Seeking Alpha

Feds reject "living wills" of 11 major lenders

  • The Federal Reserve and the FDIC say the bankruptcy plans submitted by 11 of the largest banks make "unrealistic or inadequately supported" assumptions and "fail to make, or even to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for" an orderly failure. Ouch!
  • Full feedback
  • The 11 dinged: BAC, BK, C, GS, JPM, MS, STT, and the U.S. units of BCS, CS, DB, and UBS.
  • To review: Dodd-Frank requires banks annually submit a "living will" detailing their operations and exposures and how they could be dismantled without the need of a bailout in the event they near failure. Pleasing the regulators is a must as they have the power to force tougher capital rules or restrictions on growth, or even mandate a breakup of the lenders. As for the current failures, the banks have about a year to address D.C.'s concerns.
  • "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," says the FDIC's #2 official, Thomas Hoenig.
  • ETFs: XLF, FAS, FAZ, UYG, VFH, IYF, SEF, IYG, FXO, FNCL, FINU, RWW, RYF, FINZ
From other sites
Comments (33)
  • Mike Maher
    , contributor
    Comments (2616) | Send Message
     
    News flash: If one of the largest banks in the country fails, there is going to be a negative effect on the economy. There's no way around it. You can cut down on risk, and add to capital buffers, but if a bank fails, its going to need support, either from the taxpayer or other institutions. 200 years of banking history tells us this. Just next time don't let the CEO's and BoD's all keep their jobs and lets move on.
    6 Aug, 09:05 AM Reply Like
  • Moon Kil Woong
    , contributor
    Comments (11161) | Send Message
     
    Yes, the only way to solve TBTF banks is to force them to be smaller and not to put such a burden on the economy and none on the taxpayer. TBTF = failure.
    6 Aug, 12:46 PM Reply Like
  • JasonC
    , contributor
    Comments (3567) | Send Message
     
    Moon - no, Mikle had is right. Bank failures will hurt the economy and will require public intervention.

     

    We've tried just having banks be small and it doesn't change that - thousands of small banks failing is just as bad as a big bank failing and in some ways harder to manage (happened in 1930s, also happened in our S&L crisis). And no, it isn't less likely - the causes of major bank failures do not insure away by diversification, any more than the causes of mortgage default insure away by putting many mortgages in the same MBS. Whenever failures get big enough to matter, they will be highly correlated. Lots of smalls cures nothing.

     

    Mike has it right and the entire political system is simply in denial about a patent fact of economic and financial life. Pols consider bankers unpopular and therefore wish they could never do anything to help bankers. But the public, despite hating bankers, actually needs bankers, and economies die without them. So whenever banking has a terminal illness, either the public moves to help bankers despite pols hatred of them, or the public gets killed by the effects of bankers getting killed.

     

    At bottom, the true interests of bankers and public are aligned, not opposed, but the public doesn't see this or doesn't want it to be true.

     

    Prosperous capitalism without prosperous capitalists remains a round square and a misunderstanding. The only thing resentment of the rich can ever produce is economic misery. When the financial system actually needs help, it actually deserves it, the public good actually requires it, and it should actually get it - populist resentments be damned.
    6 Aug, 12:54 PM Reply Like
  • nooseah
    , contributor
    Comments (496) | Send Message
     
    What a pile of horse sht. I would laugh if what you said wasn't so deluded.

     

    You're saying that the tax-payer must prop up the banking system - it's in their interests?

     

    Banks should be allowed to go to the wall - at most, depositors should be saved but the rest wiped out. That way bond holders and shareholders would only support sound institutions and shun the gambling dens.

     

    Re-introducing Glass-Steagall would be a big step toward mitigating risks in the banking system but that would severely curtail profitability at the IBs so the bankers have been pushing against any such move. The only reason bankers are able to earn such extraordinary salaries is by virtue of the tax-payer subsidy in the first instance -- along with the ability to use depositors' funds to take highly leveraged bets on financial markets. The bottom line is that tax-payers are being bent over big-time but they just don't get it.

     

    Seriously, you need to find something else to comment on. Something you actually know about.
    6 Aug, 02:00 PM Reply Like
  • SoCalNative
    , contributor
    Comments (496) | Send Message
     
    "The only thing resentment of the rich can ever produce is economic misery. When the financial system actually needs help, it actually deserves it, the public good actually requires it, and it should actually get it - populist resentments be damned."

