Nine of the biggest banks, including JPMorgan Chase & Co. and Bank of America Corp., are set to deliver plans this week for how their businesses could be unwound after a collapse as part of a U.S. government effort to show no financial firm is too big to fail.
Lenders with more than $250 billion in nonbank assets must deliver so-called living wills -- liquidation plans expected to run into thousands of pages -- by July 1 to banking regulators charged with determining whether they are credible.
The plans, mandated by the 2010 Dodd-Frank financial-regulation overhaul, are meant to give the government a way to shutter complex financial firms without cost to taxpayers or threat to the broader economy. In the run-up to the submission deadline, they have become the focus of a debate between some who think they should be used to limit banks’ size and others who see such intervention as inappropriate.
“At the end of the day, this isn’t going to become the hidden tool to break up JPMorgan and Bank of America,” said Jaret Seiberg, a senior policy analyst at Guggenheim Securities’ Washington Research Group. “To take that radical of a step, you’re going to need something more concrete than disputes over how credible a living will was written.”
Dodd-Frank requires banks to provide shutdown strategies for the Federal Deposit Insurance Corp. and the Federal Reserve as a safeguard against a repeat of the market turmoil and U.S. bailouts that followed the September 2008 bankruptcy of Lehman Brothers Holdings Inc. The living wills rule allows regulators to force restructurings and asset sales at companies whose plans aren’t based on reliable information and wouldn’t allow the company to dismantle itself in an orderly way.
“I think they should use the authority,” former FDIC Chairman Sheila Bair said in an interview last week. “How well they use it is going to be up to them.”
That view is opposed by Thomas Hoenig, the former Federal Reserve Bank of Kansas City president who now serves on the FDIC’s board. Instead of forcing lenders to restructure one-by-one, the government should revive the separation of investment and commercial banking that was discarded with the 1999 repeal of the Glass-Steagall Act, Hoenig said in a June 26 Bloomberg radio interview.
Judging each bank’s credibility is “picking winners and losers based on what they present to you, and I think it is fraught with problems,” he said.
Banks are wondering: “Are regulators actually going to dictate what our legal or organizational structure looks like?” according to John Lane, a former FDIC deputy division chief who worked on the agency’s Dodd-Frank powers.
The living wills must identify the legal relationships between units in each bank, its contractual connections, what its funding needs are, its most vital employees, how assets will be valued in a failure and what should be sold off to raise cash. Shorter public summaries of the plans will be posted describing each bank’s ideas.
“It’s a whole different ballgame that they’ve never had to deal with before,” said Mitchell Glassman, a former FDIC division head. “What happens when the worst case happens?”
Glassman, now a director at Deloitte Consulting LLP in Washington, said he expects “some novel approaches and some sophisticated thinking” in the plans and said they will act as templates for the rest of the industry.
“I think a lot of boards recognize that they were kind of flying blind, because they didn’t realize where the risk was coming from because the interconnections were not known,” said Lane, now a special adviser at Promontory Financial Group LLC in Washington. “You might as well build this into your governance process, because it’s going to help you when the stress comes. And it will come.”
Whether the plans are ultimately used to force changes at banks, findings of non-credibility probably won’t come from the FDIC in the first year, according to Jim Wigand, chief of agency’s the Office of Complex Financial Institutions.
“It will be in the second round where there’s likely to be more of an engaged dialogue about what actions are necessary to remedy deficient plans,” Wigand said in a May interview.
JPMorgan’s Chairman and Chief Executive Officer Jamie Dimon told lawmakers this month that his bank’s plan “has been drafted and circulated and given to some of the regulators.”
“We have to allow our big institutions to fail,” Dimon told members of Congress at hearings on his bank’s $2 billion trading loss. “People have to believe it’s real,” and federal regulators must work with overseas counterparts to ensure plans aren’t undermined by cross-border complications, he said.
Though the living wills and the FDIC’s new authority to dismantle failing systemically important financial institutions aren’t in the same sections of Dodd-Frank, the agency sees the wills as information that can be used to bolster breakup plans already on hand for the largest banks.
Acting FDIC Chairman Martin Gruenberg has drawn praise for recent speeches laying out how the agency intends to handle failures by forming bridge holding companies and letting solvent subsidiaries keep operating.
The FDIC’s strategy “appears to have all of the essential characteristics to solve the too-big-to-fail problem,” John C. Dugan, who served as comptroller of the currency before joining law firm Covington & Burling LLP, and Timothy Ryan, president and CEO of the Securities Industry and Financial Markets Association, said in a Bloomberg View column. Ryan was director of the now-defunct Office of Thrift Supervision before going to work for JPMorgan in 1993, according to his Sifma biography.
Others doubt this will squelch the threat that big institutions will need government rescues.
“This too-big-to-fail question will always be out there,” Glassman said. He said some of these big firms “may be systemically important for some time, unless there can be some structural changes.”
If a bank fails and needs FDIC money it “should be dismantled after that, and the name should be buried in disgrace,” Dimon said.
JPMorgan offered an illustration of its own hypothetical failure in a March presentation, suggesting a crash triggered by $200 billion in losses. The bank described the kind of bridge company foreseen by the FDIC and showed how temporary U.S. funding could be repaid through the sale of business units.
Jerry Dubrowski, a Bank of America spokesman, and Karina Byrne, a spokeswoman for UBS AG, said their banks hadn’t yet filed living wills and declined to reveal any details on their contents. Spokesmen for other banks, including Molly Meiners at Citigroup Inc., Jennifer Zuccarelli at JPMorgan, Michael DuVally at Goldman Sachs Group Inc., Sandra Hernandez at Morgan Stanley, Michael O’Looney at Barclays Plc., Duncan King at Deutsche Bank AG and Steven Vames at Credit Suisse Group AG, declined to comment on the process.
The deadline for banks smaller than the initial nine is a year away, and that group will include Wells Fargo & Co., said Ancel Martinez, a Wells spokesman.
“I’m still trying to find the one investor who believes that the living wills will work,” Mike Mayo, who analyzes bank stocks at CLSA Ltd. in New York, said in a telephone interview. “When you find the one investor who thinks living wills will work for the $2 trillion banks, let me know.”