Tuesday, June 12, 2012

JPMorgan Provides example of "Orderly Liquidation" after a catastrophic loss

by Bill McBride on 6/12/2012 08:08:00 PM

From the Financial Times: JPMorgan plan for ‘catastrophic’ event

[T]he presentation given at a Harvard Law School event is also an unusually frank acknowledgement that there are limits to the capital buffers of even healthy banks.

In the doomsday scenario set out by [Gregory Baer, deputy general counsel], a $50bn loss would trigger “a run on the bank” - with $375bn of funding, including bank deposits, draining away.

The government would then step in and mark down the bank’s assets, leading to an additional $150bn loss. Shareholders would be wiped out but senior creditors would be transferred to a new bridge company that allows “critical activities [to] continue to operate smoothly”.
excerpt with permission
Here is the presentation: Orderly Liquidation of a Failed SIFI (systemically important financial institutions).

This provides a "Hypothetical, illustrative example of the orderly liquidation of JPMorgan Chase". This is a pretty catastrophic event: "For illustrative purposes, we describe the impact of a catastrophic, idiosyncratic event causing a $200B loss and $550B of liquidity outflows – leading to Orderly Liquidation Authority being invoked to resolve JPMC"