     

    I like that. +1
    6 Aug, 02:01 PM Reply Like
  • SoCalNative
    , contributor
    Comments (496) | Send Message
     
    nooseah,
    Regardless of which view you take, JasonC is writing his thoughts. That's what this is - a forum for your thoughts. You may be 100% correct but, you sound like a bitter ass.
    6 Aug, 02:09 PM Reply Like
  • Buckoux
    , contributor
    Comments (6338) | Send Message
     
    JasonC,

     

    Very well said. All of it!
    6 Aug, 02:26 PM Reply Like
  • Philip Marlowe
    , contributor
    Comments (1067) | Send Message
     
    JasonC you are fricking hilarious. If I go up to you and ask you to give me a billion dollars for free in exchange of nothing, will you give it to me? And if you do not, does that proof that you hate me that you harbor some secret populist resentment towards me?
    6 Aug, 02:33 PM Reply Like
  • JasonC
    , contributor
    Comments (3567) | Send Message
     
    "Banks should be allowed to go to the wall - at most, depositors should be saved but the rest wiped out. That way bond holders and shareholders would only support sound institutions and shun the gambling dens"

     

    It has been tried, and it has no such effect. But do you know what effect it does have? It kills mainstreet. Because the destruction of N dollars of financial capital, when finance is running at a typical 10 times leverage, reduced total credit outstanding by 10*N, automatically and deterministically. You have successfully murdered the gamblers. Congratulations on your moral rectitude. But you just murdered 9 times as many non gamblers. Oh, you saved the depositors, so kind of you. By the way, they were gamblers too, but let that slide. By saving the depositors have you preserved total credit or the money supply? No you have not. Less financial capital, any prudent capital requirements or regulatory leverage requirements, equals a leveraged reduction in total credit out and with it total wealth of all assets at market values.

     

    Why is final demand growth punk throughout the rich world since 2008? Because trillions in financial capital were destroyed by defaults. Instead of net new credit funding expansion of existing businesses and development of new ones, every financial institution was issued an order by the moralists to repay all their debts as soon as possible. And guess what? They mostly did and are mostly still standing because they succeeded in doing it.

     

    But nobody got new credit, and so nobody got hired. Mainstreet gets it in the neck. Moralists crow about all the rich people they've crucified. They never even consider all the growth they blew to atoms in the process.

     

    If you want prosperity, you want rich people making money in every sense of that phrase. It is the only thing that has ever employed everyone and enriched everyone in the entire history of man. If you hate it happening, welcome to the pain.
    6 Aug, 02:36 PM Reply Like
  • Philip Marlowe
    , contributor
    Comments (1067) | Send Message
     
    Wow, Jason that is the ultimate straw man argument. You are now arguing that banks are a good thing in general. Nobody disputes you on that. Nobody is arguing for the abolishment of banks altogether.

     

    We are talking about FAILED banks. Banks that are insolvent. They do not have a very positive effect on society. If a business fails through mismanagement it is usually in societies best interest for the business to be liquidated as quickly as possible so that people that are better at management of this type of business can enter the space.

     

    If pizza store makes bad tasting pizza and it fails, is it better to: (1) keep giving it taxpayer money so it continues to make bad pizza or (2) let it fail so a better pizza cook can enter the location and try their luck.

     

    The answer for banks is the same. If a bank is properly unwound it will give the opportunity for another bank to emerge in its space. The only difference is that it is much easier to liquidate and unwind a pizza shop than a bank. There is where Dodd Frank comes in.

     

    But you jason argue that big banks should be special. We should not let them fail at all. They should be able to make all the mistakes and bad decisions they want, and the taxpayer should just pay up when things get bad. Why?
    6 Aug, 03:15 PM Reply Like
  • th3decider
    , contributor
    Comments (365) | Send Message
     
    You talk as if the only thing that can grow an economy is debt and credit. Borrowing against a future paycheck is a not a raise, and debt is not growth unless the return of that debt is greater than the cost of it, and we long ago passed the point where government debt provides a positive ROI. As for a corporate setting you talk as if no one ever heard about simply saving money to use for future investments instead of borrowing.
    6 Aug, 03:19 PM Reply Like
  • dnorm1234
    , contributor
    Comments (1125) | Send Message
     
    >Banks that are insolvent

     

    So which banks were insolvent and which were simply in need of liquidity when the crisis hit?
    6 Aug, 08:10 PM Reply Like
  • dnorm1234
    , contributor
    Comments (1125) | Send Message
     
    >As for a corporate setting you talk as if no one ever heard about simply saving money to use for future investments instead of borrowing.

