“Ah…I’ll stop there because we’re running out of time, but I have to say, Chairman Yellen, I think the language in the statute (section 165 of Dodd-Frank requiring orderly liquidation plans for Too Big to Fail institutions) is pretty clear, that you are required, the Fed is required to call it every year on whether these institutions have a credible plan…

…And I remind you, there are very effective tools that you have available to you that you can use if those plans are not credible.  Including forcing these financial institutions to simplify their structure or forcing them to liquidate some of their assets – in other words break them up.”, United States Senator Elizabeth Warren

“U.S. Senator Warren’s brief questioning of Fed Chairman Janet Yellen and the Chairman’s pathetic response makes clear that the Fed and FDIC are not determining that the plans are credible (as required by law)…because the section 165 requirement itself is not in fact possible. There is absolutely no way to  have a timely and orderly liquidation of an institution as large and complex as a Too Big to Fail financial institution such as JP Morgan.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Full testimony available at: http://www.c-span.org/video/?320413-1/hearing-monetary-policy-economy.  Quoted testimony starts at 1:55 (direct link here: http://www.c-span.org/video/?c4503902/warren-yellen).

 JULY 15, 2014

Monetary Policy and the Economy

Janet Yellen presented to the committee the Federal Reserve Board’s semiannual report on monetary policy.

Senator Elizabeth Warren:

“You know, one of the tools that Congress has given the Fed to combat too big to fail is section 165 of Dodd-Frank.  This is the section that requires large financial institutions to submit plans each year describing how they could be liquidated, in a rapidly and orderly fashion, without bringing down the entire economy or needing a tax payer bailout.  Now the Fed and the FDIC must review these plans, and if they don’t buy that the plan would actually result in the rapid and orderly liquidation of the company, then they must order the company to submit a new plan.  And here’s the key part: as part of the order to submit a new plan, the Fed and the FDIC can require the company to simplify its structure or sell off some of its assets.  In other words, break up the bank so that it could be more easily liquidated and not pose a risk to the economy.

So let’s consider what happened during the Lehman Bros. Bankruptcy in 2008.  That’s the one that sparked the financial crisis, nearly melted down the economy, and triggered the bailout by the taxpayers.  The court proceedings took three years, clearly not rapid or orderly.  But Lehman was tiny compared to today’s biggest banks.  When it failed, Lehman had $639 billion in assets.  Today, JP Morrgan has nearly $2.5 trillion in assets.  That’s four times as big as Lehman was when it failed.  Lehman had 2099 registered subsidiaries when it failed, and JP Morgan, I…I really almost couldn’t believe this when I read it, JP Morgan today has 3,391 subsidiaries.  That’s more than 15 times the number of subsidiaries that Lehman had when it failed.  Three years to resolve Lehman.

Now, JP Morgan has filed resolution plans in each of the last 3 years, and the Fed hasn’t rejected any of them as not credible.  Given our recent experience with the bankruptcy of Lehman Brothers, can you honestly say that JP Morgan could be resolved in a rapid and orderly fashion, as described in its plans, with no threats to the economy and no need for a tax payer bailout?”

Fed Chairman Janet Yellen:

“So, the living will process, as I understand it, is something that’s intended to be iterative, in the sense that the firms submit plans and will receive feedback from the regulators on whether or not we think that the Fed and the FDIC regard these plans as…um…sufficient for resolution under the bankruptcy code. Um, we have given feedback on the first round of plans that were submitted, and are working, actually, to, at this point, give feedback on the second round of plans.  In fact the firms have now submitted a third round of plans.”

Senator Warren:

“I’m sorry, Chairman, I’m just a little bit confused.  JP Morgan submitted a round of plans in 2012, and my understanding is that neither the Fed nor the FDIC said that those plans were not credible.  It then submitted plans in 2013 that neither the Fed nor FDIC said were not credible, and it has submitted plans in 2014.  So, I’m not sure on whether you are saying plans are not credible and you are continuing to talk with them and asking them to change their plans, is that the case?”

Chairman Yellen:

“Well, we’re working to give these firms feedback on their second round of submissions, and I think what we need to do is give them a road map for where we see obstacles to orderly resolution under the bankruptcy code and give them an opportunity to address those obstacles.”

Senator Warren:

“Well, I appreciate that you are doing that, but the statute, it seems to me, is pretty clear here.  That it’s mandatory that these plans be submitted each year and that each year you determine whether or not these plans are credible.  And I guess the question I’m asking is have they ever gotten to  a plan that you can say with a straight face is credible?”

Chairman Yellen:

“Well, I understood this to be a process, these are extremely complex documents for these firms to produce.  Our second round of submissions, were looking into plans that run 10s of thousands of pages.  And…um…that…I think what was intended was that this determination you are talking about, whether or not they are credible, do they facilitate…the question is do they facilitate an orderly resolution.  And I think we need to give these firms feedback…”

Senator Warren:

“Ah…I’ll stop there because we’re running out of time, but I have to say, Chairman Yellen, I think the language in the statute is pretty clear, that you are required, the Fed is required to call it every year on whether these institutions have a credible plan.  And I remind you, there are very effective tools that you have available to you that you can use if those plans are not credible.  Including forcing these financial institutions to simplify their structure or forcing them to liquidate some of their assets – in other words break them up.  And I just want to say one more thing about this process…the plans are designed not just to be reviewed by the Fed and the FDIC, but also to bring some kind of confidence to the marketplace, and to the American tax payer that in fact there really is a plan for doing something if one of these banks starts to implode.  You said these plans run to the 10s or thousands of pages…all I can say is that what’s been released to the public is 35 pages long.  That’s about 1 page for every 100 subsidiaries that have to be dealt with.

I think that the plans that have been released by these companies have not been something that the public can look at and say, ‘yea, I see that they’ve got a plan to get through this.’  So I would hope you would urge greater transparency by these large financial institutions that are required to submit these plans, and I hope the Fed will be making a call on whether or not the Fed, under its statutory responsibility, sees these plans as credible for resolving these financial institutions if they hit financial trouble.

Thank you, from all parties.”

 

Posted on July 16, 2014, in Postings. Bookmark the permalink. Leave a comment.

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