April 14, 2016

Five Big Banks Get Bad Grades on Living Wills, No One Gets Clean Pass; Admission That “Too Big to Fail” is Alive and Well

Eight big banks got their living will grades announced yesterday. Five, Bank of America, JP Morgan, Bank of New York Mellon, State Street, and Wells Fargo, were told if they didn’t submit better plans by October, they’d face sanctions, like restrictions on dividends and acquisitions. Two got split grades. The Fed thought Goldman’s plan was fine, but the FDIC disagreed, and the two regulators had the opposite view of Morgan Stanley. Citigroup, which fared the best, was nevertheless told its scheme had shortcomings. Citigroup, Goldman, and Morgan Stanley have until July 2017 to fix their living wills.

Yellen probably felt cornered into taking this step and it also may have been one of the big reasons for meeting with Obama and Biden earlier in the week. Elizabeth Warren had earlier called the Fed chair out over her failure to take the living wills seriously. Yellen didn’t give a good answer because she had not good answer. Worse, Neal Kashkari at the Minneapolis Fed is putting the “too big to fail” issue front and center in a series of conferences and is seeking broad public input. Bernie Sanders and Hillary Clinton are whacking each other almost daily about their plans to tame what Bill Black calls systemically dangerous financial institutions.

But the Fed’s move, while consequential, is certain to make almost no-one unhappy.

These measures are more serious than a wet-noodle lashing. Even though curbs on growth via acquisitions and dividends may sound like a trivial punishment, it hits banks, and more important, bank executives where they care most, in their stock prices. Why own a bank stock unless it is too big to fail, pays dividends, buy back stock, or buy other players to as least look like they are growing? And CEO, particularly those former Master of the Universe bank CEOs, take particular umbrage at being told what to do. So trust us, there was plenty of consternation in the executive suites of the banks that were fingered.

Now the banks did a good job of being contrite and persuading their shareholders that they could get everything fixed by October. but if they have overpromised, the stocks will take a hit and the CEOs will find their halos more than a bit tarnished.

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