Bloomberg reports on the progress the big banks have made in preparing their government-mandated “living wills:”
Twelve banks granted the public a clearer look of their living wills Monday after regulators demanded they present more convincing plans this year for dismantling themselves in the event of failure. While the excerpts give investors and traders a better sense of what will happen in a crisis, the companies won’t learn for months whether the proposals are good enough to satisfy authorities and head off pressure to divest businesses.
Excerpts released Monday show the strategy at most of the big banks is to keep subsidiaries operating while their parent companies go to bankruptcy court and then sell some units. Many of the firms would cling to their core banks while shedding Wall Street operations that trade securities and make markets for clients. [Emph. added.]
Pure fantasy. The main purpose of a living will, remember, is to provide a roadmap that shows how an institution will proceed if it fails in the midst of a financial crisis. Absent a crisis, you don’t need living wills. Rather, in the case of a plain vanilla one-off bank failure, regulators will move in and (in the case of, say, Bear Stearns and Washington Mutual) resolve the situation via a government-assisted sale to a solvent buyer. In the case of the collapse of Wachovia, the resolution even happened without any government help whatsoever.
But during a panic, there aren’t necessarily any obviously solvent would-be buyers around. Everyone’s balance sheet is suspect! An orderly liquidation via a living will is supposed to be the next best thing. Mark me down as skeptical. If I’m reading this Bloomberg article right, for instance, come the next panic, several major broker dealers are going to be liquidated or sold all at the same time. JPMorgan reportedly plans to shrink itself by a third. Citi would shed $200 billion in assets Bloomberg reports.
So in the middle of the next panic, market liquidity is going to essentially vanish as the big banks shutter their market-making units, and banks’ ability to create credit is going to shrink as they downsize themselves. All of this, again, in the middle of a financial crisis. Thus the effect of these nutty living wills will likely be to take a bad situation and make it much, much worse. But the taxpayers won’t be on the hook for any money, so Elizabeth Warren will be happy.
Policymakers need to face the fact that, in bankruptcy, banks are different than other kinds of businesses. An ailing, bankrupt manufacturer will get access to emergency liquidity and will be able to keep its operations running. But no liquidity provider is apt to provide emergency funding to an ailing bankrupt bank. It would risk putting itself under, as well. Only the federal government would be in a position to provide the troubled bank the liquidity it needs. So policymakers should come up with a way for that to happen without putting taxpayers permanently at risk. I think a new chapter of the bankruptcy code specifically to deal with financial services companies might be helpful—particularly if it an included a provision for an after-the-fact industry clawback to compensate taxpayers for the emergency liquidity they provided. (Suggestion welcome in comments section below, by the way.)
But anyone who thinks living wills are even remotely a solution is kidding himself.
What do you think? Let me know!