JP Morgan Chase 2009 Annual Report Download - page 34

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We support an enhanced resolution
authority — and the elimination of
“too big to fail”
Even if we achieve the primary goal of regu-
lating financial firms to prevent them from
failing, we still have to get government out of
the business of rescuing poorly managed firms.
All firms should be allowed to fail no matter
how big or interconnected they are to other
firms. That’s why we at JPMorgan Chase have
argued for an enhanced resolution authority
that would let regulators wind down failing
rms in a controlled way that minimizes
damage to the economy and will never cost the
taxpayer anything. Fixing the “too big to fail”
problem alone would go a long way toward
solving many of the issues at the heart of the
crisis. Just giving regulators this authority, in
and of itself, would reduce the likelihood of
failure as managements and boards would
recognize there is no safety net. Think of this
enhanced resolution as “specialized bank-
ruptcy” for nancial companies. The principles
of such a system would be as follows:
• A failure should be based on a company’s
inability to finance itself.
• The regulator (or specialized bankruptcy
court) should be able to terminate manage-
ments and boards.
• Shareholders should be wiped out when a
bank fails – just like in a bankruptcy.
• The regulator could operate the company
both to minimize damage to the company
and to protect the resolution fund.
• The regulator could liquidate assets or sell
parts of the company as it sees fit.
• Unsecured creditors should recover money
only after everyone else is paid – like in a
bankruptcy. (In fact, the resolution authority
should keep a significant amount of the
recovery to pay for its eorts and to fund
future resolutions.)
• In essence, secured creditors should be
treated like they are treated in a bankruptcy.
• The resolution fund should be paid for
by the financial industry (like the FDIC is
today).
• All institutions under this regime should live
with the exact same rules.
• Regulators should make sure that compa-
nies have enough equity and unsecured debt
to prevent the resolution fund from ever
running out of money. To give an example,
while Lehman had $26 billion in equity, it
also had $128 billion in unsecured debt. A
resolution regulator, in my opinion, would
clearly have been able to let Lehman meet
its obligations, wind it down and/or sell it o
and still have plenty of money left over to
return some money to the unsecured credi-
tors. Had this been done wisely, the economy
would have been better o.
• If a rm fails, there should be enough clarity
about the financial, legal and tax structures
of that firm to allow regulators, cooperating
across international boundaries, to wind it
down in a controlled manner – what some
refer to as “living wills.”
• While there is no argument about who
should pay for the resolution (i.e., banks), there
are some technical issues about how it should
be funded. The resolution regulator does need
to be able to fund these companies while they
are being wound down, and there are plenty of
appropriate ways to accomplish this.
Once it is established that any firm can fail,
rms of all sizes and shapes should be allowed
to thrive. It is wrong to assume that big firms
inherently are risky. Banks shouldn’t be big for
the sake of being big, but scale can create value
for shareholders and for consumers who are
beneficiaries of better products that are deliv-
ered more quickly and less expensively. These
benefits extend beyond individuals to include
businesses that are bank clients, particularly
those that are global in scale and reach, and
the economy as a whole.