Reuters uncovers a scoop, that there’s apparently a second-layer living will process, a secret one beyond the public living wills we know about. To refresh your memory, banks are required to fill out living wills that detail how they would be unwound in the case of a financial failure. The initial public living wills that came out featured staggeringly little information, but according to Reuters there’s a second will process:
U.S. regulators directed five of the country’s biggest banks, including Bank of America Corp and Goldman Sachs Group Inc, to develop plans for staving off collapse if they faced serious problems, emphasizing that the banks could not count on government help.
The two-year-old program, which has been largely secret until now, is in addition to the “living wills” the banks crafted to help regulators dismantle them if they actually do fail. It shows how hard regulators are working to ensure that banks have plans for worst-case scenarios and can act rationally in times of distress [...]
According to documents obtained by Reuters, the Federal Reserve and the U.S. Office of the Comptroller of the Currency first directed five banks – which also include Citigroup Inc, Morgan Stanley and JPMorgan Chase & Co – to come up with these “recovery plans” in May 2010.
They told banks to consider drastic efforts to prevent failure in times of distress, including selling off businesses, finding other funding sources if regular borrowing markets shut them out, and reducing risk. The plans must be feasible to execute within three to six months, and banks were to “make no assumption of extraordinary support from the public sector,” according to the documents.
The May 2010 letters come before the final passage of the Dodd-Frank law.
It’s interesting that this is coming out two years later, after the initial offerings of the living wills were criticized, and in the midst of a Presidential campaign. The distinction made is between a “recovery plan” and a “resolution plan,” where recovery involves selling off the non-core businesses and securing funding, and the resolution involves protecting the taxpayer from further bailouts.
One interesting part of this is the degree to which Bank of America engaged in something like a recovery plan last year. They made numerous sales of non-core businesses, particularly assets in China, in a bid to, as I called it, get “small enough to fail.” BofA even considered giving up on some regions of the country in an effort to downsize. I wonder if they were practicing an early rollout of their recovery plan? The article suggests that both BofA and Citi have engaged in just that.
The regulators in the article make it seem like a bank with a resolution plan and a recovery plan is bulletproof, but plenty of questions remain as to whether the taxpayer would get saddled with another emergency bailout. The vast interconnectedness of the big banks make any kind of resolution supremely difficult, involving jurisdictional issues as well as the clear political influence that the finance lobby would wield. So even with two wills, the idea that banks will be allowed to die quickly should be met with skepticism.
UPDATE: The Daily Bail has a great catch that I missed. At the end of the Reuters article, it mentioned that Jamie Dimon announced at a Harvard event that JPMorgan Chase had a recovery plan in place. They went to the source of the comments:
It’s easy to see on the PDF:
Go to page 9. Under the wipeout scenario JPM describes a $50 billion trading loss turning into a $200 billion loss as soon as the FDIC takes over. Why… ? Because JPM says they would expect the FDIC to immediately writedown JPM’s assets by an additional $150 billion.
Holy mark to bullshit. Jamie Dimon just admitted to the world that JPM is mis-marking assets to the tune of $150 billion.