Elizabeth Warren Grills Fed Chair Janet Yellen On Too-Big-To-Fail Banks

WASHINGTON -- Sen. Elizabeth Warren (D-Mass.) raised concerns Tuesday in a hearing about whether financial behemoths targeted by "too-big-to-fail" laws had complied with measures requiring them to craft plans for their own orderly breakups in case they run into problems like those that sparked the 2008 financial meltdown.

Warren pointed to the colossal failure of Lehman Brothers, which started the recession, noting that the firm had $639 billion in assets and 209 subsidiaries, and that it was so big and complicated it took three years for courts to unwind.

The unfortunate experience of Lehman was a key reason why part of the Dodd-Frank financial reform law said major institutions qualifying as too big to fail had to submit plans, known as living wills, to the Federal Reserve and the FDIC explaining how they could be "liquidated in a rapid and orderly fashion" without bringing down the financial system or requiring taxpayer bailouts.

If the institutions don't offer "credible" plans, regulators are supposed to request new ones, and then begin possible intervention.

"Here's the key part," Warren told Federal Reserve Chairwoman Janet Yellen in her regular testimony on the state of the economy. "As part of the order to submit a new plan, the Fed and the FDIC can require the company to simplify its structure or sell off some of its assets -- in other words, break up the bank so that it could be more easily liquidated and not pose a risk to the economy."

To illustrate why that's so key, Warren compared the failed Lehman Brothers to one of the increasingly monster-sized banks today: JP Morgan, which has nearly $2.5 trillion in assets and 3,391 subsidiaries, Warren said. But she was unable to get an answer as to whether the Fed has received any credible plans from the financial institutions since starting to review them in 2012.

"Can you honestly say that JP Morgan could be resolved in a rapid and orderly fashion as described in its plans with no threats to the economy and no need for a taxpayer bailout?" Warren asked Yellen, who did not answer directly.

"The living will process, as I understand it, is something that's intended to be iterative, in the sense that the firms submit plans and will receive feedback from the regulators," Yellen said. "We have given feedback on the first round of plans that were submitted, and are working, actually, to at this point, give feedback on the second round of plans. In fact, the firms have now submitted a third round of plans."

Warren, unsure whether that meant the Fed found the firms' plans credible or not, asked again. Yellen once again did not explain directly.

"I think what we need to do is give them a roadmap for where we see obstacles," Yellen said.

That prompted a frustrated-looking Warren to ask point-blank: "I guess the question I'm asking is have they ever gotten to a plan that you can say with a straight face is credible?"

Yellen did not say they had.

"I've understood this to be a process -- these are extremely complex documents for these firms to produce," Yellen said. "We're looking at plans that run into tens of thousands of pages. And I think what was intended is that this determination that you're talking about, about whether or not they're credible, the question is do they facilitate an orderly resolution, and I think we need to give these firms feedback."

Warren reminded Yellen that the law requires the Fed to make determinations every year on whether the firms have provided credible living wills, and that if they have not, the Fed has the power to act.

"There are very effective tools that you have available to you that you can use if those plans are not credible, including forcing these financial institutions to simplify their structure, or forcing them to liquidate some of their assets -- in other words, break them up."

Watch the full exchange above.

Michael McAuliff covers Congress and politics for The Huffington Post. Talk to him on Facebook.

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Elizabeth Warren