Federal Reserve and FCIC Reject TBTF Banks' "Living Will"

To (mis)quote Bette Davis, "Fasten your seat belts. It's going to be a bumpy ride," because the regulators are claiming that the big banks contingency plans are worthless and leave the taxpayers on the hook:

Congress’s overhaul of the financial system aims to reshape large banks so that if they get into trouble they can descend into an orderly bankruptcy that does not set off a wider panic.

But on Tuesday, two regulators, the Federal Reserve and the Federal Deposit Insurance Corporation, sharply criticized the plans that the banks have prepared for winding themselves down in a controlled fashion. The F.D.I.C. said that it had determined that the so-called living wills were “not credible.”

The agencies have sent letters to 11 banks, including JPMorgan Chase and Goldman Sachs, pointing out perceived shortcomings in the resolution plans that they submitted in 2013. The agencies demanded that the banks make improvements in living wills they submit for 2015.

“Despite the thousands of pages of material these firms submitted, the plans provide no credible or clear path through bankruptcy that doesn’t require unrealistic assumptions and direct or indirect public support,” Thomas M. Hoenig, the vice chairman of the F.D.I.C., said in a statement.

I am so not surprised by this.

The banksters aren't providing meaningful "Living Wills" because it is in their interest not to do so.

Having a meaningful bankruptcy wind down plan means that, if something goes wrong, their stock options becomes worthless, and they probably lose their jobs, but if Uncle Sam is forced to bail them out, there is a pretty good chance that they get to keep their jobs and their hefty pay packages.

After all, that is what happened last time around.

The regulators should get tough with the banks:

If the banks do not make satisfactory changes, the regulators could take action, including requiring banks to sell units to shrink and simplify their corporate structures if they failed to comply with other orders, officials of the agencies said.

The regulators should give a reasonable amount of time (I would suggest 4 weeks, so that Congress won't be back in session), and if they do not see a complete and meaningful plan, they should start breaking them up.

BTW, the big problem here is what Warren Buffet calls, "Financial weapons of mass destruction," derivatives:

In suggesting areas the banks need to focus on, the regulators highlighted derivatives, which played a central and destabilizing role in the 2008 crisis. Derivatives can complicate bank resolutions because they may require collapsing banks to make payments to derivatives holders before other clients and creditors.

Unfortunately, derivatives allows financial institution to increase their leverage while technically staying properly capitalized.

They aren't properly capitalized, of course, which is why the US government had to bail out AIG so that it could pay their insurance claims at 100 cents on the dollar.

It's going to happen again, and no one is going to jail, again.

It sucks.

The right thing to do is for the Federal Reserve and the FDIC to break up the banks, as it always has been, but the banks own Washington, so it ain't going to happen.

H/t Naked Capitalism.