Fed & FDIC Release JPMorgan, 8 TBTF Banks’ Living Wills

After much kicking and screaming (and 2 years of delays/ feet dragging) the Fed has complied with the Frank-Dodd act and publicly released the living wills (resolution plans) of Wall Street banks including BOA, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, Morgan Stanley, UBS, and JP Morgan.

According to the Frank-Dodd legislation, each plan must describe the company’s strategy for rapid and orderly resolution under the Bankruptcy Code in the event of material financial distress or failure of the company.

The filing releases critical information, including JP Morgan’s interest rate derivatives positions at the end of 2011 ($54.5 trillion, down from $63.6 trillion at the end of 2010), total FOREX positions, equity positions, and total notional derivatives ($71.2 trillion!).

Those interested in reading how JP Morgan executives envision the death of their beloved Morgue can read the full crisis/ liquidation scenario below:

From the JP Morgan Filing:

High-level description of resolution strategy
Fortress balance sheet
JPMorgan Chase has a fortress balance sheet and significant liquidity and earnings power. The
Firm maintains significant excess capital. As of December 31, 2011, JPMorgan Chase had a
Basel I Tier 1 common ratio of 10.1%, and estimated that its Basel Ill Tier 1 common ratio was
approximately 7 .9%. In addition, as of December 31, 2011, total firm-wide credit reserves were
$28.3bn, resulting in a loan loss coverage ratio of 3.35% of total loans.

Liquidity reserve
In addition, the Firm maintains a significant amount of liquidity, primarily at its bank subsidiaries,
but also at its nonbank subsidiaries. As of December 31, 2011, the Firm’s Global Liquidity
Reserve was estimated to be approximately $379bn. The Global Liquidity Reserve represents
consolidated sources of available liquidity to the Firm, including cash on deposit at central banks,
and cash proceeds reasonably expected to be received in secured financings of highly liquid,
unencumbered securities, such as government-issued debt, government- and FDIC-guaranteed
corporate debt, US government agency debt, and agency MBS. The Global Liquidity Reserve
also includes the Firm’s borrowing capacity at various FHLBs, the Federal Reserve Bank
discount window and various other central banks as a result of collateral pledged by the Firm to
such banks. In addition to the Global Liquidity Reserve, the Firm has significant amounts of
other high-quality, marketable securities available to raise liquidity, such as corporate debt and
equity securities. Another key strength of the Firm is its diversified deposit franchise, through the
Retail Financial Services, Commercial Banking, Treasury & Securities Services and Asset
Management lines of business, which provides a stable source of funding and decreases
reliance on the wholesale markets. As of December 31, 2011, total deposits for the Firm were
$1,127.8bn.
These factors should enable the Firm to endure severe stress events and absorb substantial
losses without failing.

Recovery plan
The Firm also has a comprehensive recovery plan detailing the actions it would take to avoid
failure by staying well-capitalized and well-funded in the case of an adverse event. JPMorgan
Chase has provided the Federal Reserve with comprehensive confidential supervisory
information and analyses about the Firm’s businesses, legal entities and corporate governance
and about its crisis management governance, capabilities and available alternatives to raise
liquidity and capital in severe market circumstances.
Title II resolution plan: Single point of entry recapitalization
In the unlikely event that the Firm were to default on its obligations or be in danger of default,
and neither our recovery plan nor another private sector alternative were available to prevent the
default, the Firm could be resolved under the provisions of Title II of the Dodd-Frank Act. The
preferred Title II strategy would involve a “single point of entry” recapitalization model in which
the FDIC would use its power to create a bridge entity for JPMorgan Chase, transfer the
systemically important and viable parts of the Firm’s business, principally the stock of its main
operating subsidiaries and any intercompany claims against such subsidiaries, to the bridge
entity, recapitalize these businesses by contributing some or all of such intercompany claims to
the capital of such subsidiaries and exchanging debt claims against the liquidating “left-behind”
parent entity for equity in the bridge entity. Under this strategy, only JPMorgan Chase would be
placed in a Title II receivership and the principal operating subsidiaries of JPMorgan Chase
would continue in business as subsidiaries of the bridge entity without being placed in resolution
proceedings.

