TOO COMPLEX TO FAIL—LIVING WILLS. Since the Lehman bankruptcy in September 2008, I have posted a number of times about the difficulties that the complexity of Lehman’s business made for the bankruptcy. For example, I posted here in July 2009 that: “…in addition to the concept of â€œtoo big to failâ€, there should also be the concept of â€œtoo complex to fail.â€ I cited Jennifer Hughes in the Financial Times for reporting that more than 9 months after the bankruptcy, the administrators were still trying to find out which of the tens of thousands of counterparties were net creditors or net debtors.
This report by the Global Association of Risk Professionals summarizes how the Federal Reserve and the Federal Deposit Insurance Corp. recently told 11 of the biggest banks that their “living wills” were inadequate. (Very large banks are now required to prepare procedures in advance to make themselves easy to disassemble if they go bankrupt). “Before 2015, the banks should develop a ‘less complex legal structure’ and amend financial contracts, including for derivatives, to provide regulators more time to resolve a failing institution, the agencies said.”
The good news is that attention is being paid to the problem; the bad news is that excessive complexity remains.