I think that financial institution shares that work like they did in late 19th century England and require the purchaser to stand ready to put up an additional $75 per share when the firm needs the money (even if it’s just to pay off creditors in bankruptcy) would be a reasonable alternative to full personal liability for managers.

http://www.telegraph.co.uk/comment/36427 77/Dont-panic-weve-seen-this-before.html

The fact that there were failures even in the presence of full personal liability doesn’t support (or harm) your argument. You’re asserting that personal liability doesn’t matter, I’m asserting that it does. On that issue, I think we’ll just have to agree to disagree.

An additional benefit of personal liability is that it significantly reduces the losses to creditors. I know for sure that Britain’s biggest banking failure of the 19th century (Overend Gurney, similar to Lehman) resulted in 100% recovery for the creditors — after the bankruptcy was processed.

In other words (at least in 19th century Britain) making creditors whole was a private sector obligation, not the public sector obligation it’s become in the modern US. As a taxpayer, I feel strongly that private liability for broker obligations is a better system, even if I can’t prove that it will change their incentives.

I think the difference here is that I think the managers of these companies did not believe they were taking life-threatening risks. If you put the probability of have those assets taken away at zero – like for instance alot of Lloyds names did – then having those assets at risk will not change your behaviour. As for the wider consequences, again look at the near collapse of banking in Britain in 1825, the panic in the late 19th century after Barings nearly went belly up, the panic of 1907 and of course the Great Depression when plenty of privately owned banks went bankrupt. Again look at LTCM where not only did they lever up with their own money but made a point of giving back the OPM – despite much complaining from those investors.

The only way i can think that a partnership would have changed perspectives is that in a partnership there is motivation to work your way up in one company and become a partner where you make the serious money. Without that motivation people are more mobile and more of a IBGYBG attitude can take over but i think it is a minor factor compared to the simple discounting of the catastrophic downside.

You may disagree, but it seems pretty clear to me that anyone who is at risk of losing everything he owns due to liability for bank obligations, is going to take less risk than somebody who is just going to lose a fraction of what he owns. (In fact, I think this is basic principal-agent theory.) Since risk-taking by banks is the reason we needed the TARP program, it’s very hard for me to understand how the reduction in risk-taking created by telling bank executives that all their personal assets are on the line would fail to reduce the likelihood that we have a financial crisis (though I can easily agree that even this penalty will not entirely eliminate the risk of financial crisis).

Danny, the point is the consequences were not the same whether the brokers were private partnerships or not.

There’s a big difference between losing $1 billion and losing your house(s) all your assets and $1 billion. That difference matters — and it is why your historical comparisons are faulty.

FifthDecade, the management shareholding in BSC and LEH was far far far higher than say JPMC and the Lloyds names should have taken a more active management in what was after all an unlimited liability. Exactly what golden parachute did Jimmy Cayne or Dick Fuld get? If having over 1.5 billion USD between the two of them at risk didn’t focus their minds what sum would you suggest would? Did being a partnership stop GS taking risks that nearly killed them in 94? The point I am trying to make is that having your own cash at risk is not a panacea.

As for not holding bankers to account, did you personally lose a billion dollars? Jimmy Cayne did. Did you lost 400+ million? Dick Fuld did. Sure no one is going to break down and cry that either of them has to make do with “only” many tens of millions but to say it had no consequences is simply not true.

Also, you might want to check who actually holds shares in banks. It most certainly is not millions of little guys.

Finally, let me offer the opposite hypothesis. High ownership made these people emotional when it came to finding solutions. At the end of the day, it was simply too hard for Dick Fuld to see his company go for a song and he ended up losing it all, something that has been shown over and over to be a common response to losing money.

There has clearly been a disconnect between capital owners and the users of that capital for some time. With today’s multiplicity of small shareholders, none of whom have any power to affect the company as a whole except through participation as an essentially decisionless small cog in the institutional wheel of fortune, management can pay itself what it likes, take huge risks, but take golden parachutes when they leave after causing ruination.

Who’s holding the bankers who caused it all to account? Nobody. So the good bankers get tarred with the same brush as social lepers.

I think we’d all be fine with the banks, if the CEO’s and other senior management were forced to liquidate their private estates to cover their banks’ obligations the way the banks-owners 1929 and earlier had to. Isn’t it kind of silly to pretend that the fact that almost no senior bankers were financially “ruined” in the current crisis doesn’t matter?

If having a billion dollars at stake didn’t stop Jimmy Cayne taking risks with BSC then why would BSC being an LLP stop him?

PS LTCM had a ton of partner money in it. Not only did a significant portion of some senior partners wealth go down the tubes but some also borrowed against that “wealth” so certainly not OPM at LTCM.

So. We’ve got too big too fail countered by you have to be too small to fail (for different reasons, naturally) and then you’ve got a financial crisis that is big for any government to deal with, but is small compared to the amount of money that goes around the world in capital markets; then you have the shortage of lending causing businesses to fail and jobs to go countered by banking changes to reduce liquidity by making liquidity less liquid with Basel III and regulators reining in risk taking just when risk taking is the low risk option and traders taking high risks with little personal risk… and I won’t even mention increasing Partisanship.

I wonder if anyone ever thinks that sometimes small reactions are better than big ones? Perhaps it’s time to throw away the economics text books and start again.