

Not-so-crazy alternative to more finanacial regulation - payne92
http://blog.payne.org/2009/03/26/dont-regulate/

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russell
Sorry, it's a totally crazy proposal. What he is proposing is moving liability
beyond a certain point to the stockholders. Try this scenario on. Your 401K is
invested in a mutual fund which holds some portion of AIG, maybe your
equivalent is 10 shares. AIG holds some significant percentage of the $60
trillion in derivatives out there. Are you prepared to pledge your assets to
cover your share, say $100,000? Thought not. (Lloyds of London works that way.
That's why they dont let us join.)

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payne92
Good points.

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.

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krschultz
These people didn't create a too big to fail company, they were hired by a too
big to fail company. When I'm taking a job as an engineer I should have to
inspect all the books to make sure they're clean or else I could lose all my
personal savings? Forget it.

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Dilpil
The idea sounds good if you have a chip on your shoulder about rich people,
which the author clearly does, but the proposed system is insane. Good
economies encourage people to work and invest. This is a MASSIVE disincentive
to do both. It is no coincidence that many of the world's poorest economies
are found in regions where the government thinks like this.

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jerf
You didn't finish the sentence: "It's a massive incentive to do both..." in
the form of a single company over the liability limit.

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.

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s_baar
Upvote for accuracy. This is the best solution to many problems. Liability
should only be limited between two parties through a contract. It's ridiculous
how by paying the government a higher percentage of your profits you better
protect your own assets if your company hurts a third party (ie pollution).
This would easily be the easiest way to solve many problems, as the author
points out, but it is also the only time I've had to grant credence to the
argument it leading to a race to the bottom. Usually you only hear left-
wingers say that when they complain about free markets or sweatshop labor
abroad, but this is a reform that might actually drive out business abroad. I
don't even think America has the economic clout to make this an effective
measure when the status quo is so widespread. It's a great idea, but at a time
of psuedo-protectionism taking hold in and each territory at local and state
level trying to carve out their own economic niche industry, it's as
politically nonviable as it will ever be.

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.

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ryanwaggoner
Every investor would immediately pull out all of their money if this was
implemented.

