James Wigand is the head of the Federal Deposit Insurance Corp.’s grandly named Office of Complex Financial Institutions, created by the 2010 Dodd-Frank Act. He will have a $60 million annual budget and a 156-member staff to monitor the health of the country’s 22 largest banks—and dismantle them if they run into trouble. His digs come complete with a 65-inch video screen, mounted in a conference room, that can connect him to any FDIC office in the country when a crisis erupts. What he doesn’t have is the ability to unwind lenders’ international operations or public confidence that the too-big-to-fail era is over. “A segment of the market won’t believe it until the authority is used,” says Wigand, 55. “I hope we never have to use it, but we’ve been given the power. So once it’s used, the market will believe.”
Doubts about whether the government will let the largest banks go under have plagued Wigand’s office since its inception last year. Even with his new authority and resources, Wigand will need approval from the Treasury Dept. before seizing a big bank. Standard & Poor’s and Moody’s Investors Service are still basing their ratings of U.S. banks partly on the likelihood of government bailouts. “The orderly liquidation powers that Dodd-Frank Act gives to regulators will not by themselves prevent future government support of a handful of individual financial institutions,” S&P said in July after reviewing the FDIC’s new resolution powers. The company also said Bank of America (BAC) and Citigroup (C), the No. 1 and No. 3 U.S. lenders by assets, would have ratings two levels lower if it weren’t for what S&P considers implicit government backing. Moody’s said on Sept. 21 that it “continues to see the probability of support for highly interconnected, systemically important institutions as very high.”
Markets share that view. U.S. banks with assets of more than $100 billion—the ones that fall under Wigand’s purview—have paid about half a percentage point less to borrow than smaller banks since 2008, the International Monetary Fund said in a May report. The differential, which shows investors’ belief in government backing for the top banks, didn’t exist between 2003 and 2007.
The FDIC has been able to seize and dismantle smaller banks since it was created in 1933. The Dodd-Frank Act expanded its scope, giving it the authority to wind down the operations of a bank holding company and to order a bank to sell assets or restructure even if other regulators, such as the Federal Reserve, haven’t weighed in.
Wigand, who majored in zoology at the University of Maryland and has an MBA from the University of Chicago Booth School of Business, has sifted through the wreckage of more than 300 failed banks during almost two decades at the agency. He was deputy director of its resolution division, which sells the assets of failed lenders, for 13 years before being appointed to his current job. The biggest bank collapse on his watch was Washington Mutual, which had more than $300 billion of assets when it was seized in 2008.
In his new post, he’ll be able to call on the 2,200 employees at the agency’s resolution division to help sell the assets of any big bank that is wound down. His office will also have permanent examiners at banks in addition to inspectors from the Fed and the Office of the Comptroller of the Currency. “Prior to Dodd-Frank, the systemically important companies thought there was no other option but for the government to bail them out, so they didn’t sell, merge, or recapitalize as regulators requested them to do,” says Wigand. “Now there’s a viable alternative, so they’ll pay attention to what regulators say.”
About half of the positions in Wigand’s division, which occupies two floors of a satellite office near the agency’s headquarters in Washington, are still vacant. In the meantime, he has 40 employees on loan from other departments at the FDIC. Among their responsibilities is analyzing the structure of the banks they’re assigned to cover, how units relate to each other, and who their creditors and trading counterparties are.
Traditionally, “regulators looked at capital and liquidity and were comforted when there appeared to be enough of each,” says Jason Cave, a deputy director of the complex institutions office. “But nobody looked at who’s providing the credit, on what terms, what are the trends in the industry on liquidity. We’ll pay more attention to those.”
Wigand’s office is waiting for banks to submit their living wills—blueprints of their organizational structures and how they could be dismantled if necessary. Bank of America, Citigroup, and 10 other lenders with assets of more than $250 billion need to submit such plans by July 2012, as required by Dodd-Frank. Others will have at least an additional year to comply. Wigand expects that the exercise of preparing these documents will force the largest companies to simplify their organizations by closing unneeded legal entities. “These institutions haven’t had a holistic view of the enterprise,” he says. “Now they’ll have to.”
The biggest impediment Wigand faces is the lack of international agreements on how to wind down the overseas operations of big U.S. lenders. The largest banks have hundreds of legal entities registered under different nations’ laws. When one collapses, local authorities tend to seize the assets held by the unit under their jurisdiction, which makes it tougher to sell businesses at the best value. Lehman Brothers’ more than 2,000 legal units are embroiled in at least 50 bankruptcy trials in as many countries. Citigroup is active in more than 100 countries, and JPMorgan Chase (JPM), the second-largest U.S. lender, in more than 60, according to the companies’ websites. Discussions with overseas regulators are continuing. Without their cooperation, the FDIC’s efforts to seize a financial company with multinational operations could fail.
Christopher Whalen, managing director of Institutional Risk Analytics who has been critical of the government’s failure to restructure troubled big banks, says he’s hopeful the existence of Wigand’s complexity office will encourage more self-discipline among banking executives. “Banks will want to take steps to do the necessary restructuring—selling down assets, divesting from non-core businesses—voluntarily, because option B is being taken over by the FDIC,” says Whalen. “Option B will crush the management and shareholders and perhaps even the creditors, so why would anyone opt for that?”