Five Big Banks Draft Plans for Going Out of Business

 

The Five Big Banks Draft Plans for Going Out of Business

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

http://finance.yahoo.com/news/big-banks-craft-living-wills-075041248.html

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 month.

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 underwriting.

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 round.

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 plans.

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 healthy institutions.

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.

Noa's picture

"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."

If corporate welfare recipient and ponzi schemist, Jamie Dimon said it, it's automatically suspect in my view.  If darn near all of the countries on earth are indebted to the central banks and if the largest banks are on the verge of bankruptcy (supposedly), who has all the money?  JP Morgan owns Chase, Rothschild owns Bank of America, and Rockefeller owns Citibank. 

Bankrupt?  I doubt it.  Sounds like another ploy to deceive and swindle to me.

Here's what Max Keiser has to say on the subject:  http://rt.com/programs/keiser-report/episode-307-max-keiser/

Wendy's picture

The Federal Reserve charter is up this December anyhow. It looks like they are planning a self implosion. It's very interesting to me that Ron Paul is finally succeeding in passing an audit the Fed bill - by the time this bill is actually implemented it will have been too late - the Fed will already have been dissolved because of the end of it's charter or a complete world wide banking failure. Today I rip off my Ron Paul bumper sticker - I am now feeling that he has been controlled opposition all along. The latest from his campaign is that his son, Senator Rand Paul has endorsed Romney and he has asked that his supporter delegates act "respectfully" at the republican convention and not try force a vote for him. (many of Romney's delegates are actually Ron Paul supporters who are pledged to vote for Romney but it is debatable as to whether they can actually be forced by law to vote for Romney) Sounds like similar tactics that were used when Kerry backed down so quickly against Bush. It looks like the "fight" was fixed all along...

Noa's picture

http://www.zerohedge.com/contributed/2012-07-01/77-jp-morgan%E2%80%99s-n...

77% of JP Morgan’s Net Income Comes from Government Subsidies

George Washington's picture


JP Morgan’s credit rating would be much lower without government backing.

As Bloomberg noted last week:

JPMorgan benefited from the assumption that there’s a “very high likelihood” the U.S. government would back the bank’s bondholders and creditors if it defaulted on its debt, according to the statement. Without the implied federal backing, JPMorgan’s long-term deposit rating would have been three levels lower and its senior debt would have dropped two more steps, Moody’s said.

And as the editors of Bloomberg pointed out a couple of weeks ago:

JPMorgan receives a government subsidy worth about $14 billion a year, according to research published by the International Monetary Fundand our own analysis of bank balance sheets. The money helps the bank pay big salaries and bonuses. More important, it distorts markets, fueling crises such as the recent subprime-lending disaster and the sovereign-debt debacle that is now threatening to destroy the euro and sink the global economy.

 

***

 

With each new banking crisis, the value of the implicit subsidy grows. In a recent paper, two economists — Kenichi Ueda of the IMF and Beatrice Weder Di Mauro of the University of Mainz — estimated that as of 2009 the expectation of government support was shaving about 0.8 percentage point off large banks’ borrowing costs. That’s up from 0.6 percentage point in 2007, before the financial crisis prompted a global round of bank bailouts.

To estimate the dollar value of the subsidy in the U.S., we multiplied it by the debt and deposits of 18 of the country’s largest banks, including JPMorgan, Bank of America Corp. and Citigroup Inc. The result: about $76 billion a year. The number is roughly equivalent to the banks’ total profits over the past 12 months, or more than the federal government spends every year on education.

JPMorgan’s share of the subsidy is $14 billion a year, or about 77 percent of its net income for the past four quarters. In other words, U.S. taxpayers helped foot the bill for the multibillion-dollar trading loss that is the focus of today’s hearing. They’ve also provided more direct support: Dimon noted in a recent conference call that the Home Affordable Refinancing Program, which allows banks to generate income by modifying government-guaranteed mortgages, made a significant contribution to JPMorgan’s earnings in the first three months of 2012.

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