looking to see

[00:59:50] Speaker 03:
go under.

[00:59:51] Speaker 03:
What we're looking at is sort of a whole series of events with lots of different counterparties, lots of third parties, and, you know, MedLife sort of poo-poos like the impact on third parties, but that's absolutely crucial because, as the council explained, those third parties don't necessarily know the risk, the exposure of MedLife's own counterparties.

[01:00:17] Speaker 03:
You get a freezing up.

[01:00:19] Speaker 03:
sort of the entire flow once things start to go downhill.

[01:00:24] Speaker 00:
And again, it sounds like the asset liquidation channel is driving everything here.

[01:00:29] Speaker 00:
That all this analysis of what they have, what they're going to do, how much they're going to have to call in, who's going to call in other things on them.

[01:00:36] Speaker 00:
All of that analysis seems to make it essentially foreclosed.

[01:00:40] Speaker 00:
It's hard to imagine how anything could ever

[01:00:43] Speaker 00:
when it has, when it satisfies the asset liquidation factor, isn't going to necessarily satisfy the exposure transmission channel because golly gee, there's really nothing more to look at because we've just found that they have a lot of, a huge amount of money, a lot of exposure.

[01:01:04] Speaker 03:
It just doesn't seem like that we can be rigor to that.

[01:01:09] Speaker 03:
Whether or not that's true, I don't think there's anything.

[01:01:13] Speaker 00:
Well, they have to find, I mean, according to the council, they have to meet both forms of that test.

[01:01:19] Speaker 00:
No, I don't think that's true.

[01:01:20] Speaker 00:
That's not right.

[01:01:20] Speaker 00:
Well, at least they're telling us they relied on determinations under both prompts.

[01:01:25] Speaker 03:
Right, but I mean, look, if you look, I mean, if in the end, look,

[01:01:29] Speaker 03:
one looks at this and goes, gee, like, the exposure channel really is most informative in that it tells me about the problem of asset liquidation.

[01:01:38] Speaker 03:
And let's just assume that that was a conclusion.

[01:01:40] Speaker 03:
There's nothing wrong with that.

[01:01:42] Speaker 03:
You know, the question is, did MetLife apply the factors in the statute to make the determination?

[01:01:50] Speaker 03:
It did respond to, like, sort of the sort

[01:01:57] Speaker 03:
of information, you know, that were put forth.

[01:02:00] Speaker 03:
I'd like to say, like, in terms of, like, the, like, cost-benefit analysis, which, like, the theory of the cost-benefit keeps changing a little bit.

[01:02:08] Speaker 03:
Is it, like, a cost – is it a cost-benefit to med life, or is it a cost-benefit to the overall, sort of, like, point of the statute, which –

[01:02:19] Speaker 03:
apply to this council?

[01:02:21] Speaker 03:
I don't know the answer, Your Honor, but if it's an executive order that, I mean, I'm familiar with the executive order that applies to regulations.

[01:02:29] Speaker 03:
This isn't, I mean, this determination is not a regulation, so I don't know if... Well, the guidance is, in a way.

[01:02:36] Speaker 04:
One wonders whether the guidance was in compliance with the executive order and should be construed that way.

[01:02:45] Speaker 03:
I mean, the guidance is specifically not a regulation.

[01:02:48] Speaker 03:
I mean, it makes that very clear.

[01:02:51] Speaker 03:
So I don't think that the executive order by its terms would apply.

[01:02:55] Speaker 04:
The guidance is, the regulation is an interpretation of the statute.

[01:03:00] Speaker 04:
The guidance is an interpretation of the regulation.

[01:03:04] Speaker 04:
and the decision here is an interpretation of the guidance.

[01:03:08] Speaker 03:
I don't think that actually the guidance is an interpretation of the regulation.

[01:03:12] Speaker 03:
I mean, it's really just explaining how the council is going to proceed.

[01:03:18] Speaker 03:
It makes very clear that it's not adding anything to the statute, nor of course is it taking away anything from the statute.

[01:03:28] Speaker 03:
And the arguments about the impact

[01:03:30] Speaker 03:
I mean, what the council itself said in the pages that were being cited is, look, we look

[01:03:38] Speaker 03:
the process of, like, the Federal Reserve's, like, credential regulations and what they're going to say.

[01:03:45] Speaker 03:
And by the way, they haven't established, like, what the capital requirements may be.

[01:03:50] Speaker 03:
And they're supposed to, by statute, tailor these requirements for insurance companies.

[01:03:56] Speaker 03:
This is all, like, sort of out there, and it's the Federal Reserve Board that does this.

[01:04:02] Speaker 03:
It's not the Council.

[01:04:03] Speaker 03:
And will that be subject to challenge once it's issued?

[01:04:05] Speaker 03:
Absolutely, Your Honor.

[01:04:06] Speaker 03:
I mean, the regulations.

[01:04:09] Speaker 03:
I mean, what the Council simply said is, look, our job in this is to make a determination.

[01:04:17] Speaker 03:
Federal Reserve regulations, if they are in fact counterproductive, because the statute looks quite clear, you're not supposed to be counterproductive.

[01:04:26] Speaker 03:
If the Federal Reserve regulations were, and I'm not obviously suggesting that they are or will be, but if they were, they would certainly be subject to challenge.

[01:04:40] Speaker 03:
Thank you very much.

[01:04:41] Speaker 01:
Thank you, counsel.

[01:04:42] Speaker 01:
The case is submitted.