The FDIC would distribute the stock of the bridge entity to the Firm’s creditors, both long-term
debt holders under indentures and others, in order of priority in satisfaction of the claims against
the Firm not assumed by the bridge entity. Importantly, any losses associated with recapitalizing
the bank would be borne by equity holders and, to the extent necessary, the creditors of the Firm,
and not by the US government or taxpayers.
Upon the consummation of the recapitalization, the holders of debt claims against JPMorgan
Chase, both long-term debt holders under indentures and others, would cease to have any rights
as creditors of the holding company, including as to the holding company’s prior debt service
obligations and obligations to repay the principal amount of such indebtedness. While
recapitalization would be intended to preserve the going-concern value of JPMorgan Chase for
the benefit of its creditors, which value could increase over time as financial markets recover and
market conditions return to normalcy, the value of the equity received by holders of debt claims
might not be sufficient to permit them to recover their investment.
Recapitalization would be intended to preserve the operation of the Firm’s systemically important
functions, promptly return the systemically important and viable parts of the Firm’s business to
the private sector without a lengthy period of government control, preserve the going concern
value of the Firm for the benefit of its creditors, and avoid the value destruction which could
result from a disorderly liquidation of the Firm or its assets.
Title I resolution plan: Recapitalization
Alternatively, the Firm’s Resolution Plan is required to provide for the rapid and orderly resolution
of JPMorgan Chase under the Bankruptcy Code in a way that the Firm believes would not pose
systemic risk to the US financial system. The Resolution Plan does not provide for the
resolution of JPMorgan Chase or any of its subsidiaries using the extraordinary resolution
powers available to the FDIC under Title II. The Resolution Plan would involve restructuring the
Firm’s balance sheet with the goal of achieving well-capitalized status without imposing any
losses on taxpayers. The Resolution Plan provides that, in order to achieve the significant
benefits of resolution through recapitalization, the Firm’s lead bank subsidiary, JPMorgan Chase
Bank, N.A. would be recapitalized, either without initiating one or more FDI Act receiverships, or
if necessary, by utilizing the FDIC’s traditional resolution powers in receivership proceedings
under the FDI Act. The va lue necessary for the recapitalization of JPMorgan Chase Bank, N.A.
would come from intercompany balances owned by JPMorgan Chase and, if a receivership is
commenced, any third-party claims left behind in the receivership. JPMorgan Chase would be
placed in Chapter 11 proceedings and creditors and shareholders of JPMorgan Chase would
realize value from the receivership only to the extent available to JPMorgan Chase as a
shareholder of JPMorgan Chase Bank, N.A., after the payment of JPMorgan Chase Bank, N.A.’s
creditors. Other material entities that are sufficiently self sustaining and able to continue in the
ordinary course of business would not need to be placed into reorganization proceedings.
In the unlikely event that the amount of intercompany deposit and non-deposit third party
liabilities at JPMorgan Chase Bank, N.A. are insufficient to recapitalize it, the Resolution Plan
contemplates that the Firm would decrease the size of its consolidated balance sheet until it is
adequately capitalized by divesting any of our lines of business, any of the twenty-five material
legal entities which are significant to the activities of the Firm’s core business lines, or any other
divestiture opportunity that presented itself to the Firm in resolution. The Firm believes that its
core business lines and critical operations are highly attractive businesses. Many of them are
global leaders and top competitors in the products and markets in which they have chosen to
compete. As a result, each business unit would have multiple, diverse and not necessarily
overlapping potential buyers.
Title I resolution plan: Sale and wind-down
If it were not possible to resolve subsidiaries or other assets of the Firm through recapitalization,
the Resolution Plan provides that the Firm would resolve its business lines, material legal entities
and other assets through divestiture or, as needed, in rapid and orderly wind down in
proceedings under the Bankruptcy Code and other applicable insolvency regimes such as, for
US broker-dealer subsidiaries, in liquidation proceedings overseen by the Securities Investor
Protection Corporation. The Resolution Plan contemplates that the divestiture and wind-down
process would be conducted in a manner that permits the orderly transfer to other providers of
the businesses, customers, customer accounts, customer securities and other property
associated with the Firm’s operations with minimum systemic disruption and without losses to
taxpayers.
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Click here for The Morgue’s living will: