Rob Long: "I want to see them selling apples on the street corner"
The quote above refers to something Rob Long said in the latest podcast about executives and traders and hedge fund types who somehow were allowed to leave failed firms with $100's of millions of dollars in the bank, while taxpayers were left with a massive bill. Not only is it unfair, but the incentives are terrible.
James was skeptical, but I think Rob's diagnosis was on the money, and I think there is a fairly simple solution to all of this. The solution is to impose full liability on the owners of financial institutions. With full liability, in the event of a bankruptcy, creditors would be allowed to go after all assets of the firm and all assets of the owners of the firm - investment accounts, company stock, luxury suites at Citifield, beach houses in Hamptons, expensive artwork, private jets etc. No limited liability, no protected assets.
Sound ridiculous? Well, not too long ago, we had such a system, at least with Wall Street investment banks. Investment banks used to be privately held partnerships, where partners had full exposure to firm losses. That is why investment banks used to be relatively conservative firms, who made their money selling advice and providing services.
Once the firms started going public and their own money was no longer at risk, it wasn't too long before they were engaging in highly risky activities, such as trading on their own account with super high leverage.
An executive might think twice about trading subprime mortgages at 30-1 leverage if he or she knows that not only is their job and company stock at risk, but that the $100 million that they had already taken out of the firm is also at risk. You want regulation? Well, there it is. Problem solved.
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Comments:
Oct '10
Re: Rob Long: "I want to see them selling apples on the street corner"
That the executives got off scot-free was a result of the creditors being bailed out by the poor, suffering taxpayer. If that safety net was removed, these creditors would do their job of monitoring the solvency and risk positions of their debtors - just like they do in normal industries. If the creditors, deprived of implicit government guarantees, felt that doing business with partnerships rather than limited liability vehicles was the way to go, we'd soon end up with credible apple-selling threats.
Aug '11
Re: Rob Long: "I want to see them selling apples on the street corner"
Awesome post. I would extend this thought process to attorneys and CPA firms practicing securities law or working for listed companies. No limitation of liability. Everyone bets the farm every day!
Oct '10
Re: Rob Long: "I want to see them selling apples on the street corner"
I completely agree that creditor rescue is a big problem. Creditors are supposed to be the regulators, but after 30 years of government bailing out creditors to financial institutions, that changed. Eliminating creditor rescue is part 3 of my reform proposal.
I just think you need both - stop bailing out creditors and allow creditors to go after personal assets.
Edited on September 23, 2011 at 5:43pmNov '10
Re: Rob Long: "I want to see them selling apples on the street corner"
I also think that maybe it's time to start enforcing the laws on legal liability for directors. This page is from Canada, but I assume something similar is in effect in the States.
Sep '10
Re: Rob Long: "I want to see them selling apples on the street corner"
The enablers are certainly very much to blame as well as the CEOs of those firms. When I read Michael Lewis's book and heard this argument for partnershiips advanced for the first time I thought it made sense but I must say on further reflection I think that, had they not received that capital they probably would have sold out to European institutions who would then have done the same things as we now know they did do. I really think it comes down to government insuring depositors only and they should have been more clear about what was and was not insured to prevent runs on money markets but the should have made the creditors take a hit. Forcing and end to limited liability smacks of bringing back debtors prison to me.
Aug '10
Re: Rob Long: "I want to see them selling apples on the street corner"
Revoking corporate personhood has been a longtime desire of the anarchist Left.
Oct '10
Re: Rob Long: "I want to see them selling apples on the street corner"
I think that in an ideal world, the degree of liability would be part of a contractual negotiation between the owners of a corporation and creditors. In other words, owners can choose whether or not personal assets are available to creditors in terms of recourse, and creditors would demand a higher or lower rates of interest accordingly.
With the financial services industry, I'm not sure that it's possible based on where we are now.
Some research has been done regarding free banking in 19th century Scotland, and there were very few bank failures, but the bank owners were on the hook for all deposits.
Edited on September 23, 2011 at 8:39pmAug '11
Re: Rob Long: "I want to see them selling apples on the street corner"
I'm suggesting that those who act as investment banks - underwriting, market making, investment advisory, hedging - be stripped of limited liability, not commercial banks. And that those who provide attestation (CPAs) and practice securities law for listed companies (securities law firms) also be on the hook. These are steps backward, but they place the risk where it belongs, with the reward.
Sep '10
Re: Rob Long: "I want to see them selling apples on the street corner"
Douglas Kimball
I'm suggesting that those who act as investment banks - underwriting, market making, investment advisory, hedging - be stripped of limited liability, not commercial banks. And that those who provide attestation (CPAs) and practice securities law for listed companies (securities law firms) also be on the hook. These are steps backward, but they place the risk where it belongs, with the reward. · Sep 23 at 12:01pm
Its an interesting idea. I'm not against it necessarily. I work for a wall st boutique that did not get caught up in it, by the way. I despise the people who brought this about and I want to see them punished but I also had friends who lost their jobs at Arthur Anderson even though they had nothing to do with Enron or Global Crossing etc.
