Perhaps the biggest farce to result from the Dodd-Frank legislation designed to "rein in" banks was the ridiculous notion of "living wills" - a concept that makes zero sense in an environment where the failure of even one bank assures a systemic crisis and could - as the Lehman financial crisis showed - lead to the collapse of all other interlinked financial institutions.
Which is why we were not surprised to read this morning that federal regulators announced that five out of eight of the biggest U.S. banks do not have credible plans for winding down operations during a crisis without the help of public money.
Which is precisely the point: now that the precedent has been set and banks know they can rely on the generosity of taxpayers (with the blessing of legislators) why should they even bother planning; they know very well that if just one bank fails, all would face collapse, and the only recourse would be trillions more in taxpayer aid.
As Reuters writes, the "living wills" that the Federal Reserve and Federal Deposit Insurance Corporation jointly agreed were not credible came from Bank of America, Bank of New York Mellon, J.P. Morgan Chase, State Street, Wells Fargo. What is more impressive is that the Fed and FDIC found any living will to be credible.
Also amusing: it was only the FDIC which alone determined that the plan submitted by Goldman Sachs was not credible while the Goldman-dominated Fed gave its blessing; alternatively, the Federal Reserve Board on its own found that the plan of Morgan Stanley - Goldman's arch rival in investment banking - not credible. Citigroup's living will did pass, but the regulators noted it had "shortcomings."
"The FDIC and Federal Reserve are committed to carrying out the statutory mandate that systemically important financial institutions demonstrate a clear path to an orderly failure under bankruptcy at no cost to taxpayers," FDIC Chairman Martin Gruenberg said in a statement. "Today’s action is a significant step toward achieving that goal."
None of the eight systemically important banks, which the U.S. government considers "too big to fail," fared well in the evaluations. However, a bank has to fix deficiencies only if the two regulators jointly determine its plan does not have the potential to work.
"Each plan has shortcomings or deficiencies," said FDIC Vice Chairman Thomas Hoenig in a statement. "No firm yet shows itself capable of being resolved in an orderly fashion through bankruptcy. Thus, the goal to end too big to fail and protect the American taxpayer by ending bailouts remains just that: only a goal."
Banks whose living wills are deficient can be subject to more stringent regulation such as requirements to have more capital or restrictions on growth. If they do not fix the identified problems within two years, they can be forced to divest assets.
How seriously did banks take this finding? Earlier today JPM confirmed its intentions to to increase capital return in the first half following the board's approved of an incremental $1.9b in share buybacks. Because why worry: there are "living wills", and if that fails, there is always a bailout.