Comments on: Forcing all broker-dealers to go private http://blogs.reuters.com/felix-salmon/2010/11/02/forcing-all-broker-dealers-to-go-private/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Danny_Black http://blogs.reuters.com/felix-salmon/2010/11/02/forcing-all-broker-dealers-to-go-private/comment-page-1/#comment-20123 Thu, 04 Nov 2010 10:11:26 +0000 http://blogs.reuters.com/felix-salmon/?p=5916#comment-20123 The book the article is based on looks interesting. This was also quite and interesting book I thought – “The Panic of 1907: Lessons Learned from the Market’s Perfect Storm”

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By: Danny_Black http://blogs.reuters.com/felix-salmon/2010/11/02/forcing-all-broker-dealers-to-go-private/comment-page-1/#comment-20122 Thu, 04 Nov 2010 10:04:09 +0000 http://blogs.reuters.com/felix-salmon/?p=5916#comment-20122 No idea, by the way, very interesting thank you for forcing me to learn new stuff and check my assumptions. Will look into it more.

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By: csissoko http://blogs.reuters.com/felix-salmon/2010/11/02/forcing-all-broker-dealers-to-go-private/comment-page-1/#comment-20118 Thu, 04 Nov 2010 06:06:30 +0000 http://blogs.reuters.com/felix-salmon/?p=5916#comment-20118 Nice article on Overend Gurney. The private owners took it public less than two years before the bankruptcy — and were required to offer a personal guarantee on the existing liabilities. In an age where shareholders were expected to stump up up to 3x the original purchase price if the firm needed cash, this was a very bad deal for the shareholders — leading as one might expect to criminal prosecution. Your article talks about the ruin of the partners and the losses of the shareholders, but I didn’t see anything about directors not getting wiped out.

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.

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By: Danny_Black http://blogs.reuters.com/felix-salmon/2010/11/02/forcing-all-broker-dealers-to-go-private/comment-page-1/#comment-20109 Thu, 04 Nov 2010 00:48:26 +0000 http://blogs.reuters.com/felix-salmon/?p=5916#comment-20109 Overend Gurney was a Public Limited Liability Company not a partnership when it went bankrupt which is how a number of the directors didn’t get wiped out.

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

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By: csissoko http://blogs.reuters.com/felix-salmon/2010/11/02/forcing-all-broker-dealers-to-go-private/comment-page-1/#comment-20106 Wed, 03 Nov 2010 23:22:23 +0000 http://blogs.reuters.com/felix-salmon/?p=5916#comment-20106 Your answer doesn’t address what I said. We can all agree that brokers will sometimes go bankrupt even if they’re partnerships — the question is one of the frequency and the size of the losses. I don’t think it’s possible to demonstrate that increasing bank CEO losses in the event of bank failure will definitely have no effect on the likelihood of bank failure.

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.

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By: Danny_Black http://blogs.reuters.com/felix-salmon/2010/11/02/forcing-all-broker-dealers-to-go-private/comment-page-1/#comment-20105 Wed, 03 Nov 2010 22:44:27 +0000 http://blogs.reuters.com/felix-salmon/?p=5916#comment-20105 csissoko, well that clearly is not true in this case. Brokers went bankrupt when they were partnerships. GS sailed pretty close to the wind in 1994 when it was a partnership – although to be fair this near-death experience did start the ball rolling to become a public company.

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.

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By: csissoko http://blogs.reuters.com/felix-salmon/2010/11/02/forcing-all-broker-dealers-to-go-private/comment-page-1/#comment-20104 Wed, 03 Nov 2010 22:23:01 +0000 http://blogs.reuters.com/felix-salmon/?p=5916#comment-20104 @Danny Black,

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).

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By: Danny_Black http://blogs.reuters.com/felix-salmon/2010/11/02/forcing-all-broker-dealers-to-go-private/comment-page-1/#comment-20098 Wed, 03 Nov 2010 20:50:18 +0000 http://blogs.reuters.com/felix-salmon/?p=5916#comment-20098 csissoko, sorry wasn’t clear. By consequences I meant to the economy at large not to the partners.

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By: csissoko http://blogs.reuters.com/felix-salmon/2010/11/02/forcing-all-broker-dealers-to-go-private/comment-page-1/#comment-20091 Wed, 03 Nov 2010 18:47:25 +0000 http://blogs.reuters.com/felix-salmon/?p=5916#comment-20091 Correction: “all your assets and $1 billion” –> “all your assets including $1 billion”

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By: csissoko http://blogs.reuters.com/felix-salmon/2010/11/02/forcing-all-broker-dealers-to-go-private/comment-page-1/#comment-20088 Wed, 03 Nov 2010 18:32:37 +0000 http://blogs.reuters.com/felix-salmon/?p=5916#comment-20088 Danny Black: “csissoko, the point is the consequences were the same whether the brokers were private partnerships or not”

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.

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