How Important Is MetLife?

MetLife, the parent company of the Metropolitan Life Insurance Company, is one of the largest financial institutions in the world. Founded in New York City approximately 150 years ago, the firm now manages insurance, annuity, and employee benefit programs for 90 million people across the globe.

It’s an important firm, isn’t it? That’s why U.S. government officials voted to propose that MetLife be labeled a “systemically important” financial institution. Such a decision would serve to acknowledge the insurer’s dominant position within the nation’s economic system. And, accordingly, it would place the insurer under a more intensive spotlight of oversight and regulation.

Understandably, MetLife is eager to avoid any additional regulatory oversight activities, especially in light of its high profile failure of a government “stress test” two years ago. Thus, it is acting vigorously to avoid the “systemically important” label, even going so far as to threaten the government with a lawsuit.

To a certain extent, we can certainly understand MetLife’s argument about the inappropriateness of being labeled a “systemically important” financial institution. After all, the firm only began to expand from its insurance origins into the banking sector in 2001. And it didn’t receive any TARP bailout funds at all during the 2008 – 09 global financial crisis.

On the other hand, during the crisis in the autumn of 2008, American Express, Goldman Sachs, and Morgan Stanley all converted their corporate structures into bank holding companies in order to qualify for billions of dollars in TARP funds. One can easily argue that MetLife, by refraining from any reliance on TARP funding, should (out of a simple sense of fairness) be spared the levels of oversight that are now imposed on these other institutions.

And yet three non-bank institutions — AIG, GE Capital, and Prudential — have now been labeled “systemically important.” How can one argue that MetLife deserves to be excluded from this group?

So what should we make of MetLife? Is it a “systemically important” firm? Should a global financial giant that did not accept TARP funds, but that did fail a stress test in 2012, be given a label that draws enhanced regulatory scrutiny?

As the global financial crisis recedes into history for contemporary decision makers, it becomes less relevant than recent events. Because MetLife failed a stress test just two years ago, and given its current dominant position in the insurance sector, its designation as a “systemically important” institution may be inevitable.

Libor and Bitcoin

One is a venerable industry benchmark that was first introduced by the world’s leading global banks several decades ago. The other is a virtual currency that only exists on the internet and that was first proposed by a software developer a mere six years ago.

What could these two financial mechanisms possibly share in common? Regrettably, they have both emerged as instruments of illegal manipulation on a mammoth scale. In addition, they have both raised existential questions about the limits of regulatory authority in a complex and evolving global economy.

Libor, of course, is the variable interest rate that is established by a daily opinion survey of a group of global banks in London. It has become the preferred benchmark for $350 trillion of variable rate loans, swaps, and other securities with valuations that depend on prevailing market rates.

Bitcoin, on the other hand, is the $7.7 billion virtual currency unit that has begun to be accepted as legal tender by a variety of global organizations. Many commentators have praised the Bitcoin as the internet era’s version of an ounce of gold, i.e. as a storage unit of monetary value that is not subject to revaluation by any individual government entity.

Both mechanisms, however, have been targets of manipulation and scandal during the past two years. Regulatory investigations and lawsuits are continuing to plague the global banks that contribute to the Libor rate, while similar controversies and investigations have just begun to stain the Bitcoin market.

Both sets of controversies have also raised existential questions about the limits of governmental oversight. Do banking regulatory officials possess the authority to regulate opinion surveys like the Libor mechanism? Or internet activities that produce virtual commodities, like the Bitcoin system?

Although the British banking authorities have concluded that the Libor survey process is subject to regulation, they are permitting the survey itself to remain in private hands. And the Japanese authorities, responding to the collapse of a major Bitcoin operator in Tokyo last week, are insisting that the Bitcoin is not legal tender and cannot be regulated as such.

In the meantime, though, private investors are pressing ahead with litigation to recover damages for losses suffered in the Libor and Bitcoin markets. Will we reach a point when such lawsuits will force government regulators to focus on these financial mechanisms?

If you were Jaime Caruana, the General Manager of the Bank of International Settlements, the international organization of federal central banks, would you recommend that the global system of financial regulation establish authoritative oversight mechanisms for Libor and Bitcoin?

Cruise Ships, Airlines, and Flags of Convenience

It’s been a rough few years of sailing for the ocean cruise industry, hasn’t it? From time to time, hundreds of passengers have become violently ill, basic sanitation services have ceased to function, passengers have fallen overboard, and a vessel has capsized while its captain fled in a life boat, leaving guests and crew members behind to fend for themselves.

Why do such ghastly events continue to plague the industry? Some attribute this track record of catastrophe to the common business practice of registering ships in small nations and flying their “flags of convenience.” There’s a reason why Panama, Liberia, Malta, and the Marshall Islands lead the world in ships registered; some suggest that their business friendly regulatory policies attract shipping companies to their shores but then contribute to the lax internal controls that enable crisis after crisis.

If you’re relieved that this practice of “flags of convenience” has been restricted to the cruise ship industry, you might be concerned to learn that the airline industry is now considering its implementation as well. The budget airline Norwegian Air Shuttle (NAS) has applied to register its Operator’s Certificate in Ireland even though it intends to maintain European bases in Scandinavia and Britain.

The Air Line Pilots Association is vigorously opposing NAS’s plan, calling it an “attempt to dodge laws and regulations …” According to the ALPA, “If NAS is permitted to pick and choose the countries in which it establishes its subsidiaries … U.S. carriers will be put at a severe competitive disadvantage because the United States has one set of laws and regulations for all of its airlines …”

Of course, the practice of business registrations in small, industry friendly locales is not confined to the transportation industry. In the financial services industry, regulatory tax havens have sprouted in nations like Andorra, Cyprus, Monaco, Panama, and Switzerland. And even within the United States, tiny Delaware dominates the other 49 states in public corporation registrations.

Interestingly, however, the Norwegian Cruise Line is currently operating a single vessel with a United States registration and an American crew. The ship, known as the Pride of America, is attempting to offset the significant costs of U.S. regulations by attracting the interest of patriotic American passengers.

The Pride of America is the only large cruise ship in the world that flies an American flag. If you were the President of Norwegian Cruise Lines, would you consider registering additional cruise ships in the United States?