Cheat Sheet: Big Banks Detail How They Can Be Broken Up

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WASHINGTON — While nine of the largest, most complex U.S. banks mostly followed the same template in filing their "living wills," there were subtle but significant differences in their approach.

Some firms, for example, appeared to prefer that the Federal Deposit Insurance Corp. use its new Dodd-Frank powers to resolve the entire holding company at once, while others provided more details on the best way to handle the firm if it entered the traditional bankruptcy process.

"If you read them carefully, there are differences of approach in terms of how they would go about resolutions, albeit at a high level," said Sheryl Kennedy, the chief executive officer of Promontory Financial Group Canada. "What will be interesting going forward is to the degree those differences are grounded in business models and remain, or to what extent — through interaction with regulators or seeing what others have done — there are common approaches that emerge."

Kennedy said the plans will be critical in combating the idea of "too big to fail," partly because going forward, the banks will now have to think about their potential resolution with each business change.

"By looking at extreme tail events and impediments to resolution, firms will consider corporate structure, investment and other decisions in ways that can enhance their resolvability as opposed to, perhaps inadvertently, making it more difficult," she said.

The bulk of the public portion of the plans, which ran roughly 30 pages each, included a snapshot of financial data as well as structural information on the firms' various businesses. The key differences emerged in the final section detailing how each firm would recommend resolving it in the event of a failure.

Following is a summary of bank approaches:

JPMorgan Chase (JPM)

JPMorgan suggests three ways to take itself apart:

Option #1: Creating a bridge holding company

Using powers given to regulators by the Dodd-Frank Act, JPMorgan recommends the creation of a "single point of entry" recapitalization model in which the FDIC creates a bridge entity for the holding company and transfers into it all important parts of the company — including stock of its operating subsidiaries.

In essence, only the holding company would be placed into receivership, while the operating subsidiaries would continue as subsidiaries of the bridge bank "without being placed in resolution proceedings."

"Recapitalization would be intended to preserve the operation of the firm's systemically important functions, promptly return the systemically important and viable parts of the firm's business to the private sector without a lengthy period of government control, preserve the going concern value of the firm for the benefit of its creditors, and avoid the value destruction which would result from a disorderly liquidation of the firm," the plan says.

Option #2: Use the bankruptcy process

As required by regulators, JPMorgan also envisions a wind-down that does not involve the use of the FDIC's new resolution powers, but instead places the firm into bankruptcy.

To do this, the holding company suggests recapitalization of its lead bank subsidiary, JPMorgan Chase Bank, through intercompany balances owned by JPMorgan Chase. If those deposits are insufficient - something the firm sees as unlikely - the bank could be recapitalized by divesting any of the holding company's lines of business, which the bank said would be highly marketable.

Option #3: Selling off the pieces

Reading between the lines, this feels like JPMorgan's least favorite alternative, as it is presented last and in much less detail than the other two. Under this plan, the firm would liquidate its broker-dealer subsidiaries and divest all of its various lines of business in a rapid and orderly fashion. Other than saying it would do so in a way that would not have a systemic impact, however, the firm provides little information on how that could be done.

Citigroup (NYSE:C)
Citi outlined two options — recapitalization of its principal depository institution subsidiary, Citibank, by the parent holding company, or winding down and selling off the holding company's various pieces.

In the first scenario, Citigroup's holding company would recapitalize the bank and then begin the Chapter 11 process under the bankruptcy code. Both Citibank and the parent company's other bank subsidiaries would be able to continue its business without the need for a formal resolution process.

Citigroup said its preferred plan would be to sell the company's broker-dealers before the failure of the holding company. If that wasn't possible, it would liquidate the broker-dealers. In that scenario, Citi's core banking business would be kept separate from the failed holding company and broker-dealers business. The firm would continue, but as a smaller, recapitalized banking institution.

An alternative option would be to wind-down or sell Citi's operations in an orderly fashion that would provide customers with continued service as they move on to other providers.

Under this approach, Citi's businesses and assets would be either sold or wound down, leveraging Citi's capital resources "to fully protect depositors and its liquidity resources to enable an orderly and deliberate wind-down of its activities."

Bank of America (BAC)
Bank of America envisions its U.S. bank entities being placed into FDIC receivership, with certain assets and liabilities transferred to a bridge bank and the others wound down.

The bank said its plan also included strategies to ensure continuity of certain business lines and key operations following the failure of certain other businesses.

Bank of America outlined the asset and business sales that could occur during the resolution process. So, for example, depending on the asset, potential buyers could include a national, international and regional financial institutions; private equity and hedge funds; and even insurance companies.

The firm provided several resolution regimes that would have to be applied given the scope of its business lines following its acquisition of Merrill Lynch and its subsidiaries.

For example, FDIC-insured depository institutions, such as Bank of America, N.A. and FIA Card Services, N.A., would be resolved under the Federal Deposit Insurance Act, while the resolution of a material non-bank, non-broker dealer domestic entities such as Bank of America Corp. and Merrill Lynch & Co. Inc., the former parent of Merrill Lynch, would be through bankruptcy procedures.

Additionally, liquidation of material domestic broker-dealer entities such as Merrill Lynch, Pierce, Fenner & Smith Inc. would be done under the Securities Investor Protection Act.

Separately, the bank included notes on a U.K. special administration regime that would be applied to investment banks, such as Merrill Lynch International, while noting that in Ireland, a special resolution regime would be applied to credit institutions like Merrill Lynch International Bank Ltd.

Goldman Sachs (GS)
In its plan, Goldman provided a number of baseline assumptions, which had been provided by regulators, that it used to craft its resolution plan.

Those included a "sudden, idiosyncratic material financial distress" at the company with no earlier disruption to the market and that markets were functionally normally.

But Goldman noted that the events leading to a failure would likely be much different and that it anticipates future plans will include other conditions and carry much different assumptions.

"These changes might materially alter the specific choices undertaken as a part of a resolution process," Goldman said in its plan.

Goldman endorsed selling the businesses and assets of its material entities to one or multiple buyers as the best means to avoiding a company-wide asset liquidation and said that would likely have a less disorderly impact on the market.

However, if it is impossible to sell businesses, then regulators should look to liquidate a substantial majority of the company's assets.

"This strategy would likely take more time than sales of the businesses and assets of the material entities and would likely not achieve maximum recovery for stakeholders as franchise value would likely erode quickly," said Goldman.

Morgan Stanley (MS)
In perhaps the tersest of plans, Morgan Stanley briefly stated that its resolution plan would be designed to maximize its net present value return through the sale or disposition of assets, while also ensuring that depositors have timely access to their insured deposits.

The firm also specified that there were several alternative resolution strategies including possible sales to global, national and regional financial institutions without providing any further details. However, it noted that under each strategy "insured depositors would have timely access to funds, there would be no cost to the FDIC deposit insurance fund and there would be no serious adverse effects on the global and U.S. financial stability."

Barclays (BCS)
Barclays said it developed a number of potential strategies to resolve its material entities, core business lines and critical operations while keeping in mind reducing any impact that could have on the U.S. economy.

As part of its strategy, it considered both pre- and post-proceeding transactions, such as stock sales, and business and asset sales. Those material entities or core business that could not be transferred would be wound down in an orderly fashion.

The firms also considered a broad number of buyers for such operations, which would include credit worthy private sector purchasers with sufficient capital like national and foreign financial firms and private equity funds.

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