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Financial funeral plans

I'm still working my way through Sen. Chris Dodd's FinReg proposal, but this seems like a really good idea to me.

Funeral Plans: Requires large, complex companies to periodically submit plans for their rapid and orderly shutdown should the company go under. Companies will be hit with higher capital requirements and restrictions on growth and activity, as well as divestment, if they fail to submit acceptable plans. Plans will help regulators understand the structure of the companies they oversee and serve as a roadmap for shutting them down if the company fails. Significant costs for failing to produce a credible plan create incentives for firms to rationalize structures or operations that cannot be unwound easily.

By Ezra Klein  |  March 16, 2010; 12:30 PM ET
Categories:  Financial Crisis , Financial Regulation  
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Comments

Watch out for warnings of "death panels for your money" a few months from now.

Posted by: HenryKraemer | March 16, 2010 11:50 AM | Report abuse

"this seems like a really good idea to me"

Really? Because it seems politically insane to me. Even if it practically a good idea--which seems highly debatable--it strikes me as politically tone deaf.

A transcript of the discussions that spawned this piece of brilliance:

"Hey, leading up to the elections, what can we give the Republicans so they can accuse us of trying to shut down American business and institute a socialist state?"

"Well, I've got some ideas, but it should also be something that paints us not only as anti-business, but inherently negative and failure-focused."

"Oh, of course. And it should be an excuse to tax any companies that don't think their primary focus should be on their imminent failure and dissolution."

"Naturally. But it should also be something Republicans can characterize in a pithy, memorable way--you know, 'Euthanasia for Companies' or 'Government Mandated Suicide Notes' or . . . well, heck, let's leave that up to them. They should have to do *something* to get us thrown out of office en masse!"

"I know! Let's mandate that companies have to describe how their going to fail, and how they will be eaten by the vultures, once they fail. And punish them if they don't. Man, the Republicans will be so happy about this."

"Ecstatic! Well, better go pack my stuff. Not that long until November."

No to mention, it sort of equates corporations with people (at least financially), which seems poor timing given the recent hyperbole about a certain supreme court decision equating corporations with people in regards to political speech.

And the practical problems seem legion. A company today is not the same company, in many cases, as a company tomorrow.

And unless the same legislation mandates that government programs have to describe how they are going to end and be dismantled once they either achieve their ostensible purpose or fail at achieving their ostensible purpose, I think it could be fairly described as myopically focused on shutting down private businesses while ignoring waste and excess in failing government programs that run in perpetuity, with no (or very little) accountability.

So, in summation, I think this is a great idea and the Democrats should push it hard. Go! This is your shining moment, progressives. Make it happen!

Posted by: Kevin_Willis | March 16, 2010 11:50 AM | Report abuse

In terms of the so-called 'optics', Corporate Living Wills is a better label (mental image) than Funeral Plans.

The problem is simple, the response is not. The problem is off-balance sheet entities, subordinate corporations and other means of hiding the true financial condition.

Will the Living Wills make the hanky-panky clear enough to move fast if needed? Probably not, given that legions of lawyers and accountants are quite ready to help hide reality from the public and regulators.

Still, its a good idea, but it needs criminal penalties (including criminal conspiracy for the hired hands) to have a hope of actually making a difference.

Posted by: JimPortlandOR | March 16, 2010 11:51 AM | Report abuse

Is there a plan that a person in power puts forth that you DON"T think is good? I remember when, during the primaries and it seemed Hillary might win, she came out with her healthcare "plan" within an hour of its release you were cheering it. "It's good, it's really good" you cooed.

Posted by: truck1 | March 16, 2010 11:56 AM | Report abuse

This is a decent idea.

When you are writing a business plan usually you include a section on "Exit Strategy." IE - We plan to sell the company/go public/etc after such-and-such conditions have been met. It is the kind of thing investors want to know.

Requiring publically traded ongoing concerns to plan for the worst seems like a good idea.

That said, Kevin is 100% correct that Republicans while try to paint the Democrats as anti business/socialist/fascist/child eaters. But so what? That is what they always do. Eventually people will realize that all the Republicans have is fear mongering and lies and will ignore the GOP nonsense.

