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If my recollection is correct, when this was happening The Economist magazine was also in favor of it. And one of the reasons they gave was that a more diverse

If my recollection is correct, when this was happening The Economist magazine was also in favor of it. And one of the reasons they gave was that a more diverse business will make bankruptcy less likely. And logically I have to agree with that. It also seems to me, that is not what caused the crisis. I think the core of the problem is A) Too much risk was taken on because there was huge incentive to maximize profit, and very little disincentive to minimize risk. People were gambling with other people's money. B) Companies that were allowed to get too big to fail. So I think we can keep mark to market, and naked short selling and even the repeal of Glass-Steagall as long as we have legislation in place to prevent systemic risk. Something like monopoly laws, but instead of monopoly, companies would be charged with being too big to fail. If the courts convict them of being systemic risk, they have to find a way to split into at least two parts, but they can do it while preserving as much share holder value as possible. And then no more bailouts! I am not sure how Glass-Steagall eliminates systemic risk and the too big to fail scenario? It makes it less likely but does it eliminate it?

ams6110 18y ago
I agree on your point B, I think that companies can get to a point where they are like a cancer, they themselves thrive (for a while) but they can end up destabilizing the host organism. Not a perfect analogy, and I worry about giving the government the power to declare that a company is "too big" because historically such powers are abused. IF such size could be pre-defined on purely objective measures, perhaps there is a way it could work.
- Retric 18y ago
  I think the rules can be fairly simple, if you have more than 5 billion a year (inflation adjusted starting now) in revenue and control more than 33% of the market you should be treated like a monopoly. That way small / midsized markets can be dominated by a single company which can be extremely efficient but no single company can become "to big to fail".
  - anamax 18y ago
    "Treated like a monopoly" doesn't mean that you can't dominate a market or get huge. FWIW, none of the large financial institutions had >20% of "the market". In other words, while those rules are simple, they don't seem to address any problems that we're having.
gills 18y ago
You do realize that the popular catchphrase "Too Big To Fail" is politician-speak for "We know these guys are crooks and we know they committed fraud on a massive scale, but won't indict them because it would bare our own corruption and failure to enforce existing laws because we really wanted our friends to make more money and donate to the campaign!"
- biohacker42 18y ago
  I kind of agree with that, but it's also oversimplifying. Putting banks into receivership doesn't just happen magically, there's laws for it. There are no equivalent laws for international behemoth insurers like AIG. The government can't just make up laws as it goes along. As to a disorderly unwinding like Lehman, well that basically caused a run on the banks.
  - gills 18y ago
    The government can't just make up laws as it goes along. You are right, and I'm glad you are saying it :) But didn't the Fed fail in it's regulatory role over the commercial banks to whom AIG was counterparty on swaps, when they allowed valuation of Tier Capital assets based on the 'quality' provided by swaps from AIG and friends? With any due diligence whatsoever the banks would have known that AIG didn't have the capital to pay those contracts. From that angle it looks like some or all of: The Fed was asleep, AIG misrepresented itself to CDS customers, or banks were complicit in the misrepresentation (or they didn't care because they could hedge the CDS with short CDS from a different counterparty -- now that is systemic risk). Go a step further -- the Fed accepted these CDS-wrapped assets as collateral for TSLF/TALF loans -- so the same statements about banks could be applied to the Fed, they either didn't do the due diligence on the collateral or they are complicit in breaking the law. Right? Edit: for God's sake, I despise economics. I just want to get back to work and create stuff!
    - biohacker42 18y ago
      Absolutely, regulators failed all over the damn place. But I'm not sure how to fix that. It seems they will be merged into one giant super regulator, I'm not sure that helps. Perhaps making the head of the super regulator an elected office? And sorry about keeping you from work :) I'm in a cubicle farm... but won't be there for long.

ams6110 18y ago

I agree on your point B, I think that companies can get to a point where they are like a cancer, they themselves thrive (for a while) but they can end up destabilizing the host organism. Not a perfect analogy, and I worry about giving the government the power to declare that a company is "too big" because historically such powers are abused. IF such size could be pre-defined on purely objective measures, perhaps there is a way it could work.

Retric 18y ago
I think the rules can be fairly simple, if you have more than 5 billion a year (inflation adjusted starting now) in revenue and control more than 33% of the market you should be treated like a monopoly. That way small / midsized markets can be dominated by a single company which can be extremely efficient but no single company can become "to big to fail".
- anamax 18y ago
  "Treated like a monopoly" doesn't mean that you can't dominate a market or get huge. FWIW, none of the large financial institutions had >20% of "the market". In other words, while those rules are simple, they don't seem to address any problems that we're having.

gills 18y ago

You do realize that the popular catchphrase "Too Big To Fail" is politician-speak for "We know these guys are crooks and we know they committed fraud on a massive scale, but won't indict them because it would bare our own corruption and failure to enforce existing laws because we really wanted our friends to make more money and donate to the campaign!"

biohacker42 18y ago
I kind of agree with that, but it's also oversimplifying. Putting banks into receivership doesn't just happen magically, there's laws for it. There are no equivalent laws for international behemoth insurers like AIG. The government can't just make up laws as it goes along. As to a disorderly unwinding like Lehman, well that basically caused a run on the banks.
- gills 18y ago
  The government can't just make up laws as it goes along. You are right, and I'm glad you are saying it :) But didn't the Fed fail in it's regulatory role over the commercial banks to whom AIG was counterparty on swaps, when they allowed valuation of Tier Capital assets based on the 'quality' provided by swaps from AIG and friends? With any due diligence whatsoever the banks would have known that AIG didn't have the capital to pay those contracts. From that angle it looks like some or all of: The Fed was asleep, AIG misrepresented itself to CDS customers, or banks were complicit in the misrepresentation (or they didn't care because they could hedge the CDS with short CDS from a different counterparty -- now that is systemic risk). Go a step further -- the Fed accepted these CDS-wrapped assets as collateral for TSLF/TALF loans -- so the same statements about banks could be applied to the Fed, they either didn't do the due diligence on the collateral or they are complicit in breaking the law. Right? Edit: for God's sake, I despise economics. I just want to get back to work and create stuff!
  - biohacker42 18y ago
    Absolutely, regulators failed all over the damn place. But I'm not sure how to fix that. It seems they will be merged into one giant super regulator, I'm not sure that helps. Perhaps making the head of the super regulator an elected office? And sorry about keeping you from work :) I'm in a cubicle farm... but won't be there for long.