BANKTHINK

Nothing to Gain, Much to Lose, from Breaking Up Big Banks

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"As a theoretical economist, I have no use for terms such as 'too big to fail' or 'systemic risk.' Why? Because they cannot be quantified."

This is false, as is the idea that firms like AIG repaying highly subsidized loans is evidence that their bailouts made money for taxpayers. The concepts of too big to fail and systemic risk can and have been modeled as a taxpayer put and quantified by applied econometricians .

As an alternative to a government-directed breakup,US Corporate law could be strengthened to recognize that taxpayers have an "equitable interest" in every financial firm that is economically, administratively, or politically difficult to fail. Establishing this collective right would change risk-taking incentives at firms protected by the safety net and establish enforceable duties of loyalty and care to taxpayers for managers and regulators. It is patently unjust for financial-institution managers and regulators not to be formally responsible for monitoring, publicizing and servicing the value of taxpayers' credit support at difficult-to-fail firms. The failure to establish these duties is what prevents managers whose risk-taking or negligence exploited the safety net from being held accountable in the courts.
Posted by Edward Kane | Friday, February 01 2013 at 2:41PM ET
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