Wednesday, September 14th, 2011
In a compelling sign of the times, U.S. regulators are forcing big banks to envision their own demise in “living wills” that outline financial emergency plans. And things always go according to plan.
“U.S. regulators approved two sets of guidelines that banks including Citigroup Inc. and JPMorgan Chase & Co. will have to follow in drafting plans to protect the broader economy in the event of their own collapse,” Bloomberg says.
The contingency planning requirement also needs Fed approval before it can go into effect.
The New York Times reports the new plans will require a lot of oversight from regulators, all with an eye to avoiding another too-big-to-fail bailout:
The documents will open a window into the financial industry’s investments, trading counterparties and concentration of risk. The firms also must share what amounts to a Plan B — details for how the company can be wound down through the bankruptcy process . . . Armed with the contingency plans, regulators say they can prevent a repeat of the chaotic Lehman Brothers bankruptcy, which still lingers on today.
So the “living wills” appear to require a lot more than just contingency planning. Regulators will apparently be able to peek in and admonish bankers for stocking the larder with toxic RMBS securities, sub-prime loan packages, Greek debt, what have you.
Alvarez & Marshall managing director Paul Cantwell told The Financial Times that the wills sound like hands-on regulation:
Companies pursuing activities that may not be easily wound down in the event of failure could be forced to either abandon those business lines or restructure them to make their failure much easier for regulators to handle, he said.
That’s a great idea: plan your failure so it’s easier for regulators to clean up. Really, the prospect of close collaboration between bankers and regulators is amazing.
Combine the iron-fisted oversight that ignored the Madoff mess for a decade with the kind of investing insight that destroyed Lehman Brothers and scorched any number of other banks . . . and maybe we should all be planning for an economic nuclear winter scenario.
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