     

    Who is paying you the return on your savings if nobody is borrowing?
    6 Aug, 08:11 PM Reply Like
  • JasonC
    , contributor
    Comments (3567) | Send Message
     
    You need banks to succeed, not just to exist. Often they can take care of that themselves, sometimes they screw up and they can't. There is no way to let major banks fail messy that won't clobber millions of innocents. The desire to have that happen effortlessly is a desire for unicorns. It isn't a matter of moralism or passing a law - it is a matter of impossibility and an unwillingness of ideologues to face facts about natural law.
    7 Aug, 12:44 PM Reply Like
  • MechEngineer
    , contributor
    Comments (9) | Send Message
     
    There is a moral hazard introduced when the banks know they are too big to fail. What reason do they have to limit risk? Taxpayers be damned. I say abolish the FED, go back to gold standard, and break up any bank deemed too big. Obviously this will never happen as the powers that be will destroy the dollar to hold onto their agenda at all costs. Farewell America as we know it. Hello NWO by 2020.
    6 Aug, 09:12 AM Reply Like
  • 6012571
    , contributor
    Comments (136) | Send Message
     
    What a waste of time, DODD-FRANK one of the worst bills written by demorats. What other industry is required to adhere to this bs?
    6 Aug, 09:13 AM Reply Like
  • JD in NJ
    , contributor
    Comments (981) | Send Message
     
    What other industry can bring down the entire economy when it gets too greedy?
    6 Aug, 09:31 AM Reply Like
  • Estimated Profit
    , contributor
    Comments (25) | Send Message
     
    Government
    6 Aug, 09:36 AM Reply Like
  • JD in NJ
    , contributor
    Comments (981) | Send Message
     
    Government isn't an industry, it's societal overhead. Government, and the elected officials with whom we are stuck, are an unfortunate but necessary component of our lives. We can whine and moan about it, but that's just being immature. Instead we should strive to improve it by seeking out and voting for better people.

     

    Of course, better people don't get elected because they say and do things which, while necessary and correct, also do not tend to endear them to the lowest common denominator of voter.
    6 Aug, 09:59 AM Reply Like
  • th3decider
    , contributor
    Comments (365) | Send Message
     
    The valid question to then ask JD is, why have banks gotten to the state where they take down an entire economy when they crash? That isnt normal for any industry. The FDIC insuring deposits means the firms have little reason to NOT do risky things, the Fed backstopping them compounds this, and the crush of regulations in this industry means there is little viable free market competition and startup banks and new entrants to keep the big banks behavior in check from market forces.

     

    Banks for most of history were simply boring middlemen. They took in deposits, kept them safe and sometimes paid interest, then made money loaning those deposits out for a slightly higher interest rate. That's it, nothing more. Any local company could perform this role without collapsing the economy of the entire town they serve. Hell I personally could perform this role in my neighborhood. And because I have no Gov backstop or guarantees I would damn sure I knew what I was doing with those deposits and who I was loaning them out to. But the second I hear that all my deposits are insured no matter what I do or that the Fed will bail me out, then hell, what reason do i have NOT to go to Vegas at that point and put all my money in the slots?

     

    The government has created the situation where banks can wipe themselves out from moral hazard and bring down everyone with it.
    6 Aug, 11:33 AM Reply Like
  • Philip Marlowe
    , contributor
    Comments (1067) | Send Message
     
    Dodd Frank is absolutely necessary, unless you want the taxpayer to continue to pay enormous sums to save banks every time they screw up. Other industries can usually go bankrupt the usual way defined by US law. Banks cannot. Therefore, Dodd Frank is there to ensure that there is a way for large banks to go bankrupt without enormous bailouts.
    6 Aug, 11:38 AM Reply Like
  • Philip Marlowe
    , contributor
    Comments (1067) | Send Message
     
    Thedecider, banks have always been in danger of crashing the economy; that has been true before the fed even existed. Read up on the great depression, or the several economic crisis before the great depression. They all came with bank runs. This was before the fed and before federal insurance.
    6 Aug, 12:05 PM Reply Like
  • JD in NJ
    , contributor
    Comments (981) | Send Message
     
    And when they do crash the economy there is wide clamoring for the government to do something about the problem. So they do, and sometimes it even works.

     

    Fast forward a few decades and you start to hear people complaining that the banks are too restricted, that they wouldn't make the same mistakes they did back then. They're smarter now, they're more careful now. So the rules are rolled back. "Things are different this time."

