Banks submit their living wills to regulators, and move on swiftly.
Two investment banks, a regulator, and the ghost of Lehman Brothers walk into a bar. On one table, a trader in a purple jacket hammers his cell phone against the surface in a vain attempt to kick-start the battery. On another, a trader in a blue jacket argues with a waitress that he originally tipped her too much when all of his buddies only gave her a dollar each, yet he's the one in trouble when he does the same.
"We need to talk about these living wills," says the regulator, who clearly hasn't had a good night's sleep since the last presidential election. The two banks exchange a knowing, yet tolerant glance.
"Go on, then," says the first.
"So, essentially," the regulator pinches the bridge of his nose. "Your plan is to go bankrupt?"
Both banks nod.
The circumstances leading to the failure of a systemically important financial institution will likely be different than the specific assumptions listed above, and we expect that future submissions of our Resolution Plan will include other conditions and may have different assumptions - Goldman Sachs.
"And if there isn't enough balance in your accounts to pay off creditors, you'll strip-sell your assets?"
Both banks nod.
"And if you do need the FDIC to bail you out, you'll pay them back by raising capital through private means?"
Both banks sigh, pointedly.
"Notwithstanding the calamitous event that might cause the collapse of, let's say for fun, you," the regulator points at the first bank, which shoves its hands into the pockets of its green blazer. "Where there might not be that much private money available. Since a lot of it's in your accounts. And you're bankrupt."
"Do you have a better idea?" asks the second, gold-bedecked bank.
"It's a pointless exercise," agrees the first.
"Yes, I can see that," the regulator replies, waving a thick sheaf of paper at them both. "You've copied and pasted ‘This is a pointless exercise and we're only doing it because you're making us' several thousand times."
"Don't worry," says the second bank, patting the regulator on his rapidly-thinning head. "We'll revise it with a new set of suppositions in three months."
Or at least, that's how I'd imagine the conversation going. But the issue of living wills has been a topical one, and it's been lost this week amid Barclibor, the Council of the European Union adopting derivatives rules proposed earlier this year, and Bob ‘Diamond' Diamond's resignation in light of the aforementioned scandal.
Let's be honest, although we'd like to pretend that an institution like JPMorgan, or Goldman Sachs, or Morgan Stanley aren't just Too Big To Fail, they're Too Big To Consider The Possibility Of Failing, Bear Sterns and Lehman teach us otherwise. Not that those two have gone away, of course, rather than been absorbed osmosis-like into various other institutions, but the point remains.
Economically, the argument is inviolable, in a broad sense. There needs to be some sort of plan of action that will be put into place if this event happens. But the banks do have a point. If you read through the living wills submitted this week ─ and I do have to warn you, they are interminably dull reads ─ the sheer amount of supposition and what-if necessary to create such documents effectively renders them useless, particularly given the points that they have to follow.
Take Goldman's filing, for instance, which outlines the criteria ─ sudden, idiosyncratic financial distress at Goldman alone, while the rest of the market is fine, other market participants in a good financial condition, and no extraordinary government support ─ then consider Goldman's wonderfully contemptuous response.
"The circumstances leading to the failure of a systemically important financial institution will likely be different than the specific assumptions listed above, and we expect that future submissions of our Resolution Plan will include other conditions and may have different assumptions," it says. "These changes might materially alter the specific choices undertaken as part of a resolution process."
Essentially saying, the last time this happened, it impoverished continents and changed governments, so the conditions make no sense, and it's been a pain in the ass from stage one. And it makes no sense.
I'm all for contingency planning in the event of an emergency. And given the technology pedigree of these enormous institutions and the effect that their trading programs, infrastructure and strategies have on the market, let alone the retail implications, there needs to be some kind of Plan B. A bank, after all, is more than just the salesmen and flow traders, there's architecture and infrastructure to consider, along with how they're interlinked with other institutions. But as regulatory mandates go, this is just ridiculous.
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