From The Deal Pipeline
By Ronald Orol
July 7, 2014
Critics of too-big-to-fail banks should relax — the largest financial institutions won’t cost taxpayers any money if they fail.
At least that’s what the biggest 17 financial institutions are telling federal regulators in the publicly available portions of their most recent set of living wills, which were released late Wednesday.
The documents are meant to be guides for how these institutions would be wound down if they fail. The plans seek to help regulators and financial institutions limit the damage from a big bank failure and avoid the kind of Chapter 11 filing submitted by Lehman Brothers in 2008 that helped drive a global banking crisis.
Large financial institutions are required to submit their plans to the Federal Reserve and Federal Deposit Insurance Corp. This is the third set of living wills filed by the country’s biggest banks. However, banks must submit both public and confidential sections, with regulators expected to focus more heavily on scrutinizing the private submissions. A group of big banks including JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. submitted their third set of living wills.
The wills were released as President Barack Obama on Wednesday, in an interview with business radio show “Marketplace,” discussed the plans and efforts at financial reform. He said the living wills were put in place so that “if they [banks] do screw up,” there is an orderly process of winding them down with creditors and shareholders taking hits so that taxpayers don’t have to. He suggested that further reforms may be coming for big banks. “Now what we’ve been able to do is to try to prevent taxpayers from being the folks who are left holding the bag. But it’s still not a real efficient way for us to run a financial system. That’s going to require some further reforms. That’s going to require us looking at additional steps that we can take,” he said.
American International Group Inc., considered a key contributor to the crisis and the recipient of a $182 billion taxpayer-funded bailout, submitted a living will for the first time this year. It said in its 16-page public filing that its resolution plan provides for an orderly resolution in a reasonable time period without posing systemic risk to the “larger financial system” and without need for taxpayer support.
It suggested two plans, the first of which would involve the sale of some AIG insurance units while it wound-down its noninsurance unit — AIG Financial Products Corp. — in a Chapter 11 plan. If that didn’t work, AIG said it would enter U.S. and international receivership proceedings to liquidate all of its businesses. AIG Financial Products is the derivatives unit that required a bailout, without which it would have quickly expanded an already escalating financial crisis.
Bank of America, which received a $45 billion bailout, described three possible strategies for dismantling itself in a safe manner.
The third one involved the parent company entering Chapter 11 while some of its subsidiaries would enter a new resolution process being set up by federal regulators.
The new resolution process, known as “orderly liquidation authority,” or OLA, is meant to be employed as an alternative to traditional bankruptcy in situations where Chapter 11 filings would have broader negative impacts on the U.S. and global economy. This approach allows federal regulators to lay off executives and inject taxpayer funds to keep the institution operational while they are restructured or dismantled.
After the crisis abates, large banks will be assessed a fee to cover any taxpayer costs, though critics argue that collecting this fee would be challenging and likely delayed for years.
Nevertheless, Bank of America said their approach would allow for its most systemically significant operations to continue operating in a way that would “maximize value and systemic stability.”
Citigroup offered two approaches — one for how it would dismantle itself through traditional bankruptcy and another that would employ the new OLA approach. The megabank, which itself received a cumulative $50 billion bailout during the crisis, said there were “multiple scenarios” by which it could be resolved without the use of taxpayer funds. It envisioned a scenario in which once the ongoing business operations of the bridge holding company’s subsidiaries were stabilized, it could return to the private sector as a “viable, well-capitalized financial institution under new senior management and ownership, without the use of taxpayer funds.”
Critics have raised concern about a failure of regulators to require disclosure for the vast majority of the plans. They also have raised worries that banks have not receive specific feedback from regulators on their plans.
“The whole exercise is somewhat absurd,” said Boston University law professor Cornelius Hurley. “If this is an exercise to restore trust, it hardly does that. If they [regulators] really wanted to restore confidence they would make the whole plan public, not just the pandering stuff they have submitted.”
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