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Expert advice

5 August 2014 By Antony Currie

Banks’ latest living-will flop may open the door for boutiques. On Tuesday, U.S. watchdogs again rejected emergency breakup plans from JPMorgan, Goldman Sachs and nine other institutions, citing numerous shortcomings. Devising ways to dismantle complex banks without roiling the financial system is no easy task. That’s why Wall Street’s largest firms might want to consider calling on their smaller rivals for help.

This is the second time that the Federal Reserve and the Federal Deposit Insurance Corp have punted orderly resolution programs back to the banks. The regulators are still finding all sorts of unrealistic assumptions, and few of the institutions have attempted to identify, let alone implement, changes in corporate structure that would make them easier to unwind.

FDIC Vice Chairman Thomas Hoenig, who as president of the Kansas City Fed harshly criticized too-big-to-fail banks, made an eminently reasonable point. Many of the 11 banks, he wrote, “employ teams of experts that prepare acquisition and restructuring plans for clients” and so ought to do better.

He’s only partly right, though. Banks and securities firms generally don’t have restructuring teams, largely because a host of rules barred them from getting into the business. Some of those rules changed in 2005, however, prompting the likes of Goldman to give it a go. Most soon gave up.

Perhaps that helps explain why they’re all having so much trouble satisfying the regulators. It’s one thing to offer advice on gung-ho dealmaking. Helping troubled companies sort themselves out requires entirely different skills, ones the banks don’t seem to have – even though several nearly failed during the financial crisis.

But the likes of Lazard, Evercore, Moelis, Greenhill and Rothschild do have that knack. Granted, living wills are not as important as they seemed when enshrined in the 2010 Dodd-Frank financial reform law. Converting banks’ bonds to equity – known as a bail-in – may be enough to keep financial institutions afloat in a crisis. But if regulators want orderly resolution plans done right, they might want to ask the big banks to call in the experts.


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