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”. 

Experience

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

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In reading through the paper this morning a real estate ad briefly caught my eye based on its brightly coloured tag line “Experience does not count – until it does!”

This is likely true in real estate as well as many other professions as well.  It is certainly true in risk management.  At many places you could probably have a novice be the risk manager.  It might be argued that if a novice was the risk manager then it was a sign that a very experienced and intelligent risk management team had put in place a risk system that was so advanced and well thought out that even a novice could manage it.  How comfortable does that type of experience make you feel?

Another argument to ponder is whether experience is helpful or harmful when a novel situation occurs (which is what almost all significant risk situations are).  Or another argument to raise is whether academic experience counts more or less than practitioner experience.    It also needs to be considered what the shelf life of experience is; does experience age like a fine wine, or like a half-smoked stogie.

“Experience does not count – until it does”, is a wonderfully ambiguous phrase.  It is perfect for risk management.

Planning Documents

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

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I worked for an organization that in one area was still very much in a growth mode.  In essence the organization was taking on a new project and the project manager was a lively and energetic person who had a knack for getting things done.  

The launch of the new product was a smashing success and the project manager cemented their reputation for getting things done.  As the new project rolled along, more people were added to the team and slowly things started to become institutionalized.  As more administrators were added, the demand for process and planning documents increased.  However there was a problem; the project manager who brought the project to life and who was still the key player in making things successful was not all that skilled in process and planning documentation creation.  This created a problem as the demand for more and more structure took hold.  It was not long before the project manager was pushed out.

You can probably stop reading as I suspect you know how things ended.  With the original project manager out, the number of processes and planning documents increased, while the quality of the project declined to such a state as to declare it unsustainable.

Professional managers often confuse process and planning documents for getting things done.  Only getting things done is getting things done.  Furthermore, the more experience working with people I have, the more I understand that the skills in getting things done are not the same skills that lead to creating process and planning documents.   This holds for projects and it holds for risk management.