Section 165(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires each nonbank financial company supervised by the Federal Reserve and each bank holding company having assets of $50 billion or more (a “Covered Company”) to develop what has commonly become referred to as a “living will,” essentially a plan of orderly liquidation (the “Resolution Plan”). The Federal Reserve and the FDIC published a proposed rule on March 29, 2011, to implement this provision. The proposed rule requires a Covered Company to provide its initial plan within 180 days from the effective date of the final rule or the date the entity becomes a Covered Company. Each Covered Company will then be required to submit an updated plan within 90 days of the end of each calendar year. Interim updates are required if an event occurs that might have a material impact on the Resolution Plan. The Resolution Plan must be submitted the Federal Reserve and the FDIC for their approval. The Plan must take into account what type of distress in the world financial markets might result in failure of the Covered Company and, most importantly, it must assume that the government will not provide any extraordinary support. The Resolution Plan must provide for the “rapid and orderly liquidation” of the Company and should include provisions that protect any FDIC insured institutions from risks created by nonbank subsidiaries of the Covered Company. It should also assess the feasibility of the Covered Company’s plan, including timelines, for executing any sales, divestitures, restructurings or other similar actions.

Editorial Comment: When the credit markets freeze and it is impossible to value financial assets, how exactly will a huge financial company liquidate itself in a “rapid and orderly” manner? A dearth of buyers in such a situation will make the liquidation impossible to accomplish in a short period of time and if it is accomplished it will likely be a very messy affair. An orderly liquidation really presumes that the credit markets are working normally and that the financial distress a large bank is suffering is restricted to it alone. In such a situation there would be willing buyers for the assets and the liquidation would not trigger a broader crisis. One suspects that any Resolution Plan will be much more aspirational in nature than a true blueprint for what to do in a financial panic.