WASHINGTON-U.S. oversight of MetLife Inc. was called into question Monday at a court hearing where the Obama administration sought to reassert the federal government's authority to regulate the large insurance firm.
Judges at the U.S. Court of Appeals for the District of Columbia Circuit asked pointed questions to government lawyers and at times appeared to express sympathy for MetLife during a hearing that lasted more than an hour.
But the three-judge panel pushed back on some of MetLife's arguments as well, and didn't clearly indicate its direction for a final decision. It could take months before the panel issues an opinion.
The Financial Stability Oversight Council, a group of senior regulators known as FSOC, is appealing to the court to reassert federal oversight of MetLife. It voted in December 2014 that the company was a "systemically important financial institution" deserving of stricter regulation, but U.S. District Judge Rosemary Collyer earlier this year overruled that decision, saying it was unreasonable and based on a "fatally flawed" process.
Judge Collyer was appointed by President George W. Bush.
The panel hearing Monday's arguments included two appointees of President Barack Obama, Judges Sri Srinivasan and Patricia Millett, as well as Judge A. Raymond Randolph, an appointee of President George H.W. Bush.
Beyond issues related to MetLife directly, the case holds broader significance.
The ability to bring large financial companies such as MetLife under tougher rules was an important piece of the 2010 Dodd-Frank financial overhaul. The law created the council to watch for gaps in financial regulation and to tag financial companies for stricter oversight if it determined their failure could put the broader economy at risk.
Judge Collyer's decision, if upheld, would call into question other instances where the Obama administration has used that authority, especially in the cases of American International Group Inc. and Prudential Financial Inc.
The Obama administration is also trying to protect the legacy of Dodd-Frank. The law has faced other legal challenges as well, including a recent ruling finding the structure of the Consumer Financial Protection Bureau unconstitutional.
During Monday's hearing, Judges Millett and Srinivasan interrupted Mark Stern, an appellate litigation counsel at the Justice Department, several times to ask how his arguments were supported in public statements the FSOC has made. The judges could rule in MetLife's favor if they decide the regulators didn't adequately explain their procedures or reasoning.
Judge Millett, when discussing MetLife's contention that the FSOC hadn't adequately supported its conclusions, said part of the company's argument seemed "reasonable enough."
"You can't just say [MetLife] is so big" that if it fails, bad things will happen, she told Mr. Stern. "You're not specific enough when you say, 'It's a really, really bad situation? so we assume that bad things are going to happen.'"
Mr. Stern said the FSOC did extensive analysis to support its decision.
Lawyers for MetLife and the government also clashed on the question of whether the oversight council should have analyzed the likelihood that MetLife would find itself in deep economic distress.
Judge Randolph said the FSOC, by assuming MetLife was in trouble and then assessing the consequences, essentially predicted "there was a 100% chance" MetLife would fail.
Mr. Stern said the FSOC had a responsibility to assume the worst because financial crises, by their nature, are unexpected. He pointed to distress at AIG in the lead-up to the 2008 crisis: Probably the only people that would have predicted AIG's collapse, he said, "were the guys in 'The Big Short'," the book and movie about the handful of investors who foresaw the housing crash.
Eugene Scalia, partner at Gibson Dunn & Crutcher LLP representing MetLife, said there was no "explicit statutory compulsion" for the FSOC to assess the probability that MetLife would fail, but it is still unreasonable for the government to punish the company without analyzing that question.
Mr. Scalia also faced some pushback from the judges. Judge Millett disputed his characterization of part of the FSOC analysis, saying it was "much more comprehensive" than the MetLife lawyer was suggesting.
Judge Srinivasan told Mr. Scalia that Congress gave the FSOC flexibility, so perhaps the group wasn't "out of bounds" for ignoring some of the issues raised by MetLife.
Mr. Scalia said the FSOC violated the legal requirements that govern how federal agencies must make decisions, for example by ignoring expertise offered by insurance experts and not analyzing the impact its decision would have on MetLife.
Write to Ryan Tracy at firstname.lastname@example.org