Even more exciting up-and-coming financial regulation: Big banks now required to produce emergency plans

posted at 4:41 pm on August 10, 2012 by Erika Johnsen

Blergh. It appears that federal regulators have recently required that the five largest American banks — Bank of America, Goldman Sachs, Citigroup, Morgan Stanley, and JPMorgan Chase — need to come up with “recovery plans” in the event of fiscal calamity, and the plans should be careful not to rely on public-sector help. …Gee, ya’ think? Riddle me this, dear regulators: How did we get in this “too big to fail” situation in which banks might reasonably expect federal assistance in the first place? It couldn’t have been because of — oh, I don’t know — too much government interference in the private sector, could it?

The two-year-old program, which has been largely secret until now, is in addition to the “living wills” the banks crafted to help regulators dismantle them if they actually do fail. It shows how hard regulators are working to ensure that banks have plans for worst-case scenarios and can act rationally in times of distress.

Officials like Lehman Brothers former Chief Executive Dick Fuld have been criticized for having been too hesitant to take bold steps to solve their banks’ problems during the financial crisis.

According to documents obtained by Reuters, the Federal Reserve and the U.S. Office of the Comptroller of the Currency first directed five banks… to come up with these “recovery plans” in May 2010.

They told banks to consider drastic efforts to prevent failure in times of distress, including selling off businesses, finding other funding sources if regular borrowing markets shut them out, and reducing risk. The plans must be feasible to execute within three to six months, and banks were to “make no assumption of extraordinary support from the public sector,” according to the documents. …

Recovery plans differ from living wills, also known as “resolution plans,” which are required under the 2010 Dodd-Frank financial reform law. Living wills aim to end bailouts of too-big-to-fail banks by showing how they would liquidate themselves without imperiling the financial system.

Yes, because we should never expect private, profit-seeking ventures to act rationally, should we? It’s completely the government’s fault if they’ve altered banks’ preferred course from agile and responsive profit-seeking to clunky and entrenched rent-seeking. But hey, I guess we should give the feds a break — even if they have no possible way of foreseeing the long-term effects of their incredibly dumb and growth-hindering regulations, they at least have the best of intentions, right? They’re from the government, and they’re here to help! The White House couldn’t possibly be capable of corruption, cronyism, playing politics, or doing whatever they darn well please, the costs be damned. They’re just looking out for us is all.

Just kidding, but isn’t it pretty to think so?

The Justice Department said Thursday it won’t prosecute Wall Street firm Goldman Sachs or its employees in a financial fraud probe.

In a written statement, the department said it conducted an exhaustive investigation of allegations brought to light by a Senate panel investigating the 2008-2009 financial crisis.

“The department and investigative agencies ultimately concluded that the burden of proof to bring a criminal case could not be met based on the law and facts as they exist at this time,” the department said. …

The Justice Department’s decision capped a good day for Goldman as the Securities and Exchange Commission decided not to file charges against the firm over a $1.3 billion subprime mortgage portfolio. At the same time, the Justice Department’s decision ensured that the Obama administration will continue to feel political heat, particularly from the liberal wing of the president’s own party, for not having brought more prosecutions in the financial crisis.

Wait a moment… somebody remind me why banks like Goldman thought it would be a good idea to get into the business of making subprime loans again?


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Bring back Glass–Steagall.

Socratease on August 10, 2012 at 4:44 PM

Dodd, Frank and Napolitano s/b in prison, for cronyism.

Schadenfreude on August 10, 2012 at 4:44 PM

What’s the federal government’s emergency plan? Default?

RBMN on August 10, 2012 at 4:46 PM

How about we go back to when they actually had to a reasonable amount of liquidity? Does anyone know what kind of reserves these banks have right now in case there’s ever another economic calamity that causes people to start withdrawing their money?

Doughboy on August 10, 2012 at 4:46 PM

Bring back Glass–Steagall.

Socratease on August 10, 2012 at 4:44 PM

Seconded.

On one hand, I’m always irritated when Obama starts threatening private business for supporting his political opponents. On the other hand, it’d be hard to find a group of banks dirtier and more corrupt than these folks. Isn’t there some way both Obama and the banks can both lose?

Doomberg on August 10, 2012 at 4:46 PM

Might want to give a think if you have some, lots of money in the bank? Who’s to say, you WILL ever get it if they go under? I know FDIC insured, well look at who the FDIC is!

We have already done gobs on this issue with funds.
L

letget on August 10, 2012 at 4:47 PM

It appears that federal regulators have recently required that the five largest American banks — Bank of America, Goldman Sachs, Citigroup, Morgan Stanley, and JPMorgan Chase — need to come up with “recovery plans” in the event of fiscal calamity, and the plans should be careful not to rely on public-sector help.

