Living Wills

By Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.

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Today the various regulators opined on the Living Wills created by financial institutions on how they would deal with their wind-ups in an orderly fashion that would not require government assistance and also how their demise would be conducted in such a way as to not impact the financial markets or the economy.  Apparently, several of the banks did not submit plans that were deemed worthy and will need to resubmit plans or face higher capital requirements.

As I have blogged about before, a Living Will is in concept a good idea.  However it is also seriously flawed in practice.  Even worse, it is a misleading public relations exercise that tries to convince that all will be calm in an economic crisis.

In human flesh, one can in a small way plan for their demise – after all, the only thing as certain as taxes is death.  As we age, planning for our demise becomes a necessary and a useful exercise.  As we approach a certain age, we can take stock of where we are, and where we are likely to be in our final days.  The exercise however is much harder to do when you are in the prime of your life.  You do not know what the (hopefully) long future will bring.  You cannot foresee the obligations and wishes that are likely to develop, such as grandchildren.  You also cannot plan for the uncertainties of life such as an accident.  In the prime of your life, the best you can do is plan for some possible events, which is perhaps helpful, but not always useful, and may be downright unhelpful if it causes ambiguities or misunderstandings based on the particulars of the realized future situation.

A Living Will for a corporation is like preparing a Living Will in your twenties.  Even more so for a major financial institution, the specifics and context of what brings about their demise is virtually impossible to foresee.  Furthermore, a collapse of a financial institution is likely to be a systemic event, which collectively will render the various Living Wills being invoked impotent or at worst contradictory.

It is a fool’s mission to assume that Living Wills will save the financial system in the event of the demise of a major financial institution.  That is not to say the exercise is without merit, but its limitations must be recognized.  Living Wills are not a recipe that can be blindly followed to ensure calm in a economic crisis.  Perhaps Eisenhower said it best when he stated, “In preparing for battle I have always found that plans are useless, but planning is indispensable”.