Thursday, January 9, 2014

A Modest Proposal

Going back through the motley archive of items I may have read, coupled with things I meant to read at some point, a few gems have popped back into the front of my mind that are worth sharing - and as my wont, share I shall over the next little bit.

Here's a good one to start: forget about finding a way to regulate banks to avoid the whole "too big to fail" phenomenon; just use existing structures in a new - or, perhaps, and old - way to induce banks to behave in a way that's more in line with responsible market players.

Behold:

So here’s an un-vetted idea I want to throw out there [...]: Would it be feasible to pass a law requiring banks above a certain size—say $100 billion in assets—to exist as private partnerships, instead of publicly traded entities?

This way, banks could continue to be large, if they wanted to be. It’s probable that certain types of banking functions are best managed at banks with substantial scale. But if those large banks were structured as private partnerships, in which the partners were financially liable for failure, those banks would be heavily incentivized to be conservative in the way they managed their books, substantially diminishing the risk that they would need to be bailed out in the future.
  Seems reasonable to me. I highly doubt that the honorable Mr. Dimon would have carried himself in public the same way if he was an unlimited partner in the aftermath of the London Whale. I also highly doubt that the London Whale, or anything even passingly similar to it, would have happened if Mr. Indoor Tennis' very well coiffed rear was on the line.

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