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