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Banks, Insurers Resist U.S. ‘Funeral Plan’ Crisis Breakup Rules* 2011‐03‐23 04:01:00.9 GMT By Rebecca Christie and Ian Katz March 23 (Bloomberg) ‐‐ Banks and insurers are pushing back against U.S. rules that will require some financial companies to show how they can be dismantled during a crisis. Under the so‐called living will plans, firms might have to divide themselves into separate entities that could be sold if the company were in danger of failing. Such break‐up plans are costly and would hurt financial companies by forcing them into illogical management structures, industry groups say. “Managing a big, complex, global entity by splitting it up into all kinds of jurisdictional boxes is far from ideal,” Eugene A. Ludwig, chief executive officer at Promontory Financial Group, a Washington‐based financial consultant, said in an interview. “It doesn’t make things safer. It makes things less safe by depriving supervisors of a clear line of sight into the workings of the company.” Regulators say they need an orderly wind‐down mechanism to avoid a repeat of the panic that gripped markets when Bear Stearns Cos., American International Group Inc., and Lehman Brothers Holdings Inc. floundered in 2008. Proposed rules on living wills, due from the Federal Reserve and Federal Deposit Insurance Corp. as soon as next week, are part of the debate between Wall Street and Washington over how tightly firms should be supervised and how the markets will react to such scrutiny. Lobby groups including the American Bankers Association are voicing concern to regulators in a series of comment letters seeking to limit the impact of the new rules. JPMorgan Chase & Co. and New York‐based insurer MetLife Inc. have discussed so‐ called resolution, or the unwinding process, with FDIC officials. Detailed Rule FDIC Chairman Sheila Bair is defending the need for a detailed rule. Bair and Fed Governor Daniel Tarullo are scheduled to discuss the issue in a meeting as soon as today, as their staffs prepare the draft regulations, a person familiar with the matter said. “The planning process in itself for some institutions will require structural changes,” Bair said in an interview with Bloomberg News at a conference in San Diego yesterday. A company will have to determine “how it is organized, how it could be broken up and sold off in pieces if the need occurred, and I think none of that really has happened yet,” she said. The Dodd‐Frank act passed last year says companies whose failure could threaten the financial system must design a living will. While the law can’t be changed without action by Congress, regulators have leeway in how it’s implemented. Bair said yesterday the FDIC will consider a proposed rule on living wills next week.
Paying Attention Douglas Elliott, an economic studies fellow at the Brookings Institution in Washington, said that living wills are “useful, partly because neither the banks nor the regulators were paying sufficient attention to this.” “If there had been a funeral plan for Lehman, I’m sure things would have proceeded significantly more smoothly,” said Elliott, a former managing director at JPMorgan. Since November, representatives from companies including JPMorgan, Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley, Fidelity Investments, BlackRock Inc., Barclays Plc, Credit Suisse Group AG and Deutsche Bank AG have met with Fed or Treasury Department officials to discuss issues related to systemic risk, according to records released by regulators. A living will is an “enormous burden” that puts banks on a course “that differs dramatically from the way they currently look at their business,” said Mark Tenhundfeld, senior vice president at the American Bankers Association. Smaller Subsidiaries The break‐up process, sometimes called subsidiarization or ring‐fencing, can involve requiring banks to turn different business lines and foreign branches into stand‐alone subsidiaries. Keeping separate boards of directors and management teams, and distinguishing capital and liquidity for different entities would be costly for banks, said Promontory’s Ludwig, a former Comptroller of the Currency under President Bill Clinton. The Financial Stability Oversight Council, charged with averting a repeat of the 2008 financial crisis, will ask firms for data so that it can start deciding by midyear which non‐bank financial companies are “systemically important,” or pose a potential threat to the system. Bair, one of the FSOC’s 10 voting members, said she wants to be sure no systemically important firms are overlooked. Resolution Planning “At least in terms of resolution planning, I would err on the side of inclusiveness,” Bair told the Senate Banking Committee Feb. 17. Regulators will review the plans and ask banks to correct any deficiencies found, Bair said. If banks don’t comply, the Fed and the FDIC have the authority to impose tougher capital, leverage and liquidity requirements, along with restrictions on growth, activities or operations. “In certain cases, divestiture of portions of the financial company may be required,” said Bair, who steps down as FDIC chairman in June. Companies are also concerned about whether the information in their living wills can be kept confidential, said Annette Nazareth, a partner at Davis Polk & Wardwell LLP in Washington and a former Securities and Exchange Commission member. “For firms that have never provided this level of granular business data to a governmental entity, it is really quite concerning,” Nazareth said March 8 at a National Association for Business Economics conference in Washington.
MetLife, FDIC MetLife executives who met with FDIC officials in December said they had concerns related to the agency’s authority to wind down companies, according to a document on the FDIC website. The executives pointed out that banks and insurers have different asset and capital structures. JPMorgan spokesman Howard Opinsky declined to comment on the firm’s meetings with FDIC officials. An 80‐page preliminary draft report by the oversight council’s staff suggests that hedge funds, asset managers and insurers may face detailed requests for data they previously didn’t have to release. Without making recommendations, the Feb. 3 study offers a glimpse of issues council members, including Fed Chairman Ben S. Bernanke and Treasury Secretary Timothy F. Geithner, will consider when deciding which companies get the “systemically important” designation. Representatives for the American Insurance Association met with Fed officials last month to discuss systemic‐risk regulation, according to the central bank’s website. U.S. insurers already are “subject to a thorough and well‐ tested regulatory regime” managed by state insurance companies, another trade group, the American Council of Life Insurers, said in a Feb. 25 letter to Geithner, the FSOC’s chairman. Minimum Capital “There is a well‐developed resolution process for insurance companies that fall below minimum capital requirements” that leads to an orderly liquidation when necessary, Julie Spiezio, the group’s deputy general counsel, said in the letter. The FSOC draft report, obtained by Bloomberg News, included a slate of proposed metrics that supervisors might use to assess whether banks are systemically important. For example, regulators could look at how many existing regulators a broker‐ dealer has and what recourse is already available to investors in an asset‐management firm, according to the draft report. The council may begin making its designations of non‐bank financial companies by midyear, Bernanke told the House Financial Services Committee on March 2. Geithner suggested in September that such a list could encompass New York‐based AIG, the bailed‐out insurer, and GE Capital, a unit of Fairfield, Connecticut‐based General Electric Co. that benefited from a government backstop for financial‐company debt. U.S. bank holding companies with more than $50 billion in assets ‐‐ including JPMorgan, Bank of America Corp., Citigroup and Goldman Sachs ‐‐ are automatically designated systemically important. For Related News and Information: For news on the credit crisis: NI CRUNCH BN <GO> For finance news: NI FIN <GO> Most‐read stories on the U.S. Treasury: TNI MOSTREAD TRE <GO> Treasury stories: NI TRE <GO> U.S. Economic Forecasts: ECFC <GO> ‐‐With assistance from Meera Louis in San Diego. Editors: Kevin Costelloe, Brendan Murray
To contact the reporters on this story: Rebecca Christie in Washington at +1‐202‐654‐1273 <tel:%2B1‐202‐654‐1273> or firstname.lastname@example.org <mailto:email@example.com>; Ian Katz in Washington at +1‐202‐624‐1827 <tel:%2B1‐202‐624‐1827> or firstname.lastname@example.org <mailto:email@example.com> To contact the editors responsible for this story: Christopher Wellisz at +1‐202‐624‐1862 <tel:%2B1‐202‐624‐1862> or firstname.lastname@example.org <mailto:email@example.com>