Ja, mein Fuhrer! [clicking heels]

- The Five Largest American Banks

OhEssYouCowboys on August 10, 2012 at 4:47 PM

How about we go back to when they actually had to a reasonable amount of liquidity? Does anyone know what kind of reserves these banks have right now in case there’s ever another economic calamity that causes people to start withdrawing their money?

Doughboy on August 10, 2012 at 4:46 PM

Reserves? Why would they need that? Bernanke can just fire up the old printing press and pop off a few billion… or trillion… for them.

Doomberg on August 10, 2012 at 4:49 PM

They told banks to consider drastic efforts to prevent failure in times of distress,

“Drastic”

“distress”

Who defines these terms?

“Hello, bank? Yes, this is the government. You are in distress. Activate your drastic measures now”

BobMbx on August 10, 2012 at 4:50 PM

Reserves? Why would they need that? Bernanke can just fire up the old printing press and pop off a few billion… or trillion… for them.

Doomberg on August 10, 2012 at 4:49 PM

Well, they did that in 2008, but even the idiots in Congress and at the Fed can’t seriously think that’ll work every time. Or has the economic stagnation over the last 4 years taught them nothing?

Doughboy on August 10, 2012 at 4:50 PM

The Justice Department said Thursday it won’t prosecute Wall Street firm Goldman Sachs or its employees in a financial fraud probe.

As they say in Chicago, “Ya pays for protection, ya gets protection!”

GarandFan on August 10, 2012 at 4:53 PM

Reserves? Why would they need that? Bernanke can just fire up the old printing press and pop off a few billion… or trillion… for them.

Doomberg on August 10, 2012 at 4:49 PM

The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.

– Vladimir Ilyich Lenin

OhEssYouCowboys on August 10, 2012 at 4:53 PM

The Justice Department said Thursday it won’t prosecute Wall Street firm Goldman Sachs or its employees in a financial fraud probe.

“Now, how about some campaign cash.”
/BHO

Bitter Clinger on August 10, 2012 at 4:54 PM

Wow, talk about burying the lede….

Can’t we have an actual post about the non-prosecution of Goldman? It’s a heck of a lot more important than the recovery plan stuff. Everyone in the banking world knew about that.

rockmom on August 10, 2012 at 4:54 PM

Well, they did that in 2008, but even the idiots in Congress and at the Fed can’t seriously think that’ll work every time. Or has the economic stagnation over the last 4 years taught them nothing?

Doughboy on August 10, 2012 at 4:50 PM

Sarcasm aside, I think their thought process is to just figure out what gets them through the next week. Once they’re out of office, it’s someone else’s problem (and someone else’s fault). I’m surprised Obama hasn’t pressured Bernanke to launch QE3, as a matter of fact. While it would make gas prices fly to the moon, it would probably also help slow down the pace of job losses for a little bit longer.

Doomberg on August 10, 2012 at 4:55 PM

You absolutely blow all credibility here:

Wait a moment… somebody remind me why banks like Goldman thought it would be a good idea to get into the business of making subprime loans again?

Goldman is an investment bank. It does not make mortgage loans. Period. Nor can you open a checking account at your friendly neighborhood Goldman location.

You clearly have a much greater command of buzzwords (“rent-seeker”)than the banking industry.

Try again.

urban elitist on August 10, 2012 at 4:55 PM

“Wait a moment… somebody remind me why banks like Goldman thought it would be a good idea to get into the business of making subprime loans again?”

Here you go, Erika…

“At President Clinton’s direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity.”

Seven Percent Solution on August 10, 2012 at 4:59 PM

I dont know why this popped out just now, but I have read about this for a little while now, and it is more suspicious that the facts just popped out and now they used to be secret.

I don’t think anyone has a problem with banks having a contingency plan on too big to fail…on the surface, I agree with this, but I wonder if the devil is in the details.

You just wonder what strings are attached to this by the current administration…the last thing we want is nationalized banks.

And, Goldman Sachs, a liberal leaning bank where Corzine came from, but still we don’t have the facts to know who to blame on the last collapse, and it is the current administration that was blaming banks and subprime loans…if you recall the red lining threats and the Community re investment act and the shenanigans at Freddy and Fanny and all the money that liberal politicians ran away with while making more and more mortgage loans has NOT yet been punished, or put to an end.

The first thing to find out is the truth about what happened, before you can cast any blame.

Fleuries on August 10, 2012 at 4:59 PM

Goldman is an investment bank. It does not make mortgage loans. Period. Nor can you open a checking account at your friendly neighborhood Goldman location.

You clearly have a much greater command of buzzwords (“rent-seeker”)than the banking industry.

Try again.

urban elitist on August 10, 2012 at 4:55 PM

Nah, GS never heard of mortgages.

BobMbx on August 10, 2012 at 4:59 PM

Gov. interference costs us money…China does not beat us because of wages, it’s because their gov. gets out of the way of business.

I would bet no single person could name all of the gov. restrictions that are placed on a bank. I would be not one person knows of the fees & licensing a bank has to have, I would bet no one single person knows all of the regulations imposed on them.
Anytime you have something so complex that even a highly trained, educated professional cannot explain, define, understand, the complexity was caused by the government…and guess who pays for that?

right2bright on August 10, 2012 at 5:00 PM

Try again.

urban elitist on August 10, 2012 at 4:55 PM

Take your own advice…you think their is only “traditional” banks that make loans? Have checking accounts? Are involved in mortgages? Really, that’s the limit of your expertise…this is where the “tee hee” comes in as people snicker at your faux arrogance.

right2bright on August 10, 2012 at 5:03 PM

Rush was blurbing on this in his radio show today. Something like the banks were told by the Fed that they need to prepare for rough times and be prepared not to seek another taxpayer bailout.

timberline on August 10, 2012 at 5:06 PM

I’m surprised Obama hasn’t pressured Bernanke to launch QE3, as a matter of fact. While it would make gas prices fly to the moon, it would probably also help slow down the pace of job losses for a little bit longer.

Doomberg on August 10, 2012 at 4:55 PM

Probably because a spike in gas prices could harm him far more politically than any fluctuations in job losses between now and November.

Doughboy on August 10, 2012 at 5:07 PM

Try again.

urban elitist on August 10, 2012 at 4:55 PM

The last two major investment banks in the US have changed their status to become bank holding companies, allowing them to take deposits from investors.
The changes should enable Goldman Sachs and Morgan Stanley to raise more funds by opening commercial banks.

And today the Wall Street Journal reported Goldman could soon become an Internet banking start-up.

You are welcome, the education is free…take it and consider it a gift…

right2bright on August 10, 2012 at 5:07 PM

Goldman is an investment bank. It does not make mortgage loans. Period. Nor can you open a checking account at your friendly neighborhood Goldman location.

You clearly have a much greater command of buzzwords (“rent-seeker”)than the banking industry.

Try again.

urban elitist on August 10, 2012 at 4:55 PM

Erika may have gotten the part about Goldman Sachs making subprime (or any) mortgages wrong. But they were BIG players in the subprime-mortgage-backed securities market.

Bitter Clinger on August 10, 2012 at 5:08 PM

Nah, GS never heard of mortgages.

BobMbx on August 10, 2012 at 4:59 PM

You’re clearly no more informed than EJ.

Goldman was under investigation for creating and selling “synthetic” mortgage-backed derivatives which tracked the performance of mortgages originated and other institutions and individuals. The neither originated the mortgages that the derivatives were based on and in many cases never even held the securities that were actually created from the mortgages — they ran a little casino and allegedly stacked the deck without telling some of the players. They settled a civil case with the SEC for $550 million in one instance, but the standard of proof is higher for a criminal complaint, hence the Justice Dpartment not pulling the trigger.

urban elitist on August 10, 2012 at 5:10 PM

The last two major investment banks in the US have changed their status to become bank holding companies, allowing them to take deposits from investors.
The changes should enable Goldman Sachs and Morgan Stanley to raise more funds by opening commercial banks.

You are welcome, the education is free…take it and consider it a gift…

right2bright on August 10, 2012 at 5:07 PM

but they haven’t done it yet, have they? And they certainly hadn’t done it before the sub-prime debacle.

And when are these quotes from? I think Goldman — along with a lot of other institutions, like GM’s credit division and GE Capital — made that switch in ’08 or early ’09, so they could get access to the Fed’s credit window during the crisis.

urban elitist on August 10, 2012 at 5:13 PM

Erika may have gotten the part about Goldman Sachs making subprime (or any) mortgages wrong. But they were BIG players in the subprime-mortgage-backed securities market.

Bitter Clinger on August 10, 2012 at 5:08 PM

Very different things. For one thing, the was no federal pressure to get involved in that market. Banks were crawling all over each other to get into the MBS market because they believed their own BS (“we’ve eliminated risk”). They thought it was free money.

