Did you see this in this morning's Wall Street Journal?:
Bank of America Corp. would consider selling its retail-branch network in Texas and its U.S. Trust wealth-management unit if the giant bank is forcedto raise capital in a market shock or severe economic downturn, according to a document provided to U.S. regulators.
The
Charlotte, N.C., company submitted the hypothetical scenarios as part
of a list requested last year by the Federal Reserve, said people
familiar with the situation. The list is part of an emergency-planning exercise requested by regulators,
who are conducting "stress tests" at 31 large U.S. banks early this
year. It isn't clear if other large banks were asked last year to
prepare similar plans. [Emph. Added]
On the one hand, I should feel honored. For all I know, I'm the one who first put the bug in BofA's ear that it might one day consider disposing of its Texas branches. It's always nice to be listened to.
But
on the other, I never fail to be shocked by how naïve regulators can
sometimes be. Let's have a thought experiment. Suppose the financial
system is suddenly engulfed by a "market shock or severe economic down
turn." That shouldn't be hard; we've just been through a doozy. Do you
remember it? Those were the days when, for example, Goldman Sachs and
Morgan Stanley teetered on the brink of insolvency because none of its
counterparties would agree to fund them for even a single night;
the companies were only saved when they got banking licenses and, with
them, access to the Fed window. General Electric nearly keeled over
after the commercial paper market froze following Lehman's collapse.
Things only un-froze once the FDIC stepped in and guaranteed the entire
$2.7 trillion market. Back then, the daily announcement of the setting
Libor each morning was big news because, on any given day, no one was
quite sure whether Libor could be set.
Do
you remember? I think you do! Now, back to our thought experiment. In a
situation like the one I just described, how much success do you think
Bank of America would have if it tried to shop its Texas branch network
in order to raise capital quickly? Or U.S. Trust? That's right, the
company would have no chance.
Here's why: by the very nature of market shocks—by definition, really—there are no buyers.
For anything. Everyone is scared shi— out of his wits. G.E. can't even
sell its own commercial paper, for goodness sake! This notion that Bank
of America or any other "systemically important financial
institution" must draw up a "living will," as is mandated by Dodd-Frank,
that will its specify its plans for asset disposition in the event of a
market panic is preposterous. Chaos is reigning, and—the libertarians'
in the audience will now please avert their eyes—order will be restored
only with massive and decisive intervention by the government. You may
not have loved TARP, but the alternative to it, doing nothing, would
have been a thousand times worse.
This
Dodd-Frank mandate that big banks draw up living wills is time-wasting
nonsense. (While I'm on the topic, the idea--which the agency loves to
brag about--that the FDIC will be able wind down a SiFi in an orderly
fashion in the midst of a market panic is similarly delusional.) It's a panic.
These
people need to get out more. A dose of the real world would do them
good. In the meantime, the next time major panic occurs, these crazy
contingency plans/living wills/whatever they're commanding the big banks
to come up with will turn out to be useless.