By Ryan Tracy and Justin Baer
When U.S. regulators this month announced their verdicts on
eight big banks' "livings wills" -- blueprints showing how the
institutions would fail without needing a bailout -- officials
promised more clarity in a process the industry has criticized as
opaque.
The government did release more information than in the past
about decisions that affect banks' business plans and balance
sheets. But the fact that the two agencies involved issued clashing
verdicts on a pair of large Wall Street investment banks, Goldman
Sachs Group Inc. and Morgan Stanley, stoked confusion and added to
calls for the government to be even more transparent in next year's
verdicts.
Both Goldman and Morgan Stanley said this month they are
committed to addressing regulators' concerns, and all the banks are
set to meet with the two agencies, the Federal Reserve and the
Federal Deposit Insurance Corp., in the coming weeks.
Teams at both Wall Street firms are already plotting how to
address the specific shortcomings highlighted by the regulators.
The firms say they are confident they can meet those demands by the
July 2017 deadline -- and relieved they aren't under the pressure
that would have come with falling short of both Fed and FDIC
standards.
The living wills are a requirement of the 2010 Dodd-Frank
financial-overhaul law: Big banks must convince both the Fed and
FDIC they have credible plans for failing without costing taxpayers
a dime.
While the Fed and FDIC spoke with one voice to six of the eight
firms they assessed -- failing five and passing one -- their
disagreement on Goldman and Morgan Stanley came without a clear
explanation. The Fed failed Morgan Stanley, but the FDIC didn't.
The opposite was true for Goldman.
New documents published by regulators "certainly provide greater
public transparency," said Michael Krimminger, a partner at Cleary
Gottlieb Steen & Hamilton LLP who advises on living wills.
"However, I'm not sure that they provide a great deal more clarity
about the standards or underlying issues for specific" banks.
Because the regulators disagreed on Goldman and Morgan Stanley,
the firms avoided the 'failing' label -- and the potential
sanctions that come with it, such as higher capital requirements --
but the firms still have to take action on the shortcomings that
regulators perceived.
"We received very detailed comments, and we are confident we'll
be able to address the items that were raised," James Gorman,
Morgan Stanley's chairman and chief executive, said last week
during a conference call with analysts. "We've dedicated
significant resources and time to this important priority and will
continue to work with our regulators to improve it."
Goldman said this month it believes it has made significant
progress toward ensuring its failure would be orderly, and "we look
forward to working with regulators to further improve our plan so
that both the Fed and the FDIC are comfortable."
The opposing verdicts are a reminder of the subjective nature of
regulators' decisions and the agencies' continuing struggle to
communicate their expectations to the industry. The split is partly
due to the Fed and the FDIC using slightly different approaches for
analyzing living wills, according to people familiar with the
matter.
The FDIC has designed a process that focuses on whether a bank
has, across the board, presented a credible bankruptcy strategy,
according to people familiar with the matter. That makes it likely
to issue a failing grade to a bank that didn't meet regulatory
expectations across a number of topics, these people said.
The Fed, by contrast, has homed in on key vulnerabilities in
each firm's plan, making it more inclined to fail a bank that had
significant problems in a single area that could ripple across the
firm, even if other parts of the plan are sound, these people
said.
The living wills "have a certain level of subjectivity
associated with them, so they become judgment calls," said Jim
Wigand, managing director at restructuring firm Millstein & Co.
who used to work for the FDIC.
Since the latest verdicts, regulatory officials have emphasized
the substantial progress they made in reaching agreement compared
with the last time they gave feedback on living wills in 2014. Back
then, they didn't agree on the outcome for any of the largest
banks.
The Fed and FDIC have said they are committed to more disclosure
and clearer explanation of their decisions. This year, for the
first time, they published the letters they sent to each firm as
well as a document explaining their process.
The split verdict on Goldman and Morgan Stanley was announced a
day after the Government Accountability Office, a government
auditor that works for Congress, said banks and the public lacked
key information to understand how regulators evaluate the plans,
such as "the extent to which FDIC's and the Federal Reserve's
frameworks for determining whether a plan is deficient are similar
or different."
In the case of Morgan Stanley, both agencies said the firm
didn't have an appropriate process for estimating how much cash it
would need during a bankruptcy and maintaining that amount of cash
across the firm. The Fed said the liquidity issues undermined the
broader plan to the point where it didn't meet the legal standard,
but the FDIC didn't believe the problem was significant enough to
reject the firm's living will entirely.
Regulators had multiple concerns regarding Goldman's plan,
including its ability to estimate cash needs, not enough
specificity in how it would handle derivatives businesses, and how
its management and board of directors would make decisions during a
crisis. The FDIC said the concerns added up to a failed plan, but
the Fed said they didn't.
In 2014, the FDIC was more hawkish, saying all eight banks'
plans didn't meet the legal standard. The Fed said the plans needed
work but didn't go that far.
Afterward, the Fed faced political criticism for appearing weak,
which continued after the banks refiled plans trying to address
regulators' concerns in July 2015.
In February, Sen. Elizabeth Warren (D., Mass.) asked Fed
Chairwoman Janet Yellen to give an explanation to the public if the
Fed's verdict differed from that of the FDIC.
That dynamic has led some regulatory watchers to speculate
privately that the Fed pursued a more aggressive tack on Morgan
Stanley to avoid the perception that it was once again playing the
role of "good cop" by a giving less harsh verdicts to both
investment banks.
Fed and FDIC officials have emphasized that their decisions were
driven by an analysis of the bankruptcy plans that the firms
submitted.
Write to Ryan Tracy at ryan.tracy@wsj.com and Justin Baer at
justin.baer@wsj.com
(END) Dow Jones Newswires
April 28, 2016 14:24 ET (18:24 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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