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.