Back in the good old days, when we still didn’t know how bad things really were, I wrote a very short post about how it wasn’t clear how to solve the financial crises, but maybe the geniuses on Wall Street shouldn’t be allowed to make things worse by consolidating. I kept it short because being a layman in such issues it wasn’t clear that my random thoughts would be very helpful. Of course now it’s clear that my uninformed ravings are pretty much just as good as any Wall Street or Federal Reserve whiz, so here goes.
This is my plan – the one I formulated back in post-election 2008 when Paulson was so visibly floundering. Any bank or other financial institution that’s facing insolvency needs to design their own breakup. Basically the conglomerate needs to split itself apart based on business units such that all the smaller companies have independent charters. For example if a company has a successful lending business, that should be spun off as a separate company and any other fragments of the company should not be doing lending. Once broken up, the government will take over one of the spin-offs.
By setting some limit on size, like requiring any sub-business to be less than 50 percent of the original company, we can assure that conglomerates will be fractured into parts substantially smaller than the parent business. There will also be an incentive for the principals in the franchise to spin off as much of the toxic parts of their balance sheet into one subsidiary – the one the government will take over. Of course the government will have to agree to the breakup plan, so it can’t be arbitrary or unreasonable, and to assure more sanity in the owner’s self-interest, none of the new businesses can be swallowed up by other firms for a period of two years. They have to be able to make it independently.
The incentive will naturally be to divest all the bad assets into the one spin-off business that the government will take into receivership, something that – we’ve been told – only the people who created the mess are smart enough to do. But they’ll also want to reduce their exposure by making the “bad” business as small as possible, which might motivate them to mark some of those toxic assets to closer to their market value, something they’ve been unwilling to do so long as they pollute their balance sheet.
The main advantage of this plan is that we get something that we need – smaller banks instead of ‘too big to fail” financial behemoths. It’s just a happy coincidence that the people who suffer most would be the CEOs and high-level executives. It’s not necessarily a requirement, but it sure would feel good.
- jack*
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