Saturday, September 1, 2012

Bank Living Wills Are Bunk

Reuters is reporting that regulators are instructing our TBTF banks to go beyond their Living Wills in terms of preparing for their orderly winding-down next time they get into serious trouble.

As an attorney, I work with the human equivalent of "bank living wills". The human version enables people (the blood-and-guts variant) to indicate their end-of-life preferences so that, if one day they lack capacity or are not able to communicate, the living will can be consulted and the individual's wishes may be carried out.

The primary end-of-life choice for humans is whether they want their life to be prolonged as long as possible given medical technology, or whether they would opt, in certain situations, to avoid being kept alive using heroic medical intervention when their quality of life is determined to be seriously compromised. Humans must make decisions like that because they are ultimately going to die.

But bank executives know that banks never have to die. No matter how badly they are managed, no matter how much fraud they commit, no matter how often they are fined by the SEC, money-infusion and increased opacity is all that is needed to keep an insolvent institution from the graveyard of failed corporations.

It is ludicrous to believe that the biggest banks, when faced with a crisis that threatens their survival, will turn to their living will instead of to the politicians that they finance.

The real tragedy is that everyone knows that bank living wills are not the answer, and yet, we are continuing to build on this fantasy. Our leaders are choosing to gloss over structural weaknesses in every possible way so that actual constructive reform can be avoided. What would it take to create a system worthy of our trust, instead of attempting to convince the world to entrust their money to a financial system riddled with fraud, opacity, and accounting tricks? It would take shrinking TBTF banks down to a size where they are not perceived to threaten the world's economy, investigating the fraud leading up to the financial crisis, introducing hyper-transparency to the industry, and infusing personal accountability for executives in publicly-traded financial sector corporations.

If politicians were serious about tackling the issues raised by having banks that are systemically dangerous, they would begin by seeking ways to make those institutions small enough to fail, small enough so that their political power does not dictate who is electable, and small enough so that politicians are able to make decisions based on protecting American citizens. Instead, we have Dodd-Frank.

Dodd-Frank is a disaster; it creates additional barriers to entry for small players, while barely being a blip in terms of compliance for the giant recidivist financial juggernauts. We need more competition, not less. Dodd-Frank is moving us in the wrong direction.

Bank living wills are only the answer if the question is, "What can we do to pretend that we are addressing the problem of TBTF banks?" Bank living wills are yet another puff in the elaborate smokescreen that Tim Geithner, Ben Bernanke, and bipartisan legislators, have been diligently billowing in order to obscure a fundamental problem facing America: Our financial system is deeply compromised and nothing is being done to fix the core issues.

Where are Obama and Romney on this issue? If you want to vote for a Republican or a Democrat who is committed to taking steps to address our compromised financial sector, you are out of luck in 2012.

Jaime Falcon

Related post: Open Letter to the Chief Confidence Officer of the USA

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