14 April 2016

Thanks Elizabeth

The Federal Reserve and the FDIC just rejected the living wills required under Dodd Frank of the 5 largest banks in America:
“The goal to end too big to fail and protect the American taxpayer by ending bailouts remains just that: only a goal,” Thomas M. Hoenig, the vice chairman of the F.D.I.C., said in a statement.

The regulators were responding to the so-called living wills that banks must submit to regulators on a regular basis to explain how the banks plan to enter bankruptcy in an orderly fashion in case of a crisis. The living wills are a requirement of the 2010 Dodd-Frank financial overhaul, intended to help make large financial institutions less of a threat to the wider economy.

The Fed and the F.D.I.C., which jointly oversee the largest banks, agreed that the plans put forward by five of the big banks, JPMorgan, Bank of America, Wells Fargo, State Street and Bank of New York Mellon, were “not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code.”

Only one of the biggest banks, Citigroup, was given a passing grade by both agencies, though it too was told that its plans needed improvements. Goldman Sachs and Morgan Stanley received passing grades from only one of the two agencies.
Of course the Vampire Squid got a passing grade.

BTW, the only reason that this happened is because Elizabeth Warren nailed Fed chair Janet Yellen to the wall over her inaction on this Dodd Frank requirement:

A serious dust-up occurred on July 15, 2014 during a Senate Banking hearing between Senator Elizabeth Warren and Fed Chair Janet Yellen on the matter of these living wills. Warren told Yellen that at the time of its collapse in 2008, Lehman Brothers had $639 billion in assets and 209 subsidiaries and it took three years to unwind the bank in bankruptcy. Warren singled out JPMorgan Chase for comparison, saying that it has $2.5 trillion in assets and 3,391 subsidiaries.

Dodd-Frank specifically states that these wind-down plans must be “credible” each year or the Fed and FDIC must reject them and force the banks to take remedial steps such as simplifying their structure or selling off assets.

Yellen was clearly not prepared for this line of questioning and stumbled badly in her answers to Warren. She said the Fed was pursuing a “process,” that the plans are “complex” with some banks submitting plans that are “tens of thousands of pages.” Yellen then summed up with this:

“I think what was intended is this interpretation you’re talking about, whether they’re credible, in other words, do they facilitate an orderly resolution, and I think we need to give these firms feedback.”

This hearing came more than six years after the greatest Wall Street banking collapse since the Great Depression and Warren was visibly agitated by these stonewalling answers from Yellen. Warren responded:
“I have to say, Chair Yellen, I think the language in the statute is pretty clear, that you are required, the Fed is required, to call it every year on whether these institutions have a credible plan — and I remind you, there are very effective tools that you have available to you that you can use if those plans are not credible, including forcing these financial institutions to simplify their structure or forcing them to liquidate some of their assets — in other words, break them up.

“And I just want to say one more thing about this process, the plans are designed not just to be reviewed by the Fed and the FDIC, but also to bring some kind of confidence to the marketplace and to the American taxpayer that in fact there really is a plan for doing something if one of these banks starts to implode.”

The public has never been allowed to see those 10,000 pages of what it would take to unwind one of the banking behemoths but is instead provided with a mere glimpse of each bank’s plan. Warren’s reference to bringing “confidence to the marketplace” was called into further question yesterday when the Government Accountability Office (GAO) released its own study on the living wills, which they refer to as “Resolution Plans.”

The GAO noted that the FDIC’s Board of Directors determined that all of the 2013 plans submitted by systemically important banks with more than $250 billion in nonbank assets were “not credible” or “would not facilitate an orderly resolution under the Code.” The Federal Reserve, however, made no such determination and simply said the banks would have to improve their plans going forward.

The GAO also gave low marks to the regulators in terms of public transparency on the living will process, writing in the report that “FDIC and the Federal Reserve are considering publicly providing more information about their resolution plan reviews. Federal Reserve officials told us that while they were continuously evaluating the release of more plan information into the public domain, they did not have a time frame for reaching a decision on this issue. FDIC officials also told us that the regulator was considering disclosing more information about its review process but had not yet reached the point of sharing such information with the public.”
Warren is one of the good ones.


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