Office of Complex Financial Institutio

Dodd-Frank Act Title II

Resolution Strategy Overview

January 25, 2012
Discussion Outline

 Transaction Overview Structural Framework Financial Framework Governance
Transaction Overview
Introduction

 Company Highlights

 Four Primary Lines of Business: Commercial Banking, Capital Markets, Global Asset Management, and Transaction  100,000+ employees in 50 countries serving institutions as well as individuals Over 1,500 consolidated subsidiaries and affiliates plus over 5,000 unconsolidated affiliates and investments Net Income $15 billion (2011): Banking – 60%, Capital Markets – 23% Asset Management – 17% Over $30 Trillion notional value of derivative trades, with over 1 million open positions

 Systemic Factors

 Resolution Considerations:

 A global commercial bank presence with a material global broker-dealer footprint, Dependent upon deposits as a primary funding source with alternative funding sources in the form of repo and secu Significant deposits related to sweep activities booked in the Cayman Islands, A large derivatives book that is managed among at least four operating units in the U.S. and abroad in the U.K., Irela

Mauritius.

Size Leverage and 

Liquidity

Interconnections Complexity Substitutability Ot

Co

$1.0 trillion in total assets, $700 billion US assets, with a significant global presence in the UK and Japan. Over $5 Trillion in assets under custody

Dependent upon market funding via unsecured short and intermediate term borrowing for a material portion of its operations

Material US and global footprint with off balance sheet exposures

Diversity of product offerings; interconnections across jurisdictions, counterparties, and entities

The sheer size and scope of its operation would require significant time for clients to move their business to other competitors. The continuity of credit availability to US customers through alternative means is another area of concern.

Wcoforregauto effdisIntbatra
Organization Structure by Lines of Business & Jurisdictio
Organization Structure by Legal Entity
Single Receivership-Parent Company Entry
Single Receivership-Parent Company Entry (Cont.)

 Single entry method of resolution

 Title II receivership at parent company

 Transfer receivership assets (primarily investments in subsidiar

to subsidiaries) to bridge holding company

 Subordinated debt and equity remain in receivership, certain ot

unsecured debt and contingent liabilities may or may not pass tholding company 

 Equity solvent subsidiaries remain open

 Receiver provides funds/guarantees, as necessary, to bridge h

company through the OLF to provide liquidity

 Bridge holding company serves as “source of strength” recapita

subsidiaries, as necessary

 Bridge holding company will downstream liquidity, as necessary

subsidiaries through intra-company advances

 In a single receivership model, only the parent company is placed into re

and, consequently, its creditors will be subject to haircuts. Equity solven

will continue to operate
Alternative: Multiple Receiverships-Parent & Subsidiaries 

 Depending on the financial condition of the group members, there may b

insolvency proceedings:

 FDIA receiverships for IDI subsidiaries

 Transfer operations, assets and deposits to bridge bank(s)

 Dodd-Frank Orderly Liquidation Authority receiverships for systemic

non-bank entities/parent

 Transfer operations, assets and certain liabilities to newly forme

financial company(ies)

 Bankruptcy for non-viable, non-IDI subsidiaries (certain other entitie

state liquidation process or modified forms of bankruptcy)

 Administration proceedings or equivalent for foreign operations

 Losses reside within each entity Pre-resolution intra-affiliate relationships, such as intra-company debt/gu

matched derivative bookings, likely to result in receiverships/bankruptcy having adverse interests and lead to destruction of franchise value
Transaction Overview: Issues for Discussion

Recapitalization

 Mechanisms available to ensure sufficient debt at holding co

sufficient “bail-in” debt between holding company and subsidenact necessary recapitalization

 Transfer of all assets of receivership to bridge versus establ

bank” outside of bridge

Liquidity 

 Liquidity levels at international operating subsidiaries and br Potential need for home and host liquidity programs at time 

crisis/stress
Structural Framework
SIFI Resolution: Exit Process
Financial Framework
Recapitalization Process

Valuation of the Enterprise Determines the “Size of Pie” Avto All Claimants
Recapitalization Process (Cont.)

Claims Process Determines the “Slice of the Pie” for Each Claiman

Unsecured Creditor CSubordinated Credito

Equity Claimants
Recapitalization Process (Cont.)
Hypothetical Loss Estimate

, 0

Unsecured Claims Waterfa

Equity

85,000 

Subordinated

Debt

39,000 

Senior

Unsecured

Debt 

199,000 

$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

Capital Stack at 

Failure

Single Receivership: Loss Estimate

• Estimated Loss Range $120B-$135B

▫ Market Based Asset Valuations▫ Franchise value estimates for business 

lines

▫ Credibility

• Senior Unsecured General Creditors haircut 3%

• Senior Unsecured General Creditors exchange 

claims for:

▫ New debt instruments▫ Convertible debt instruments▫ Equity (preferred/common)

• Former subordinated debt and equity holders 

could receive either:

▫ Call options on equity to be distributed to 

senior classes

▫ Warrants or other subordinate equity 

interests
Financial Framework: Issues for DiscussionValuation

 Mechanisms available to deal with valuation uncertainty affecting both s

distribution of “the pie” for each claimant

 Validation and market acceptance of valuation employed

-Supervisory Stress Tests-Equity and debt market valuations-Independent expert valuations-Ensuring appropriate feedback loop

Market Expectations

 Additional actions that should be taken to enhance transparency, marke

market liquidity to newco/bridge, liquidity of claims/new securities, and avaluations

 Communications to improve market/public understanding of Title II, incl

no time taxpayers are at risk
Governance
Single Receivership: Corporate Governance

FDIC

Receivership
Governance: Issues for Discussion

 How best to develop a pool of potential CEOs & Board Membe

pool current

 Achieving clarity on role and expectations of new CEO, Board, 

Advisory Committee, and balance required among different goconstituencies

 Role of FDIC as receiver and Bridge Holding Company operati