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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