Banks File Living Wills Outlining Plans to Dismantle

Eleven banks including Goldman Sachs Group Inc. and Citigroup Inc. envision shareholders absorbing losses, managers getting fired and assets being sold off as the firms filed “living wills” designed to ensure an orderly wind-down if they should ever go bankrupt.

Goldman Sachs gave regulators three scenarios in the public portion of its document posted today, with a preferred option centered on forgiving intercompany debts to help units wind down smoothly even during an economic crisis. Citigroup’s alternatives included asset sales and closing units, adding that its senior management and board “would presumably be replaced at the behest of regulators.”

The two New York-based banks were among 11 of the largest lenders, including JPMorgan Chase & Co., Bank of New York Mellon Corp. and Bank of America Corp., to submit revised plans this week after the global banks failed to convince regulators last year that they could go broke without destroying the rest of the system. The solutions include “bail-ins,” which typically involve converting unsecured debt to equity and wiping out common shareholders.

Financial Crisis

Public summaries were posted on regulatory websites today, with more detailed private versions for examiners. The living wills are supposed to help ensure that taxpayer money won’t be needed in any repeat of the 2008 financial crisis.

If the Federal Deposit Insurance Corp. and Federal Reserve aren’t satisfied that each firm has plotted a safe demise, the companies could be forced to restructure or sell off pieces. The 2010 Dodd-Frank Act gave regulators that power when it required banks to write these plans, which are meant to describe safe bankruptcies and combat perceptions that financial giants are too big to fail.

“Our preferred strategy, which is new this year in light of the broader range of strategies that has been encouraged by the regulatory guidance, would involve recapitalizing our two major broker-dealers, one in the U.S. and one in the U.K., and several other material entities, through the forgiveness of intercompany indebtedness,” said Goldman Sachs, led by Chief Executive Officer Lloyd C. Blankfein.

Core Businesses

JPMorgan, the biggest U.S. bank by assets, said it had $454 billion in high-quality liquid assets as of June 30 that could be turned quickly into cash -- up more than $100 billion from six months earlier. Shareholders would bear most of the costs for recapitalizing the New York-based firm, led by CEO Jamie Dimon, and the bank could successively sell off any of its 35 core businesses until reserves are adequate, JPMorgan said in its filing.

“Recapitalization would be intended to preserve the operation of the firm’s systemically important functions, promptly return the systemically important and viable parts of the firm’s business to the private sector without a lengthy period of government control, preserve the going-concern value of the firm for the benefit of its creditors, and avoid the value destruction which could result from a disorderly liquidation,” JPMorgan said.

Bank of America, ranked second by assets, outlined approaches that include putting the parent into Chapter 11 bankruptcy and recapitalizing “certain banking and other operating subsidiaries” deemed to be “systemically significant critical operations” that need to continue operating while the holding company is dismantled.

Ireland, India

The bank also said it would have to deal with resolution regimes in the U.K., Ireland, Germany, Japan, India and Singapore. Led by CEO Brian T. Moynihan, Bank of America is based in Charlotte, North Carolina.

In a public plan changed only minimally from last year, Morgan Stanley added a phrase that it “would enter into a Chapter 11 proceeding” as it sought to sell off stand-alone units and quickly wind down core businesses. Buyers of the firm’s parts could include other banks, private funds and insurance companies.

Barclays Plc, which is working with U.K. regulators on a resolution plan, said the London-based company would follow the strategy already outlined by officials in both countries -- imposing losses on creditors and adding capital at the parent level through a bail-in.

‘Adverse Event’

Deutsche Bank AG said that in the case of one “single, large, adverse event,” non-U.S. assets would be transferred to a German bridge bank and kept active, while U.S. assets would be assumed to fail and enter resolution proceedings.

While the Frankfurt-based company assumed the exclusion of U.S. assets from the German transfer in order to illustrate their treatment under U.S. resolution regimes, it said it didn’t believe this to be the probable or preferred outcome. Deutsche Bank is Europe’s biggest investment bank by revenue.

UBS AG, led by CEO Sergio Ermotti, said the Zurich-based bank would count on a rapid orderly resolution of its most important units, and it would focus on preserving the value of any saleable core businesses.

Credit Suisse Group AG said Swiss regulators have pointed it toward a strategy parallel to that favored by the U.S.

“A single point of entry bail-in strategy would recapitalize CS at the top,” the bank said in its plan, which would allow restructuring while avoiding the need to take apart its functioning subsidiaries.

‘Critical Operations’

State Street Corp. offered an alternative to a sale strategy, saying it could be possible for the Boston-based parent to recapitalize its banking arm, allowing bank branches and subsidiaries to avoid resolution. BNY Mellon said that in any of its scenarios, “the core business lines and critical operations would continue in operation in substantially the same manner as prior to resolution.”

“You cannot create a playbook that will be followed when the company is in trouble,” Ernie Patrikis, a former general counsel of the New York Fed and alternate member of the Federal Open Market Committee, said in an e-mailed statement. “Life just doesn’t work like that.”

Patrikis, now a partner at White & Case LLP, said the benefit of writing the wills is that bankers get to know their firms better.

‘Taxpayer Support’

“Citi has steadily built its balance sheet so that even in severe stress scenarios, it could continue to operate and serve clients without taxpayer support,” Mark Costiglio, a Citigroup spokesman, said in an e-mailed statement, calling it “highly unlikely” that the resolution will ever be needed. The bank sees this pre-planning as a way to help address “the moral hazard of ‘too big to fail,’” he said.

The first round of living wills last year fell short of what the Dodd-Frank law demands, according to Jim Wigand, who stepped down this year as the FDIC official responsible for planning for big-bank failures. Wigand said earlier this year all the banks had more progress to make before their plans would be credible.

Regulators said they wouldn’t rule any of the plans flawed in the first round. This year, lenders faced a higher bar. They needed to fix the past faults, and in April the regulators outlined demands for more details on strategies for resolving international transactions, dissolving trading connections and maintaining liquidity.

The bank plans also must account for a troubled marketplace where buyers for assets and operations may not be readily available. Dodd-Frank empowered the FDIC to take a firm over and wind it down if failure would still pose too great a threat to be handled by bankruptcy.

These 11 banks, those with more than $250 billion in U.S. non-bank assets, are the top tier of lenders required to file the wills. The next group of smaller firms, including Wells Fargo & Co., filed their first plans in July. Another cohort with $50 billion to $100 billion in non-bank assets will file by the end of the year.

Non-bank financial firms designated systemically risky by the Dodd-Frank-created Financial Stability Oversight Council, such as American International Group Inc. and Prudential Financial Inc., also will have to file plans.

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