The idea that financial firms whose collapse could create trigger broad economic problems should come up with their own living wills has been gaining traction lately.

After the confused attempt to bailout or save Lehman Brothers, Bear Stearns and AIG in 2008, some regulators have been suggesting that banks and important financial institutions plan for their own demise.

A senior Canadian finance official said on Wednesday that the Group of Twenty (G20) are thinking about the idea as a way to avoid financial meltdowns.

 Even one of the top financial advisors unwinding Lehman Brothers’ has said a living will would have helped.

But is it the banks or the regulators that oversee them who should come up with these living wills? Should they come up with them together? Who would have better incentives to prevent systemic issues?

The issue was discussed on Wednesday at a Practising Law Institute conference in New York by  H. Rodgin Cohen, a mergers & acquisitions lawyer at Sullivan & Cromwell in New York, who personally worked on deals like JPMorgan-Bear Stearns, Barclays-Lehman, and Wells Fargo-Wachovia last year.  Here is what Cohen told the conference:    

“I do think we have it somewhat backwards on all this emphasis on the living wills for these institutions. Actually the living will isn’t the institution’s responsibility. It is truly surprising to me that sitting in a locked desk somewhere there isn’t a living will which the relevant supervisor has for each institution. Clearly that did not exist last year, and hopefully we have it today. “

So who should come up with these “living wills”? Banks or Regulators or both?

For Yell, the publisher of Britain’s Yellow Pages directories, there is a world of difference between 90 and 95 percent.

The lower figure is the amount of lenders backing its debt financing plan, the higher figure is the amount it needs. If it falls short of its target this evening, the company may need to go to the court to push through a deal.

(News story here.)

The proposals are vital to the heavily indebted company’s short-term future, allowing it to rejig its capital structure and tap equity investors for up to 500 million pounds.

However, the size of the company’s lender group - 300 banks and funds - is working against it. Trying to get all the lenders signed up to the debt deal has been as difficult as herding cats, bankers say.

Going to the courts for approval can be lengthy and expensive, lawyers say. For Yell, a court case may mean they will miss tapping the equity markets before the end of the year. This will disappoint, as the equity markets have backed a range of weak companies in recent weeks, such as HeidelbergCement and Ladbrokes.

Yell may need to hope their generous spirit continues into the new year.

Restructuring a company’s finances usually means someone takes a loss.

But who should take that loss is often a difficult and nerve-jangling process. Brinkmanship is the usual tactic with hard deadlines often the only way to draw situations to a close. Clever application of legal strategies usually helps also.

All of these factors are at play in the upcoming restructuring of Wind Hellas. The big Greek mobile operator has 3.2 billion euros of debt but is running out of cash to pay its interest bills.

Of the company’s lenders, those at the bottom of the pile — the subordinated bondholders, owed 1.17 billion euros — are under most pressure.

Wind Hellas said on Wednesday that it would not pay an interest payment to these junior lenders as it finalises talks with new investors. With just 26 million euros of liquidity and a 67 million euro interest payment required in the next month someone and something had to give.

The decision not to pay interest to subordinated bondholders indicates where the most pressure is being applied.

The junior lenders are vulnerable because if the company does not pay its interest bills a forced sale becomes more likely, and such a sale would be unlikely to raise enough cash to pay back the subordinated bondholders in full.

A sale price of less than 1.8 billion euros — the value of the senior debt — could see lower-ranked lenders left with nothing.

Wind Hellas’s parent recently shifted its address from Luxembourg to a London office in a move that puts junior lenders at even greater risk. The recent IMO Car Wash court case showed the English courts are willing to strip junior lenders of their debts if company values drop.

Subordinated lenders have responded to the pressure by suggesting they could inject additional capital into the company, thus protecting their position. The company’s ultimate owner, Weather Investments, may also feel obliged to add in further capital.

Whoever acts, doing nothing is not an option. Restructuring offers are due by Oct. 22 and a deal must be concluded by Nov. 15 when an interest payment is due.

A consortium led by Spain’s Cosmen family has decided against making a takeover offer for National Express after spending a month poring over the British bus and train operator’s books, Reuters reported on Friday.

In other news:

Stricken Dutch bank DSB failed to reach a deal with major Dutch banks in late night talks on Thursday aimed at finding an option for DSB’s survival, Dutch media reported.

China Merchants Bank, which is raising 22 billion yuan ($3.22 billion) through a rights issue, won’t unveil new fund raising plans over the next three years, the China Securities Journal reported on Friday, citing president Ma Weihua.

Mining group Xstrata did not support hopes of a more general M&A rebound on Thursday, announcing it had no intention of offering for rival Anglo American and that it continued to assess a range of alternative growth options. Read the Reuters report here.

OCBC , the smallest of Singapore’s three local banks, has agreed to buy ING’s private banking unit in Asia for $1.5 billion, a surprise outcome in a complex drawn-out auction.

CIT Group  is getting closer to finalizing the terms of a new loan that would give the commercial lender, trying to avoid bankruptcy, $3 billion to $6.5 billion, two sources familiar with the matter told Reuters.

In other news on Thursday:

The British government will not underwrite a planned rights issue by Lloyds Banking Group, the Financial Times said on Thursday.

Japan’s securities regulator is probing allegations of market manipulation in share trading by BNP Paribas, the Asahi newspaper reported.