     

    Guess what happens? Wash, rinse, repeat.
    6 Aug, 12:14 PM Reply Like
  • JasonC
    , contributor
    Comments (3567) | Send Message
     
    All of them.
    6 Aug, 12:56 PM Reply Like
  • JasonC
    , contributor
    Comments (3567) | Send Message
     
    Of course it is normal for every industry. If the entire car industry went bankrupt tomorrow, we'd have a major recession. We just had a major recession because the real estate industry had a crisis - that crisis spread to and through the financial sector, but it started in real estate. Any sustained mispricing and sustained misallocation of capital can produce massive capital losses, and any massive capital loss has the same impact on the overall economy. And a magnified one whenever it passes through the financial system, precisely because the financial system functioning well is absolutely vital to modern capitalism.

     

    What we actually have here is a patient who had a heart attack, blaming his heart for it and demanding that witch doctors cut it out so that it never hurts him again. Without his heart he wouldn't live for 5 minutes - that was why a heart attack was a problem in the first place. You can't cure a vulnerability to needing your heart to work by destroying your heart, and you can't fix the sensitivity of modern economies to their financial sector working well by trashing the financial sector. It is all moralizing populist nonsense, start to finish.
    6 Aug, 01:00 PM Reply Like
  • Andre LaPlume
    , contributor
    Comments (259) | Send Message
     
    And that's saying a lot!
    6 Aug, 01:23 PM Reply Like
  • th3decider
    , contributor
    Comments (365) | Send Message
     
    But that's the thing, the entire car industry wont go bankrupt tomorrow. Most companies see their sales doing down and down, years in the making, like Detroit did, before it comes to that state. In banking, given no one really knows the balance sheet of these firms, a seemingly healthy bank can go belly up tomorrow. That is not normal except in cases where firms were conducting fraud of their books.

     

    As for your medical analogy, you also cant fix someones heart by just keeping on giving them painkillers year after year (Fed and bailouts). It feels nice, but that is all it does.
    6 Aug, 03:10 PM Reply Like
  • dnorm1234
    , contributor
    Comments (1125) | Send Message
     
    >Most companies see their sales doing down and down, years in the making, like Detroit did

     

    And they flipped a switch, sales went through the roof, and everything was swell, right?

     

    No, they went bankrupt and were bailed out at a huge loss to the taxpayers.
    6 Aug, 08:17 PM Reply Like
  • Estimated Profit
    , contributor
    Comments (25) | Send Message
     
    the3decider pretty much hit the nail on the head. There are a lot of barriers to entry due to regulation and also regulation that favors the larger banks. Banks which take more risk look better (in the short term). I think if FDIC deposit insurance rate was based on the % of overall deposits you had (concentration penalty) that would really help level the playing field and curb incentives to merge into huge mega banks.
    6 Aug, 11:49 AM Reply Like
  • th3decider
    , contributor
    Comments (365) | Send Message
     
    For anyone curious if the unintended consequences of banking insurance could be foreseen, the answer is yes: http://bit.ly/1pCoXOk

     

    The Southeast Missourian - Mar 10, 1933, page 4 of that link is a fascinating debate at the time on the creation of banking insurance. Objections were that such insurance would "encourage bad banking," and with regards to competition that "...banks would be driven into the [insurance] system, or out of business, by depositors who would seek security."

     

    So more than 80 years ago, people were not stupid. They saw the unintended consequences of all this, but as usual politics dominated...
    6 Aug, 12:31 PM Reply Like
  • MTMatt
    , contributor
    Comments (38) | Send Message
     
    My understanding was that if their "living wills" were found to be insufficient, that the banks would be broken up. Would be great, but I'm not holding my breath.
    6 Aug, 12:16 PM Reply Like
  • Andre LaPlume
    , contributor
    Comments (259) | Send Message
     
    Any banks pass?
    6 Aug, 01:24 PM Reply Like
  • lcrupp
    , contributor
    Comments (42) | Send Message
     
    Bank regulators could solve this problem by abdicating the dollars role as the "reserve world currency" and letting the Chinese Yuan take the role. Our banking system would immediately shrink, along with our economy and we could accept our new role as a third world country.....which is where we're going anyway.
    6 Aug, 01:32 PM Reply Like
DJIA (DIA) S&P 500 (SPY)
ETF Tools
Find the right ETFs for your portfolio:
Seeking Alpha's new ETF Hub
ETF Investment Guide:
Table of Contents | One Page Summary
Read about different ETF Asset Classes:
ETF Selector