Oct '10
Re: Rob Long: "I want to see them selling apples on the street corner"
Unlimited personal liability of partners has always been part of the structure of Swiss private banks. This provides an enormous deterrent against their speculating with the funds of clients on deposit with them. Many Swiss private banks have been gobbled up by limited liability corporations or transformed themselves into the same over the last two decades, but it is telling that a majority of those who remain have been in business for more than a century and some more than two,
Jun '10
Re: Rob Long: "I want to see them selling apples on the street corner"
So every stockholder in a Wall Street firm is personally liable? That alone would put an end to public banks. Who would buy that stock? What about any other corporation? Would a stockholder in a pharmaceutical be liable if the corporation marketed a horendously bad drug? No more pharmaceuticals. Shall we go on and on? Holding the executives of a corporation responsible for malfeasance is one thing. Holding all owners/stockholders responsible would put an end to capitalism. There would be no capital.
Aug '11
Re: Rob Long: "I want to see them selling apples on the street corner"
Not at all. There was a time, not so many years ago, that all CPAs, attorneys and investment banks were partnerships. I'm suggesting that we return to these structures where firms engage in those specific activities I enumerated. Investment banking is probably incompatible with passive ownership and professionals who largely self regulate need to be fully accountable. Plus, the accounting and legal professions have gone through significant consolidation and concentration. Pressures to break up and compete would be good for everyone. The professions themselves have become two-tiered, the few elites who do public company work and then everyone else.
May '11
Re: Rob Long: "I want to see them selling apples on the street corner"
What about the ratings agencies? As I recall, S&P, etc. all had Lehman and others at AAA+ until the day they folded.
Aug '10
Re: Rob Long: "I want to see them selling apples on the street corner"
Todd, you can't mean the "owners". For all I know, the owners of these financial institutions are just regular investors, if they're publicly traded institutions.
If such institutions were simply not bailed out, then a lot of people would be hurt--once--but the markets would learn to smell the kind of firm that is untrustworthy, and avoid that odor. The markets might indeed come to prefer institutions that are structured as partnerships, for precisely the reasons you laid out.
Jan '11
Re: Rob Long: "I want to see them selling apples on the street corner"
It was a pleasure hearing Rob let one go against the criminal/immoral class. Every once in a while our favorite RINO gets a bug up there (or maybe it's that nasty creature from Star Trek 2:The Wrath of Khan). The last time I remember it happening was back near the beginning of the so-called Arab Spring and Rob was cheer leading for chaos (more rubble, less trouble!). I suggest all efforts be made to discover Mr. Long's other buttons so that Mr. Lileks can push them.
Mar '11
Re: Rob Long: "I want to see them selling apples on the street corner"
Rob's right in one respect; the only real way to end bank bubbles is to convince the industry that if they screw up, they're going broke, and no bailout is coming. Where Rob is wrong is in suggesting that it be accomplished through some kind of law. As Lileks pointed out, laws for such things are the monkey's paw of politics. No matter how much good you think they'll do, they usually make things go horribly wrong.
James also had a fantastic point about consumer spending. He's right that the days of spending binges are over, and that the Obama Administration is absolutely irresponsible for trying to convince Americans to go right back to doing things that got them in economic trouble in the first place.
The issue of savings was discussed, and it bothered me that no one pointed out a central truth about saving these days: saving money is a suckers game now, because interest rates are so low, you make nothing on it, while government policies inflate money. Perversely, its better to borrow and pay it off in inflated dollars down the road than it is to save and build compound interest.
Aug '10
Re: Rob Long: "I want to see them selling apples on the street corner"
I agree with Rob but I'd also like to see Barney Frank, Chris Todd and FANNIE/FREDDIE execs selling apples along side them. Better yet, I'd like to see them in prison for their part in promoting CRA and the whole subprime meltdown. Instead they make off with millions while demonizing the banking execs that colluded in their fraud.
Jul '11
Re: Rob Long: "I want to see them selling apples on the street corner"
Douglas: Rob's right in one respect; the only real way to end bank bubbles is to convince the industry that if they screw up, they're going broke, and no bailout is coming. Where Rob is wrong is in suggesting that it be accomplished through some kind of law. As Lileks pointed out, laws for such things are the monkey's paw of politics. No matter how much good you think they'll do, they usually make things go horribly wrong.
10:02pm
I think this is spot-on. More regulation involving the "work" of Congress is only going to create more of the same structures that allowed the negatives to happen the last time around. While I have a lot of sympathy for having these clowns picking up horse apples on public highways and paying them 10 cents/apple, that must be done in parallel with making the politicians who've at least had 50% of the root cause done under their auspices. I still don't see any call for public beatings of the Fannie/Freddie crowd, nor their political benefactors. That's where all of this starts - when politicians create market incentives for political gain.
May '10
Re: Rob Long: "I want to see them selling apples on the street corner"
In the old days the barrow boys and costermongers etc of Covent Garden market and elsewhere sometimes ended up doing well in stockbroking and finance; because of their experience in calculating prices on the fly, and living with their losses when they stuffed up. Furthermore they tended to mete out tough justice on any of their own who played unfairly.
Ah well, Rob's idea as outlined, would be a truly ironic cycle, from eel-seller/periwinkle-monger, to banker, and back again, in one short life. Perhaps some pillories at either end of Wall Street, and Constitution Avenue DC, could be installed for instructive purposes as well
Edited on September 24, 2011 at 7:43pm