When the next crisis brings a major financial firm to its knees, U.S. regulators will seize the parent company but allow its units around the globe to keep operating while the mess is cleaned up, according to a planned announcement Thursday from the Federal Deposit Insurance Corp.
The equity stakeholders of the large bank or other financial firm will be wiped out, and bondholders will face losses as their holdings are swapped for equity in a new entity, as a part of the FDIC’s plan.
Nearly four years after the massive government bailouts of the financial crisis, regulators are looking to chip away at the tacit understanding that the government will step in to save top financial institutions seen as vital to the economy or banking system.
As part of that effort, acting FDIC Chairman Martin Gruenberg will outline the agency’s strategy in a speech in Chicago Thursday, his first public remarks on the dismantlement plans for banks. In recent weeks, FDIC officials discussed the plans with The Wall Street Journal. If several federal agencies and the Treasury Department agree to seize a firm, the FDIC will unwind the parent bank holding company of the faltering firm, placing it in receivership and revoking its charter. The firm’s subsidiaries around the world would continue to operate, supported with liquidity the FDIC-held parent company can borrow from the government under the Dodd-Frank financial overhaul.
Next, the FDIC would transfer most of the firm’s assets and some of its liabilities into what’s known as a “bridge company,” according to FDIC officials. There, regulators would oversee a debt-for-equity swap akin to what occurs under a Chapter 11 restructuring: Equity holders would be wiped out, but creditors would get equity in exchange for the claims they held. The company eventually would emerge from the process as a new, recapitalized private entity.
To be sure, markets have been skeptical about regulators’ willingness and ability to unwind a major financial institution in real time. The top U.S. financial firms still enjoy a funding advantage over their smaller peers, in part because investors believe their money is safer there. Credit-rating firms including Moody’s Investors Service and Standard & Poor’s Corp. say they still believe the government may bail out the biggest banks.
The FDIC, known more for its bank deposit insurance, is working to persuade major investors, analysts, economists and bankers that it is building an apparatus that could cleanly guide a massive financial firm to failure without a taxpayer bailout.
The 2010 Dodd-Frank financial overhaul gave the regulators new powers to seize a faltering financial giant and wind it down in a way that doesn’t send markets panicking.
The mechanism, called “orderly liquidation authority,” was designed to give regulators options other than the stark decision they faced in 2008—either commit billions in taxpayer dollars to prevent failure, as in the case of American International Group, or let its messy failure disrupt financial markets, as happened with Lehman Brothers Holdings Inc.