July 7, 2015
Twelve major banks have made their living wills open to the public in response to US regulators pushing for more “convincing plans” for self-dismantling should their operations fail.
The purpose of living wills is a way “to give bankers and regulators a clearer understanding of a bank’s operations and its assets and liabilities [and] map out the steps the banks would take to distribute large losses among stakeholders.”
The Federal Reserve Bank (FRB) and the Federal Deposit Insurance Corp (FDIC) are overseeing the bank’s contingency plans, ensuring that no bank is “too big to fail”.
This includes financial institutions with more than $50 billion in assets; as well as non-financial firms that are considered systemically important as understood by the US Department of Treasury (USDT) Financial Stability Oversight Council (FSOC).
The banks participating in this exercise include:
• JPMorgan Chase & Co
• Morgan Stanley
• Bank of America
• Credit Suisse Group AG
• Goldman Sachs Group
• Wells Fargo & Co
• State Street Corp
• Bank of New York Mellon Corp
• UBS Group AG
• Deutsche Bank AG
• Barclays Plc
Should another financial crisis rear its head again, these revelations provide investors and traders a better sense of the standing of banks.
Collectively, the banks divulged that they have “stockpiled long-term debt” within holding companies (or the parent company that owns the bank) to make their portfolios appear to be “less complex”.
In other words, banks have placed their derivatives (or stockpiled long-term debt) within the main corporation that owns their subsidiaries. The only problem is that if the parent fails, so do its “children”.
The bank’s assets could be placed into receivership with the intention of being split up and auctioned off; however some corporations abuse receivership and bankruptcy to make investors and creditors think they are dead in the water only to pull out at the last minute and enjoy large primary debt write-offs. This is a sort of corporate version of playing possum.
This classic con tactic would provide the unique advantage of not having to go to the Senate and demand a taxpayer bailout. The banks could simply file for bankruptcy and exert social pressure via public outcry, protests and demands of the people that Congress consider another bailout.
In this scenario, the parent company gets saved and not the subsidiaries. This tactic is a reserve version of what happened after the crash in 2008.
Regarding the bank’s contingency plans, JPMorgan’s “hypothetical death”would see the bank downsize by a 3rd and provide a resolve for the bank “without systemic disruption or taxpayer support”.
Citigroup has proposed shrinking by selling off $300 billion in corporate assets and “cut US retail banking to about $200 billion”; as well as get rid of broker-dealers.
Mark Costigilo, spokesperson for Citigroup, explained that should Citigroup go into bankruptcy, their living will “demonstrates that we can do so without the use of taxpayer funds and without adverse systemic impact.”
And Bank of America (BoA) stated that their rise out of bankruptcy would involve the unloading of $1.2 trillion in assets; as well as “shedding most of … non-bank operations”.
Last year, the major banks were told to revise previously submitted living wills because their plansdid not provide a “credible or clear path through bankruptcy that doesn’t require unrealistic assumptions and direct or indirect public support.”
All of this adds up to a bail-in, as predicted by economic analyst Jim Sinclair who said: “Bail-ins are coming to North America without any doubt, and will be remembered as the ‘Great Leveling,’ of the ‘great Flushing’ (of Lehman Brothers). Not only can it happen here, but it will happen here. It stands on legal grounds by legal precedent both in the U.S., Canada and the U.K.”
Sinclair pointed out: “Bail-ins do not require a crisis to occur and can surface one bank at a time, spread out over years. The major situation is deposits above insurance levels in banks too big to fail. Those deposits are directly in harm’s way.”