The Five Big Banks Draft Plans for Going Out of Business
Posted by Stephen Cook
Thanks to Janis
Stephen: JP Morgan Chase and Co, Bank of America, Citigroup,
Goldman Sachs and Morgan Stanley are among those submitting first
liquidation scenarios at the Federal Reserve and the Federal Deposit
Insurance Group, according to this story from Reuters. They MUST do so
by July 1!
My take on this is that they want to cover their butts, believing
they might get some money back when they come a-cropper. I also notice
they are filing these “living wills” with the Federal Reserve, which is
also soon to be exposed for what it is. So we have a scenario where the
cabal’s big banks are turning to another cabal institution for help… obviously hoping that some decades-old (il)legal loophole will be able to save them.
What is most re-assuring, though, is to see that this news has
been written by and is being widely circulated via a major worldwide
mainstream news wire service – even if the headline says “in case”, when
we all know they “have” to be put out of doing business in the way they
have been up until now.
Big Banks Craft “Living Wills” in Case They Fail
By David Henry and Dave Clarke, Reuters – June 27 2012
NEW YORK/WASHINGTON (Reuters) – Five of the biggest banks in the
United States are putting finishing touches on plans for going out of
business as part of government-mandated contingency planning that could
push them to untangle their complex operations.
The plans, known as living wills, are due to regulators no later than
July 1 under provisions of the Dodd-Frank financial reform law designed
to end too-big-to-fail bailouts by the government. The living wills
could be as long as 4,000 pages.
Since the law allows regulators to go so far as to order a bank to
divest subsidiaries if it cannot plan an orderly resolution in
bankruptcy, the deadline is pushing even healthy institutions to start a
multi-year process to untangle their complex global operations,
according to industry consultants.
“The resolution process is now going to be part of the cost-benefit
analysis on where banks will do business,” said Dan Ryan, leader of the
financial services regulatory practice at PricewaterhouseCoopers in New
York. “The complexity of the organizations will shrink.”
JPMorgan Chase & Co (JPM), Bank of America Corp (BAC), Citigroup
Inc (NYS:C), Goldman Sachs & Co (GS) and Morgan Stanley (MS) are
among those submitting the first liquidation scenarios to regulators at
the Federal Reserve and the Federal Deposit Insurance Corp, according to
people familiar with the matter.
The five firms, which declined to discuss their plans for this story,
have some of the biggest balance sheets, trading desks and derivatives
portfolios of financial institutions in the United States.
Great Britain and other major countries are imposing similar requirements for “resolution” plans on their big banks, too.
The liquidation plans are coming amid renewed questions about the
safety of big banks following JPMorgan’s stunning announcement last
month that a trading debacle has cost it more than $2 billion – a sum
far too small to endanger the bank, but shocking enough to bring back
memories of the financial crisis.
A Nod to Glass-Steagall
If the extensive planning and review process works as proponents
hope, big banks will become less hazardous to the public and regulators
will be more confident that they can let wounded institutions die
without wrecking the economy.
In congressional hearings earlier this month, JPMorgan CEO Jamie
Dimon said that the bank’s contingency plan for going out of business
would let it fail without cost to taxpayers. Living wills reduce the
systemic risk of a big bank failing, Dimon said.
The living will requirement could actually yield similar results to
restoring Glass-Steagall without actual re-enactment of the
Depression-era laws separating commercial banking from investment
banking, former FDIC Chairman Sheila Bair told Reuters TV earlier this
Bair said regulators may determine that for a liquidation plan to
work, a bank must separate traditional banking and insured deposits into
subsidiaries set apart from volatile securities trading and securities
The rules push banks to untangle their complex structures, which can
include thousands of legal entities, and which, in Bair’s opinion, have
effectively blocked proposals for breaking up the corporations.
Whether the Fed and the FDIC would actually force any banks to sell
businesses or cordon off insured deposits remains to be seen, cautioned
Richard Herring, a banking professor at the University of Pennsylvania.
“We don’t know if they will have the guts to do it, but the tools are
there,” said Herring, a leading proponent of living wills for more than
a decade, who was appointed to an FDIC advisory panel on the plans.
Herring worries, too, that the plans will be so long and complex that they will overwhelm the staff at the agencies.
Still, that the plans are being written at all is progress, Herring said.
Plan for Two Ways to Die
Under the Dodd-Frank Act, banks and regulators must imagine
liquidations in two different ways. The first is through bankruptcy
courts with banks negotiating with their creditors. This is the
going-out-of-business method planned in the living wills due July 1. The
living wills must include how subsidiaries in foreign jurisdictions
will be liquidated.
The second way is through a new kind of liquidation process in which
the FDIC takes control of putting a financial giant down. This method
has more flexibility than is allowed in bankruptcy courts, but still
uses critical information collected in the banks’ living wills, such as
where exactly to find collateral.
The new rules stagger deadlines for the banks to file plans,
depending on their size and complexity. Nine banks will file first,
including five based in the United States and four owned abroad.
Regulators have declined to name the nine banks included in the first
Other large banks will have until July and December of next year to
hand in their plans, according to the FDIC. Eventually about 124 banks
are expected to submit plans, according to the FDIC. There are about
7,300 banks in the United States.
Regulators and the big banks have been meeting since January on what
the plans are expected to include. Fed and FDIC officials have said they
expect the back-and-forth to continue once the plans have been
submitted. The rules give the banks a series of chances to refine their
But if banks cannot come up with feasible liquidation plans, regulators could order the banks to get rid of businesses.
Government intervention is a last resort, said John Simonson, the
FDIC’s deputy director of Systemic Resolution Planning and
Implementation in the Office of Complex Financial Institutions.
“I think a lot of progress can be made in having these firms make
themselves more resolvable before you get to that point of actually
imposing those severe remedies,” Simonson said.
The regulators will want to see evidence that the banks can safely
resolve their debts and transfer vital customer services and assets to
The plans could easily be 2,000 or 4,000 pages long, depending on the
complexity of the banks, said Ryan of PricewaterhouseCoopers. The plans
include “very granular detail” about bank operations, he noted, adding
that “in many cases, this is a large documentation exercise.”
For example, the banks must spell out plans for hiring lawyers and contacting regulators in key countries.
The rules for crafting the living wills are 74 pages long, including
an explanatory supplement. The plans could even include drafts of press
releases showing how the banks would announce that they are going out of
business, Herring said.
Article Link: http://the2012scenario.com/2012/06/the-five-big-banks-draft-plans-for-going-out-of-business/