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Big Banks’ ‘Living Wills’ Aiming for Bankruptcy Not Bailouts

July 03, 2012

Big Banks’ ‘Living Wills’ Promise Bankruptcy Instead of Bailouts

Employees of Christie's auction house with the Lehman Brothers corporate logo in London. Photographer: Oli Scarff/Getty Images

U.S. regulators, seeking to prevent a repeat of taxpayer-funded bailouts of the financial system, released summaries of plans for breaking up nine of the world’s largest banks in the event of an emergency.

The Federal Deposit Insurance Corp. and Federal Reserve posted the public portions of so-called living wills on websites today as required by the 2010 Dodd-Frank Act. The documents outline more detailed proposals submitted privately describing how regulators could dismantle the companies if they fail.

The banks required to file were JPMorgan Chase & Co. (JPM:US), Bank of America Corp. (BAC:US), Citigroup Inc. (C:US), Goldman Sachs Group Inc. (GS:US), Morgan Stanley, Barclays PLC (BCS:US), Deutsche Bank AG (DB:US), Credit Suisse Group AG (CS:US) and UBS AG. (UBSN)

The aim of the living wills is to give regulators a plan for shutting down complex financial firms without taxpayer bailouts or the turmoil that followed the 2008 collapse of Lehman Brothers Holdings Inc.

Banks with more than $250 billion in nonbank assets were the first of an eventual 125 firms required to produce liquidation plans, which are expected to run into thousands of pages. Nonbank companies declared by U.S. regulators to be systemically important will also have to submit living wills.

Few Details

The public summaries of the wind-down plans reveal few details. For instance, Bank of America’s summary says that assets sold off during a resolution could go to a “range of buyers including, but not limited to, national, international and regional financial institutions; private equity and hedge funds; and other financial asset buyers such as insurance companies.”

Some banks said it would be possible to save their main businesses and avoid full liquidations. As regulators instructed, the proposals presumed markets would be functioning normally with buyers ready to make large acquisitions without government backing. That wasn’t the case when firms including Bear Stearns Cos. collapsed during 2008’s credit crisis, and the law allows the regulators to require more complicated stress scenarios in future rounds.

Morgan Stanley (MS:US), owner of the world’s largest brokerage, and Goldman Sachs were among firms that said it may make the most sense to sell assets or stand-alone businesses in the event of a failure. Goldman Sachs predicted that such deals could help it avoid a company-wide liquidation. Sales, which would need to be conducted “quickly,” would likely be to other financial firms, private-equity investors, insurance companies or sovereign wealth funds, it said.

‘Substantial Majority’

“If it proves impossible to sell GS Group businesses and assets then it would be possible to liquidate a substantial majority of GS Group’s assets,” the New York-based company said. Such a strategy would “likely take more time,” it said.

“We believe the plan we sent to the Federal Reserve and FDIC provides a process to enable an orderly resolution of Goldman Sachs Group,” the company said in a statement today. Its plan works in conjunction with “the firm’s well-established risk management practices, conservative liquidity management practices and rigorous approach to regularly marking assets to market values,” it said.

JPMorgan, Bank of America, Citigroup and Zurich-based Credit Suisse (CSGN) said that one option was to shunt FDIC-insured entities into a so-called bridge bank that could be preserved.

Non-bank Units

Non-banking entities, such as Bank of America’s Merrill Lynch unit, could be put through bankruptcy proceedings, the Charlotte, North Carolina-based company said. Broker-dealer units would be liquidated according to the Securities Investor Protection Act, it said.

Donald Lamson, who represents financial institutions at Shearman & Sterling LLP in Washington, said the lone failure assumption could limit the plans’ usefulness in the event of a broad financial crisis.

“The same stresses that would prompt me to put a subsidiary up for sale would make it just as difficult for another entity to make a purchase,” Lamson said.

Citigroup, the third-biggest U.S. bank with operations in more than 100 countries, said it could separate its deposit- taking banking unit, Citibank NA, from broker-dealer units that trade stocks and bonds. The New York-based parent would then go bankrupt and sell off the broker-dealers, according to the plan. Citibank would continue as a “smaller but recapitalized and viable banking institution,” it said.

‘Orderly Fashion’

Regulators could also wind down Citigroup by selling the lender’s operations “in an orderly fashion,” the firm said. Employees would be “well equipped” to help after already reducing the size of the Citi Holdings division, according to the plan. Chief Executive Officer Vikram Pandit created the unit in 2009 to hold about $600 billion of unwanted investments. Assets fell to $209 billion at the end of March.

“Our first blush review suggests few shocks,” according to a note today by Jaret Seiberg, a senior policy analyst with Guggenheim Securities LLC in Washington. “Banks basically suggest either turning themselves over to creditors or liquidating the institutions. This should hardly shock investors.”

The information in this first round of “very high-level” summaries is not much deeper than what can be found in existing securities filings, Lamson said.

‘We Hope’

“I think that in a lot of these statements, there’s the parenthetical: ‘We hope,’” Lamson said in an interview. “These are all forward-looking assessments, and it’s very hard to see the future.”

In coming months, regulators will assess whether each living will represents a “credible” path to a rapid and orderly bankruptcy. The agencies have 60 days from submission of the plans to request more information from the companies.

“These banks owe American taxpayers more information than these excerpts from their shareholder reports and the saccharine reassurance that they’re safe,” Bartlett Naylor, who works on financial policy at the Washington-based advocacy group Public Citizen, said in an interview.

To contact the reporter on this story: Jesse Hamilton in Washington at

To contact the editor responsible for this story: Maura Reynolds at

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