Posted by: nisleib | March 16, 2010 12:12 PM | Report abuse

Bart Stupak: Pelosi has only 200 votes!

http://www.politico.com/news/stories/0310/34493.html

Posted by: JakeD2 | March 16, 2010 12:15 PM | Report abuse

nisleib: "That said, Kevin is 100% correct that Republicans while try to paint the Democrats as anti business/socialist/fascist/child eaters. But so what? That is what they always do. Eventually people will realize that all the Republicans have is fear mongering and lies and will ignore the GOP nonsense."

Yes, but you have a choice of letting them froth at the mouth, wielding their torches and pitchforks, or you can hand them a submachine gun and 10,000 rounds of ammunition.

I may be over-estimating the potential firepower of this issue but, as well-intentioned as it may be, it reads as being failure-focused and anti-private sector (or can be read that way very easily). As such, it's just political gasoline for the fire, on an issue that, while it may sound good in the abstract, would be much harder to put to productive application in practice. That is, the potential benefits are not outweighed by the political repercussions.

And I just can't shake it: "The Democrats want American business to focus on how they are going to fail! They want American businesses designing the way in which they will go out of business, instead of figuring out how to make money and hire people. Instead of figuring out how to compete in a global marketplace, Democrats want American businesses to figure out how to best commit suicide! My fellow Americans, *this* is the modern Democratic party. Right here."

Posted by: Kevin_Willis | March 16, 2010 12:25 PM | Report abuse

Kevin - I understand where you are coming from. I agree that the GOP will go after the Dems on this, of course they will. But they will go after them if they don't do this too.

Republican spokesman, "Why won't the Democrat party get companies to plan for the worst? Well, because they are socialist and want companies to fail so the government can take them over."

You see Kevin, according to today's political dynamic there are only two sides to any issue. If the Democrats take one side the Republicans will take the other. Not doing something smart because your political opponents will make an issue of it is pointless given that your political opponents will make an issue of you not doing it.

That being the case the smart move, in my opinion, is to err on the side of sound policy.

Posted by: nisleib | March 16, 2010 12:39 PM | Report abuse

Depends entirely on the regulators.

Companies have been required to have credible pension plans for decades, and the regulators have allowed them to skate by with wildly unrealistic growth assumptions and portfolios that are entirely invested in the company itself. The result is a looming pension underfunding crisis that has yet to hit the fan.

I don't see why this would be any different. Watch for friendly regulators to allow companies to "fund" shutdowns with their own stock, which will, of course, be totally worthless in the event of a shutdown.

Posted by: pj_camp | March 16, 2010 1:17 PM | Report abuse

@nisleib: "That being the case the smart move, in my opinion, is to err on the side of sound policy."

I agree with that, generally. I would just think they need to be really sure it's sound policy that's worth the political lumps, and worth risking torpedoing the bill over. While I think it sounds reasonable in the abstract, I'm not sure the practical benefits are such that it's worth the risk.

I think your example of "Why won't the Democrat party get companies to plan for the worst?" sounds a lot weaker than my example of "Democrats want companies to plan for their failure!" . . . but, maybe not.

In all honesty, I see more benefits to having a public option in healthcare--which they dropped when Republicans looked at them funny--than what will likely amount to an "exit strategy on paper only". That is, one that has to be abandoned immediately because of the 8 exit strategies they prepared, none of them take into account the specific changes that are, in fact, necessitating they go out of business.

If I were a professional Republican spin doctor, I'd be celebrating as the details of this legislation got out. That's all I'm saying.

But they might not even choose to make hay out of it at all. Then I'll just say there's a reason I don't work on K street.

Posted by: Kevin_Willis | March 16, 2010 1:20 PM | Report abuse

--"a really good idea"--

If you believe central planning is the solution for everything.

Posted by: msoja | March 16, 2010 1:31 PM | Report abuse

can this rule also apply to government too?

Posted by: visionbrkr | March 16, 2010 1:42 PM | Report abuse

@visionbrkr: "can this rule also apply to government too?"

As I pointed out earlier, this will be an *obvious* point of attack. Private enterprise has to plan for their inevitable collapse (under the weight of increasingly onerous taxation and regulation, but we won't mention that) but government can keep dumping tax payer money into failing government programs in perpetuity?

That's certainly going to look like a heckuva double standard.

And, frankly, if it really is good for the goose, then it's good for the gander.

Posted by: Kevin_Willis | March 16, 2010 2:00 PM | Report abuse

Kevin,

Don't get me wrong I'm not really attacking.


I think it SHOULD be done for both private and public. If its being done now on a state level for public why should the Federal level get to bankrupt us all?


