Nice Try: Banks' Living Wills Won't Save the Day


Nine of the world's biggest financial institutions have submitted resolution plans to U.S. regulators, the so-called "living wills," that the government will use to efficiently wind down these huge entities in the event of another financial meltdown. The largest banks constituted the first wave of submissions, those holding companies with $250 billion or more in nonbank assets. More will follow, and a total of 125 financial companies will be expected to file plans by the end of 2013.

An attempt to prevent another taxpayer bailout
These guidelines for dissolution are required under the Dodd-Frank reforms, and heavy hitters like Bank of America (NYS: BAC) , JPMorgan Chase (NYS: JPM) , Citigroup (NYS: C) , Goldman Sachs (NYS: GS) , and Morgan Stanley (NYS: MS) have all complied with the law. In addition, UBS, Barclays, Credit Suisse, and Deutsche Bank have turned in their blueprints.

For the most part, the public portions of these submissions read like public-relations documents. JPMorgan apparently could not be more in agreement with Dodd-Frank and is diligently working to adhere to its regulatory letter of the law. Bank of America seems to be entering itself into a sort of "Bank of the Year" contest, outlining how it has been concentrating on managing risk and being a benevolent employer. Financial information is similar to what is already available publicly.

As part of the program, these banks also submitted confidential information to both the Federal Reserve and the Federal Deposit Insurance Corporation, and I would expect those reports to be meatier. I do wonder, however, how much more information there is -- over and above what the banks already report to the government -- that banks are willing to part with.

Banks going rogue?
Of course, the government can't be blamed for trying to avert another financial crisis and taxpayer bailout, and who would know better the inner workings of any company other than the entities themselves? The problem with self-reporting, however, is that recipients can never really know when they have gotten all the information they asked for. Unfortunately, the banks simply can't be trusted to supply truthful information.

While the disingenuousness of banks has been at issue ever since the financial house of cards came down four years ago, it has never been quite as clearly stated as in a recent annual report by the Bank for International Settlements. According to Bloomberg, the report notes that banks have not been entirely honest when reporting things such as assets, losses, and debt. The report also takes the position that, though recapitalization of the world's banks has made some inroads, banks are still too highly leveraged. Not only are banks once again relying too heavily on trading for their income, but they have also become acclimated to believe that, based on past practice, taxpayers will once again pick them up if they fall.

Sobering, yes -- but not really news. Recent banking scandals point out just how endemic the notion has become that banks think they should be allowed to govern themselves without any outside intervention. The fact that Barclays was able, for so long, to manipulate a global interest-rate metric shows just how little interest there is in monitoring what these behemoths do, despite their effects on global fiscal policy.

Then, again, there is JPMorgan. First, there was its multibillion-dollar trading loss, then the news that the bank neglected to inform its investors of the risk model change that led to the debacle. More recently, disclosures have come to the fore that the bank treated investors shabbily in other respects as well -- such as pushing its own, inferior products on customers when competitors' would have been a better fit. Oh, and overstating the yields of these crummy investments, too.

Meaningful change or toothless legislation?
How great are the chances that these resolution plans will relieve taxpayers from rescuing insolvent financial institutions if another crisis evolves? Not great, it seems. While it does force banks to take an introspective look at their inner selves, it is unclear whether there are any requirements, beyond actually producing and handing over the resolution document that might prevent problems before they blossom into a crisis.

Also, what are we to make of the fact that our own Federal Reserve chairman, Ben Bernanke, also sits on the board of the Bank for International Settlements? On one hand, he is accepting living wills from banks with the idea of orderly dismemberment and no taxpayer support in the event of another financial meltdown. On the other, he has signed on to the opinion, penned by the BIS, that banks routinely fake their balance-sheet numbers and will expect -- and most likely receive -- public money if they once again falter. In my opinion, these two points of view are incredibly unharmonious.

Despite the efforts of regulators, it looks as if everyday Joes and Janes could once again be on the hook if banks go belly-up. Investors could be hit twice, once as shareholders and then, again, as taxpayers. While an organized dissolution would be preferable to chaos, it seems to me that regulators should be concentrating more on preventing the chaos rather than curing it.

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At the time thisarticle was published Fool contributorAmanda Alixowns no shares in the companies mentioned above. The Motley Fool owns shares of Citigroup, Bank of America, and JPMorgan Chase.Motley Fool newsletter serviceshave recommended buying shares of Goldman Sachs. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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