Sheila Bair Makes Another Useless Threat: "If the biggest banks can't show they can be resolved in bankruptcy then they should be downsized now"

One requirement of the Dodd-Frank Financial Reform bill is that the big banks are required to file resolution plans, or "living wills," outlining how they could be broken up in the event of failure.  In her interview today with Reuters, FDIC chair Sheila Bair says that some of the large, complex institutions, (Citi, Goldman Sachs, et al.) would have to be restructured if they can't come up with a credible resolution plan.  Of course, they can't come up with a credible resolution plan that would cause the Federal Bailout Machine to stand down during a crisis -- that's why they're Too Big To Fail.

It is encouraging that Bair is openly pointing out the potential weaknesses of Dodd-Frank, and that she is making threats to do something about the Too Big To Fail problem, but we can easily see this process turning into a long, drawn out wrestling match between the regulators, the banks and their well-armed brigade of lobbyists. 

And instead of tackling issues that matter, like size and leverage, we can easily see this devolving into a narrow argument over how to simplify the legal structure of these large institutions.  The complex legal structures of the Bank Holding Company, for example, was a problem in 2008, but only because these firms were already so outlandishly large and so dangerously levered in the first place.

• Video - Sheila Bair's Reuters interview...

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FDIC calls for big bank restructuring

Source  - Reuters

(Reuters) - America's big international banks should restructure their operations unless they can prove they can easily be broken up if they start toppling during a financial crisis, said U.S. regulator Sheila Bair.

Multinationals will need to set up more foreign subsidiaries and realign their legal structures to make it easier for regulators to liquidate them if necessary, Bair told the Reuters Future Face of Finance Summit.

"If they can't show they can be resolved in a bankruptcy-like process... then they should be downsized now," said Bair, chairman of the Federal Deposit Insurance Corp.

"There is no reason in the world why they should get some special treatment backstop that other businesses in this country don't have," Bair said.

She also said investors need to accept that they will get lower returns from banks that hold higher capital and run safer operations.

Bair said traditional deposit-taking banks in the United States probably can produce plans for a shutdown, but large multinationals with complex legal structures need to simplify.

"The burden is on them initially to show us that they don't think they need subsidiarization," she said. "They need to give us a plan on how they can be resolved on an international basis without it."

A former general counsel at Bair's agency said there may a tension between banks trying to meet these new regulations and maximizing shareholder value.

Bair made clear she was not advocating that some large banks be broken up now -- only that they need to make structural changes so that they could be broken up if they begin to fail.

Continue reading...

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Further Reading...

• BUSTED: Obama Lied About No More Wall St. Bailouts

• Warren Buffett: "No One Can Stop Too Big To Fail"

• "System Is Less Safe Than Before": Watchdog Says Dodd-Frank Won't Stop Future Bailouts; Clashes With Treasury At First Issa Hearing

(Reuters) - America's big international banks should restructure their operations unless they can prove they can easily be broken up if they start toppling during a financial crisis, said U.S. regulator Sheila Bair.  Multinationals will need to set up more foreign subsidiaries and realign their legal structures to make it easier for regulators to liquidate them if necessary, Bair told the Reuters Future Face of Finance Summit.  "If they can't show they can be resolved in a bankruptcy-like process... then they should be downsized now," said Bair, chairman of the Federal Deposit Insurance Corp.  "There is no reason in the world why they should get some special treatment backstop that other businesses in this country don't have," Bair said.  She also said investors need to accept that they will get lower returns from banks that hold higher capital and run safer operations.  The aim of orderly liquidation is to avoid a repeat of 2008, when the Bush administration bailed out American International Group (AIG.N) and other firms but not Lehman Brothers (LEHMQ.PK). Lehman's bankruptcy virtually froze capital markets.  The "living will" requirement mandated by last year's Dodd-Frank financial reform law is also designed to end the idea that some firms are too big to fail. It would put the greatest burden on banks with complex businesses and big international presences such as Citigroup (C.N), Bank of America (BAC.N), JPMorgan Chase (JPM.N), Goldman Sachs (GS.N) and Morgan Stanley (MS.N).  By year's end, big banks are expected to file with regulators their plans that would show how they can be closed down if they face a liquidity crisis.  REGULATORS VS SHAREHOLDERS  Bair said traditional deposit-taking banks in the United States probably can produce plans for a shutdown, but large multinationals with complex legal structures need to simplify.  "The burden is on them initially to show us that they don't think they need subsidiarization," she said. "They need to give us a plan on how they can be resolved on an international basis without it."  A former general counsel at Bair's agency said there may a tension between banks trying to meet these new regulations and maximizing shareholder value.  "If you set up a business in a way to optimize ease of liquidation, that may not be the way to optimize running a successful business," said John Douglas, now a Davis Polk attorney.  Others said the changes may be more hassle than expensive and the changes would be legalistic. "This is just the latest in 'Can you jump through this hoop backwards?'," said Paul Miller, an analyst with FBR Capital Markets.  Bair made clear she was not advocating that some large banks be broken up now -- only that they need to make structural changes so that they could be broken up if they begin to fail.

Comments

[Ben Cawtsteelin]

I don't know if anyone here has ever been to the Washington Times site, a bit radical for this group BUT they just posted this...Financial terrorism suspected in ‘08 economic crash -- Pentagon study sees element.

[DailyBail]

US awards first deepwater permit post-Gulf spill

http://www.activistpost.com/2011/02/us-awards-first-deepwater-permit-post.html

[DailyBail]

Belgium Breaks Record for Longest Time Without Government

http://news.yahoo.com/s/time/20110221/wl_time/08599205284300

[DailyBail]

Report: Yale professor intentionally gave patients hepatitis in 1940s study

http://www.ctpost.com/news/article/Report-Yale-professor-intentionally-gave-1034286.php#ixzz1FKikO3Vj

[Josie]

The more I read Bair's comments, the more I am convinced she is nothing more than a populist rhetoric-spewing bureaucrat who has very little power and even less desire to use it...a plan to restructure? Huh? Is that not de facto TBTF? So, we will allow TBTF if those TBTF banks can "prove" a method of break-up should (really when) the economy imploded again.?

I am numbing to all of this...

[DailyBail]

having the same reaction josie...used to be a decent fan of sheila, but i've been hearing hear siren calls for 2 years now and nothing ever becomes of any of it...

[S. Gompers]

You are correct on Bair, and good for Belgium.