Wednesday, July 8, 2015

Case Of MetLife Shows It Is Hard To Define Systemically Important Financial Institutions

See MetLife Calls the Regulators’ Bluff: Its lawsuit shows that only hollow claims justify the designation of financial firms as systemically important by Peter J. Wallison, WSJ. Excerpts:
"Lehman’s role in the crisis is questionable. There was chaos after it failed, but this was due to the government’s sudden reversal of the policy it established six months earlier with the rescue of Bear Stearns. That reversal upended the expectations of market participants;"

"no large financial firms failed as a result of Lehman’s bankruptcy. This means there is no real evidence for the widely held idea that large financial institutions are so interconnected that the failure of one will drag down others."

"the metrics the FSOC uses to show dangerous interconnections have never been disclosed."

"Met Life submitted evidence showing that even its total collapse would not pose a threat to other large firms. For example, in the unlikely event that the largest U.S. banks were to lose 100% of their exposure to MetLife, their losses would not exceed 2% of their capital. By comparison the fines recently levied on the largest U.S. banks by the Justice Department were four times as large. Yet those fines had no observable effect on the health of the banks involved."

"even in the implausible event that all policyholders were to surrender their policies and ask for return of their cash values—and all other MetLife liabilities that could accelerate would immediately become due—the firm could still liquidate enough assets to cover its liabilities “without causing price impacts that would substantially disrupt financial markets.” The FSOC produced no data to contradict this evidence."

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