Not-so-crazy alternative to more finanacial regulation
blog.payne.org
blog.payne.org
One thing we've learned in this crisis is that leverage causes companies that appear healthy to go under very very quickly. So you're saying that people would steer clear of investments that might ruin them financially? Fine. You've just killed off our entire financial industry, our real estate industry, and a good portion of other industries that rely on leverage to do business.
And what do you mean about no legal basis for LLCs? I'm pretty sure every state has a legal basis for LLCs.
It probably doesn't make sense to allocate ALL of AIG's losses to shareholders, just enough to create some disincentive.
Also, with this mechanism, the market would figure out over-leveraged companies with liability exposure and beat down the share prices.
Finally, maybe the answer is to allocate losses not to shareholders, but to officers, directors, and highly compensated employees, bounded by the company compensation to each person.
In other words, if you create a "too big to fail" company that fails, you might start to be personally liable for what the company's paid you in the past, and has promised to pay you in the future. The idea, again, is not to get back all of the loss, but to dis-incent extreme, leveraged risk taking by management.
"I would like to see managers of government-protected institutions take an oath to safeguard the soundness of their companies. I would like to see them subjected to prison terms for violating that oath. The oath is a general promise, not satisfied simply by staying within the boundaries of L regulation.
I believe that S regulation would change the motives of bank managers. They would be looking for ways to avoid failure, rather than for ways to stay within the letter of the law."
http://econlog.econlib.org/archives/2008/11/letter_of_law_s....
This is a much more natural system of incentives than the current ratings boards, who are paid by the entity being rated and hold only a limited, indirect personal stake in their failure or success to rate correctly.
For example, let's say, bankruptcy only lets you discharge 100% of the first $1 trillion. After that, some combination of owners/officers/executives are responsible for (say) 0.1% of obligation beyond $1 trillion.
With these thresholds, it hardly applies to "every single public company".
The vast majority of companies will be fine the vast majority of the time, so there's plenty of opportunity for an organization to sell inexpensive insurance which covers for those rare cases where the pot boils over.
The obvious hack is to slice the company into (company size)/(liability limit) pieces, but while typing up my complaints about how easy that is, it occurred to me that we have anti-trust, anti-racketeering, and anti-price-fixing laws in place that are basically solving the same problem, so maybe it could work after all with a sufficiently clever law.
One more thing: Don't assume that they could go after all you're worth, either. No one would associate with an investment, that, if gone awry, would ruin them financially. The point is that liability would be determined on the market between individuals, and there wouldn't be a one size fits all LLC. There would probably be enough to discourage irresponsible behavior, but not so much to make investors fearful.