Following the financial crisis of 2008, regulators began to look much more closely at banks, contingency plans, reserves, etc., in an attempt to stave off another round of bailouts. Without going into the idiocy of the original bailouts, it may be that current controls will, at the very least, keep the public off the hook for banker indiscretions and irresponsibility.
Many may have heard about the living wills banks have been forced to develop as a result of the 2010 Dodd-Frank financial reform law. Basically, banks had two years to produce a document that provides viable instructions as to how the company should be divided, sold and dispersed in the event of their demise.
The desire is to avoid another mess such as Bear Stearns or Lehman Brothers. In both situations regulators were left with a pile of rubble in their hand, from which it was extremely difficult to build or distribute anything in a meaningful way. Basically, if the pulse of the bank flatlines, the living will goes into effect, giving a systematic list of which subsidiaries should be sold off in an effort to bring the books out of the trenches.
That such a measure is needed is indeed lunacy. Shouldn’t every business have certain structures in place to help them cope with economic challenges? On the other hand, if we truly lived in a free market society, these banks would have been allowed to fail with they ran out of money, rather than bailing them out on the taxpayers’ dime. And this really is the reason that such legislation had to be enacted. Supposedly, this insures that banks will not be bailed out next time. Instead, they’ll be systematically sold off.
What wasn’t divulged until recently was that regulators also required the country’s five largest banks to produce comprehensive plans to avoid such insolvency in the first place, in the event that they face economic hard times. While the living will basically kicks into effect in order to respond to the demise of the bank, this recovery plan is to avoid the need of the living will by laying out a plan in the event of financial catastrophe. JP Morgan’s can be seen here.
As Reuters reports:
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.
“Recovery plans are about protecting the crown jewels,” said Paul Cantwell, a managing director at consulting firm Alvarez & Marsal. “It’s about, ‘How do I sell off non-core assets?’ The priority is to the shareholders. A resolution plan is about protecting the system, taxpayers and creditors.”
As we see these efforts continue, we should ask ourselves the right questions in regard to banks and how they operate. With the exposure to Wall Street that now pervades the banking industry, we’re simply dealing with a different animal than we were just a decade ago.
Perhaps the most telling answer is to the question, “Why is this necessary?” The reason is because the free market has died. We now live in a highly regulated society in which the elite have determined who will live and who will die. Such a condition views the banks as too important to die, even at the demise of the people who once were the determining force in this land.
What can you do to protect yourself? That’s a tough question, and likely has many answers. Consider carefully your exposure to the banking industry. Explore your alternatives. And, as many have opted, diversify in ways that are immune to the banking industry, such as precious metals, foreign real estate and other hard assets that can operate outside of financial contagion.
There is no perfect answer, because all markets are at least in some ways intertwined. But due diligence and preparing now can at least minimize headaches, or even substantial losses, in the long run.
For your prosperity,
J. Keith Johnson
The Gold Informant