When thinking about how the FDIC’s Orderly Liquidation Authority (OLA) and Living Wills would really work, I am reminded of the Mike Tyson quote “Everyone has a plan ’till they get punched in the mouth.”
The FDIC is charged in Title II of Dodd-Frank with the responsibility for winding down systemically important financial institutions. We have all seen how a bank is taken over by the FDIC on Friday night and re-emerges the following Monday. The FDIC has good practice at this. The largest and most complex bankrupt institution that has gone through the process was probably WAMU in September 2008. Most banks that the FDIC is involved with are community banks with names like Waccamaw Bank and First National Bank of Central Florida. They have new owners in a couple days.
But taking over a G-SIFI bank, with hundreds, if not thousands of subsidiaries all over the world, trillions of dollars in assets, and a Living Will running in the thousands of pages — well that is another matter. Mike Mayo, the well regarded banking analyst at Crédit Agricole Securities said in a New York Times article on July 3, 2012, “The living wills are simply an exercise to make some people feel better”.
And that brings us back to Mike Tyson. Having a plan is a great thing. But in a crisis it will all go out the window. Are we lulled into a sense of false security because of OLA? Does having a plan and an apparatus to take apart and piece back together enormously complex financial institutions the likes of JP Morgan Chase, Citibank, or Bank of America in a matter of days (or even weeks) when you’ve just been hit in the face really sound like its going to work? With all due respect to the good people at the FDIC, its an impossible task. I hope we never have to find out.
A link to the New York Times article is here.
A link to the FDIC failed bank list is here.