The founder and other senior officers of hedge fund Cadogan Management LLC, who quit the firm two weeks ago, have now agreed to buy back the business from Fortis Bank, the Wall Street Journal said, citing people familiar with the matter.

Cisco Systems plans to buy advanced wireless equipment maker Starent Networks Corp for $2.9 billion to boost its product offerings as phone carriers build out next generation networks, Reuters reports.

In other stories on Wednesday:

Royal Bank of Scotland Group is considering a government-backed plan to give up all 312 of its RBS-branded branches in England and Wales in a move to satisfy European authorities, the Financial Times says.

Las Vegas Sands, which is seeking to raise up to $2.5 billion by listing its Macau assets on the Hong Kong stock exchange, could launch the initial public offering by late November, the South China Morning Post reports.

Major U.S. banks and securities firms are on track to pay employees about $140 billion in total compensation and benefits this year, the Wall Street Journal says, citing an analysis of securities filings for the first half of 2009 and revenue estimates through the end of the year.

Xerox Corp says it plans to buy Affiliated Computer Services Inc for $5.5 billion to  expand from a document-management company into the outsourcing business. ACS would be the first big deal for new CEO Ursula Burns.

Taiwan says it will allow contract chipmakers and flat-panel firms to acquire rivals in China, a move analysts said will help cement TSMC and UMC’s lead in the semiconductor sector.

For more on these stories and the rest of the latest deals news from Reuters, click here.

And here’s the buzz from Tuesday’s newspapers:

* The Netherlands is looking into options to sell Fortis Bank Nederland assets to French bank BNP Paribas (BNPP.PA) to get approval for a merger of nationalised banks ABN AMRO and Fortis Bank Nederland, Dutch newspaper Het Financieele Dagblad reported.

* UBS  (UBS.N) (UBSN.VX) chief executive Oswald Gruebel said the bank’s U.S. wealth management unit Paine Webber is “non-core” but the Swiss bank will not sell at present, the Financial Times quoted him as saying.

* Barclays (BARC.L) has entered discussions to buy the banking arm of Standard Life (SL.L), The Times reported. Standard Life is in talks with several parties, but Barclays is believed to be the most likely bidder in a deal which could be valued at between 200 million pounds ($317.6 million) and 300 million, the paper said.

How long will it take the U.S. government to disentangle itself from the financial services sector?

More than 16 years, according to a new Piper Jaffray paper.

“The more likely answer may be that the U.S. government may never be fully repaid,” reads the paper, “Opportunities for Private Equity in Financial Services,” released last week.

The estimate is based on assumptions, including that $3 trillion of U.S. government funding has to be fully repaid and no addition funds are drawn from $23.7 trillion in commitments. 

For private equity investors, who are the focus of the paper, that’s the new reality to keep in mind when making decisions about invesmtents in this field.

“The U.S. government’s direct stakeholdings in the financial services sector will persist for many years and private equity investors should be prepared for the U.S. government’s involvement to span multiple investment, economic and political cycles,” it reads.

Still, the industry that includes banks, insurers, specialty finance and financial technology companies is likely to present ample opportunities for private equity to invest, according to the 49 page report, which also includes a sector-by-sector update on the state of affairs.

“We believe that in this period of extinction, re-birth and evolutionary change, the financial services sector will present many complex challenges for private equity investors but those will be outweighed by extraordinary opportunity,” the paper reads.

ING sells its 51 percent stake in a wealth management joint venture to partner Australia and New Zealand Banking Group for $1.6 billion as the Dutch group slims down through asset sales.

ING is offloading assets to raise 6-8 billion euros, and is also selling its Asian and Swiss private banking assets. HSBC is the front-runner to buy the Asian private bank assets, sources tell Reuters.

In other M&A news:

Britain’s biggest pubs group, Punch Taverns, puts more than 300 of its worst performing pubs up for sale as it strives to cut its debt pile.

French state-controlled power group EDF could raise its stake in waste, water and transport firm Veolia to 13-14 percent as Veolia’s boss is set to go to EDF, French daily Les Echos said.

For deals reported by other media click here.

If you see Sid, tell him. Tell him his help will be needed to swallow more UK equity than at any time since the flood of privatisations in the 1980s.

That’s the clear message from UK Financial Investments, the body that holds stakes in Royal Bank of Scotland, Lloyds Banking Group and nationalised banks. Those stakes are likely to be worth about 80 billion pounds.

“We will need to innovate, be imaginative in our approach and use the full range of sales methods available to us,” John Crompton, head of market investments at UKFI, says in a speech at Reuters offices in London.

Crompton says nothing has been decided on timing, price and how long the sell-down will take. But UKFI is expected to test investor appetite some time next year with an institution placing of several billion pounds. That could include structured transactions, including exchangeable debt issues.

Once markets stabilise, shares are likely to be offered to retail investors. That’s due to the scale of the disposal, but also to allow the public to share in any profit from the taxpayer led bail-out.

Still, “Sid” — the man on the street used to drum up interest in the privatisation of British Gas — may not be called on for another couple of years. UKFI will be keen to pitch any retail offer into stable markets to avoid repeating the BP share sale disaster, when shares were sold during the 1987 stock market crash. Taxpayers wouldn’t take that kindly.