Jan 12, 2010

Pull My Plug, Please.

Sometimes, only sometimes, the financial community comes up with an apt metaphor. One that struck me recently from a Wall Street Journal conference on lessons learned from the Great Crisis of 2008 is that large banks should have “Living Wills.”

If you don’t personally have a Living Will, you should probably think about getting one. A Living Will gives clear directions in case you are incapacitated. Revive me, don’t revive me if I will be a vegetable, and so on. And it names the people who will execute these powers. I have my beloved Dr. Weld, my retired cardiologist.

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If a bank had a Living Will, it would go through the same procedures. In case of systemic failure — the financial equivalent of a heart attack — here’s what should happen. If a bank prepares a living will in times of tranquility when there is time to thrash through all the possibilities that would be an excellent idea, especially if all the banks did it, and the information was checked with regulators and lawyers.

Mario Draghi, governor of the Bank of Italy, said, “We want to be in a position where we are free to let fail any institution without paying the exorbitant price we are paying. Therefore, the most important point is to have a mechanism that gives power, ability and funding to allow whichever authority steps in to continue preseerving the core function of the failed institution.”

The public appetite for throwing money at big banks and having taxpayers pick up the bills is nil. Wall Street firms kept alive by the taxpayers are getting ready to hand out enormous bonuses: what’s fair about that?

Living wills can be modified or tweaked as you go along. But having a living will for a bank — and getting it done now — is not only a good metaphor but a sound idea.

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AI’s Adam Smith, also known as George J.W. Goodman—is your basic Harvard magna, Rhodes Scholar, member of the US Army First Special Forces Group, novelist, screenwriter, reporter, editor, stock analyst, portfolio manager, author of three New York Times best-sellers (The Money Game, SuperMoney, Paper Money), co-founder of two magazines (Institutional Investor and New York), winner of multiple Emmy and many other awards with his long-running PBS TV series (also called Adam Smith’s Money World), former board member of four NYSE companies and the New York Times Editorial Board, head of his own lecture series at Princeton University, denizen of a New York hedge fund, and the man who introduced Warren Buffett to the world. 

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Jerry, Bob, would be great to see some fresh updates here, and perhaps an online video format as well, akin to the ASMW PBS days? Best regards, Braden

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