So there's been plenty of back and forth on the ability of the Dodd bill to create a structure that can foresee problems at financial firms and solve them. I worry, though, that the discussion has become a little abstract, or perhaps not wonky enough, so here are two nice posts from Economics of Contempt on what "funeral plans" can and cannot do. A bit from the former:The most important piece of information that financial institutions should be required to periodically submit would be a detailed description of cross-border and intra-company funding arrangements. This would allow regulators to see the direct cross-border consequences of seizing the holding company and placing it in receivership.Keep in mind that all of the information listed here was not directly available to regulators, and certainly not available on an industry-wide view, during the crisis, which made it harder to see the problems coming down the line and harder still to stop them (regulators had to deal with AIG's insolvency in the space of a few days).... Living wills should also include an updated list of the financial institution's counterparties, including exposures (on both a gross and net basis). If a financial institution can't provide that kind of comprehensive and up-to-date information, then, well, they're just going to have to invest in the necessarily operational infrastructure — that'll simply be part of the cost of being a large, complex financial institution.
Another requirement, which is closely related to the description of the institution's funding arrangements, would be a list/map of where all of the institution's assets are held, and a description of the insolvency regime in each jurisdiction. For regulators to effectively coordinate with their international counterparts, they first need to know what issues they need to coordinate, and with whom. Knowing where all a financial institution's assets are held, and how they'll be treated in an insolvency proceeding, is a necessary precondition to an orderly resolution of the financial institution.
Given what we've learned about Lehamn's infamous Repo 105 deal -- which, long story short, let them temporarily hide troubled assets in London in exchange for cash to pay down debts and mask their leverage -- I wonder if this kind of funeral plan would have made this sketchy deal impossible to ignore. The New York Fed either didn't understand what Lehman was doing when it examined the bank's books in the months prior to its collapse or chose to turn a blind eye to the problem. But if Lehman was forced to record this international transaction, and its implications in the case of a collapse, and submit that to its regulator, it seems it would be much harder to pretend the shady work-around wasn't there.
-- Tim Fernholz
