Third, there should be a clear expectation that the shareholders and creditors of the failing firm will bear losses to the fullest extent consistent with preserving financial stability. Shareholders of the firm ultimately are responsible for the organization’s management (or, more likely, mismanagement) and are supposed to be in a first-loss position upon failure of the firm.
Shareholders, therefore, should pay the price for the firm’s failure and should not benefit from a government-managed resolution process. To promote market discipline on the part of the creditors of large, interconnected firms, unsecured creditors of the firms must also bear losses. Here is where the potential conflict of policy goals is obvious.