Wednesday, October 12, 2016


All sorts of weird and wonderful things have happened in the past couple of days and tomorrow starts a house full of people for the weekend.  I can't focus so rather than trying to make stuff up I'm just going to pass until next Monday, but there is one thing that I would like to briefly touch on that you will be hearing more about in the coming days.

Last week the "Too Big To Fail" banks submitted their new "living wills" to the regulators.  You might remember that last year the first edition was rejected and as a result, this new set was rolled out.  It has been estimated that this process has cost the institutions the better part of $300 million in expenses which might be worthwhile if anything workable was obtained.  Nothing was obtained that is workable.

Regular readers of this blog are aware of my view that this is an exercise in sheer stupidity designed by politicians to satisfy what they perceive to be the demands of the voting public.  Perhaps, but the problem is of course that neither the public and especially the politicians have a clue of what will work so the default position is, "here, you design a way to commit suicide and we'll tell you whether we like it).  What resulted according to my sources is a series of remarkably similar plans (despite the fact that Wells Fargo and Citigroup have very little in common) that centers around the allowance of the Holding Company bankruptcy as soon as all of the assets are transferred into a new "holding"  company that will be used to continue the operations of various subsidiaries and "moving parts" if you will.

Now how you get out of the claim that this transfer of assets doesn't run afoul of every bankruptcy code ever written is beyond me but a lot of very high powered and high priced lawyers drew up this stuff so I guess there is a way.  It has been suggested that if all creditors, investors, etc. are informed that their claims are all subject to the exercise of a living will might do it but I would then think that you might well wind up with no creditors and no investors which sort of defeats the purpose of a sound banking system...but then what do I know.

You see, if you give a mob like that of Big Danny Tarullo a tool such as this it will probably get used because all Big Danny knows is that banks always need more capital and if deems that a bank doesn't have enough  and has no good prospects of obtaining more his first instinct will be to shut it down.  But Danny, if only capital counted, the only amount that would be sufficient is 100% for all funding and operations.  It is liquidity that is the killer.  Move in the direction most easily suited to your misunderstanding of the problem and the liquidity disappears simply because no one will wish to be involved in the mess you have created.  A dead bank, dead clients, enraged correspondents and 200,000 people without a job...not to mention sovereign nations who would not be immune to the effects of The Death of Citigroup.   Then again, great copy.

I would be remiss if I did not add that I use Citigroup as an example only because I think it is probably one of the most sturdy shops on the street from a credit standpoint...and I don't bank with them!  Anyway, keep your eyes open in the coming days for more on this.  It will be interesting to see if anyone cares any more.

See  you next week.

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