Statement of CFPB Director Rohit Chopra, Member, FDIC Board of Directors, on the Living Wills Submitted by JPMorgan Chase, Wells Fargo, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, State Street, and Bank of New York Mellon
Bailouts of large, dominant, or politically connected firms are a sign of cronyism, not capitalism. In the last crisis, the government took a number of extraordinary steps, including providing bailouts from the public, to prevent the failure of very large financial institutions from inflicting even more catastrophic damage on the economy.
In 2010, Congress sought to eliminate this reliance on public bailouts when large, complex financial institutions are on the brink of failure. Congress established a clear preference for how these massive institutions should be wound down: Chapter 11 of the U.S. Bankruptcy Code.
Specifically, the law requires that the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) and the Board of Governors of the Federal Reserve System evaluate whether the largest financial firms have credible plans in place to be restructured in a bankruptcy proceeding without disrupting the financial system.1 If they do not, they can be subjected to heightened requirements to reduce the likelihood of their failure or to make it more likely that they will be able to be wound down in a rapid and orderly manner.
In 2021, JPMorgan Chase, Wells Fargo, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, State Street, and Bank of New York Mellon did not submit full resolution plans. Instead, they submitted partial plans, pursuant to a legal exemption put into place in 2019.2 These Wall Street institutions are truly systemically important to the global economy and our financial system, with a combined $18 trillion in financial exposures, $124 trillion in client assets under custody, over 12,000 subsidiaries, and on average operate in 50 countries.3
Based on the analysis of these partial plans, it is clear that Citigroup’s plan is not at all credible,4 particularly in light of the enforcement actions two years ago by the Federal Reserve Board of Governors and the Office of the Comptroller of the Currency.5 I will vote in favor of issuing the feedback letters, because I agree with certain identified areas for improvement, but I do not believe that Citigroup is the only institution without a credible plan. It is highly unlikely that any of these institutions, as currently constituted, could be resolved in a rapid and orderly manner under the bankruptcy code.
First, I question whether there are adequate safeguards to ensure the board members at these institutions will file for bankruptcy at the appropriate time. Second, I do not believe they would be able to obtain adequate financing for an orderly court-supervised bankruptcy due to their size, complexity, and the magnitude of their short-term financing needs.6 Nor is it wise to alternatively assume that the unprecedented strategy of self-financing the bankruptcy would be successful.
Finally, these firms are so large and deeply interconnected with our economy that they could inflict severe costs on businesses and households as they spiral toward failure, even before they file for bankruptcy. Regulators may ultimately step in, again, to bail them out and limit the damage.7
The partial and full plans submitted this past cycle and in previous cycles will certainly be helpful if the Secretary of the Treasury opts to address a failing systemically important financial institution outside of the bankruptcy process through a resolution supervised by the FDIC.8 I also agree that these partial plans help to address some previously identified problems.
However, our job is not to make a determination as to whether the plans are helpful to facilitate a resolution by the FDIC.9 The law requires us to judge if the plans will work in a court-supervised bankruptcy proceeding. As of now, this seems like a fairy tale.
Ending “too big to fail” continues to be a goal, but it is not yet a reality.10 Next year, these global systemically important financial institutions will submit complete plans, which will be more robust than the partial plans submitted last year. It is critical that we evaluate those plans using the appropriate legal standard and with sufficient rigor.