If Erika doesn’t recognize that, she’s too ill-informed to be taken seriously on this issue.

urban elitist on August 10, 2012 at 5:18 PM

Even more exciting up-and-coming financial regulation: Big banks now required to produce emergency plans big mattresses

FIFY

Lawdawg86 on August 10, 2012 at 5:19 PM

Take your own advice…you think their is only “traditional” banks that make loans? Have checking accounts? Are involved in mortgages? Really, that’s the limit of your expertise…this is where the “tee hee” comes in as people snicker at your faux arrogance.

right2bright on August 10, 2012 at 5:03 PM

I realize that. In fact, a large percentage of the loans were in the run-up to the crisis were originated by non-bank mortgage companies (which were not subject to CRA and other pressure,but that’s another argument).

But you know what? Not a single one of them was originated by Goldman.

urban elitist on August 10, 2012 at 5:21 PM

‘Toon of the Day: Reid’s Source

http://predicthistunpredictpast.blogspot.com/2012/08/toon-of-day-reids-source.html

M2RB: Cheap Trick

Resist We Much on August 10, 2012 at 5:21 PM

What’s the federal government’s emergency plan? Default?
RBMN on August 10, 2012 at 4:46 PM

What do you think this is all about? This IS the federal government’s emergency plan.

Of course properly collateralized banks don’t need a default plan. That doesn’t make the tiniest bit of sense. And nothing about these “emergency plans” help the banks weather any financial crisis. In fact, just the opposite.

All these plans do is force banks to pave the way for the federal government to nationalize their assets without notice.

logis on August 10, 2012 at 5:27 PM

Of course properly collateralized banks don’t need a default plan. That doesn’t make the tiniest bit of sense. And nothing about these “emergency plans” help the banks weather any financial crisis. In fact, just the opposite.

All these plans do is force banks to pave the way for the federal government to nationalize their assets without notice.

logis on August 10, 2012 at 5:27 PM

Capital ratios are up substantially since the crisis, and leverage down. A lot of banks are complaining that the requirements are too high, in fact.

I think if we wanted to nationalize the banks, we could have done that in 2009. It would have been pretty easy, since most of them had to take whatever terms Bernanke/Geithner/Obama imposed or do a Lehman Brothers.

urban elitist on August 10, 2012 at 5:35 PM

The ONLY reason the libs want the big banks to come up with a plan for their recovery is so the libs will know how to counter it in order to make NEW bail out plans, but next time around the banks will become government property.

Meanwhile, since the doj won’t bust goldman, obamacommie now has his hand stuck out waiting for that donation.

Wolfmoon on August 10, 2012 at 5:45 PM

Proverbs 29:18 “Where there is no vision, the people perish.”

JellyToast on August 10, 2012 at 5:48 PM

Let us please “cut to the chase”. I have been a commercial banker since 1971 ( why yes, actually I am ancient).

Everyone needs to understand that the ultimate goal is the control and nationalization of the banking industry.

Pay attention, please. They will kill community banks as fast as they can.

Spots the Dog on August 10, 2012 at 6:17 PM

Well, Hate to state the obvious here but, it’s more than past time to Break Up the Banks and let competition get banking back to a normal industry and that way we won’t here the same ridiculous “TOO BIG TO FAIL” song and dance again.

God Bless America!

paratisi on August 10, 2012 at 6:25 PM

Pic of the Day: Don’t Mistake Slogans For Solutions

http://predicthistunpredictpast.blogspot.com/2012/08/pic-of-day-dont-mistake-slogans-for.html

Resist We Much on August 10, 2012 at 7:28 PM

All these plans do is force banks to pave the way for the federal government to nationalize their assets without notice.
logis on August 10, 2012 at 5:27 PM

Capital ratios are up substantially since the crisis, and leverage down. A lot of banks are complaining that the requirements are too high, in fact. I think if we wanted to nationalize the banks, we could have done that in 2009. It would have been pretty easy, since most of them had to take whatever terms Bernanke/Geithner/Obama imposed or do a Lehman Brothers.
urban elitist on August 10, 2012 at 5:35 PM

I have no way of guessing what your personal plans are, but you and I are most definitely not the “we” I was talking about.

Of course a nationalization like you’re describing could not have happened in 2009, or today, because the banks that actually HAD all those creamy delicious assets wouldn’t have agreed to any “terms.” Obviously the government has no use for insolvent banks, and all the solvent banks want to KEEP those assets, and use them to beat the pants off all their government-drone-controlled competitors.

Whenever one of these “fundamental transformations” finally occurs, consent is never an issue. All that matters is the speed at which assets can be confiscated by a bunch of thugs how have no real clue what to do with those assets. And that is the only thing these “emergency plans” are designed to affect.

logis on August 10, 2012 at 10:17 PM

Warren Buffett closed a textile mill, so what.

fossten on August 11, 2012 at 12:27 AM