And come on now, you know we're not taxed enough. We need MORE taxes not the same or less. Or I'm sorry more "TARGETED" taxes.

Posted by: visionbrkr | March 16, 2010 2:11 PM | Report abuse

Well, if there isn't a plan to unwind big banks and financial firms, what is going to prevent the next meltdown?

This seems like a big selling point for living wills for businesses.

Without it, companies need more reserves to insure that they can unwind without bringing the financial system down.

If it is framed that this is the way to avoid govt bailouts, it will be a hit.

Posted by: srw3 | March 16, 2010 2:31 PM | Report abuse

@msoja: If you believe central planning is the solution for everything.

Each company has its own plan. There is no central planning for rescue. In fact, this is the opposite of having the govt make a plan to unwind big banks and financial firms.

Posted by: srw3 | March 16, 2010 2:34 PM | Report abuse

--"Each company has its own plan. There is no central planning for rescue."--

So, the plan to have a plan, isn't a central planning plan?

And, of course, I suppose it isn't backed by the full threat of force inherent in every government decree? Right.

Posted by: msoja | March 16, 2010 2:42 PM | Report abuse

As Simon Johnson has repeatedly pointed out, until there is a cross-border resolution mechanism in place all this talk about "living wills," and "funeral plans," is at best a distraction from the real issue at hand, too big and too interconnected to fail. Does anyone really believe that if there was a run on Goldman Sachs or any of the other big five banks the Federal Reserve Board would sit back and follow even the best laid out plans? Of course not. These plans would immediately be thrown out the window to prop-up the global financial system. The real question is whether or not the Federal Reserve Board will be able to do this a second time. We have probably already turned the corner on too big to fail. We're in too big to save territory now.

Posted by: nklein1553 | March 16, 2010 2:44 PM | Report abuse

I think that nklein (and S Johnson) is correct here. There needs to be some agreement among the international community about how to unwind these huge firms or (better solution) put a max size on firms and make them spin off new companies when they reach a certain size to minimize systemic risk.

Posted by: srw3 | March 16, 2010 2:50 PM | Report abuse

srw3,

WE AGREE!!!!

Personally why allow them to wind themselves up if you don't want to have the expense (who does) of winding them down?

Can't anyone say no?

Exxon/Mobil??

Aetna/US Healthcare??


Personally i have no problem with companies in completely separate industries or even in industries that have synergies to allow each to grow reasonably (like Comcast and NBC for example) but at some point they get too big.

God, I sound like a liberal, YUCK.

Posted by: visionbrkr | March 16, 2010 3:17 PM | Report abuse

Yep, the TBTF/TITF (too interconnected to fail) issue is one that liberals and conservatives should be able to find common ground on, at least in principal. However, once you get into the more concrete policy proposals I think you're going to find agreement starts to break down. Take proposals to increase capital reserve requirements, for example. Forcing large financial institutions to hold more capital on hand as their portfolios expand is a commonly cited method to create a disincentive for excessively large growth. However, an implicit tax on size such as this will also have the effect of reducing the velocity of money, which in the current deflationary environment would almost certainly lead to a higher unemployment/underemployment rate. Inflation "doves," who tend to be more liberal, argue to counteract this the current zero interest rate policy (ZIRP) should be continued indefinitely. Alternatively (and I believe more wisely), some would prefer a permanent and rather large injection of base money into the economy (so-called quantitative easing, as opposed to the "credit-easing," that occurred during the initial 2008/2009 financial crisis). Inflation "hawks," who tend to be more conservative, would adamantly oppose such policies. And this is just one example of possible policy disagreements. There are many, many more. So in conclusion, while the TBTF/TITF issue seems at first to bring liberals and conservatives together, when actual policies are proposed I think you will find the consensus will break down pretty quickly.

Posted by: nklein1553 | March 16, 2010 3:43 PM | Report abuse

Jim from Portland is right, the better phrase is "Living Wills." These are not uncommon in the literature for financial institutions, especially since the consequences of bankruptcy estates that cross borders are legal and pragmatic nightmares for everyone. For some background:

Bank for International Settlements, Report and Recommendations of the Cross-border Bank Resolution Group: http://www.bis.org/publ/bcbs162.pdf?noframes=1

Avougelas et. al. - Living Wills as a Catalyst for Action: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1533808

Posted by: dgs290 | March 16, 2010 5:45 PM | Report abuse

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