Thursday, July 5, 2012

Small Enough to Fail

In today's Financial Times, a contributing editor called for governments to instigate a modern-equivalent of the trust-busting of Wilson and Roosevelt:
Rather than jury-rigging the existing system, or falling back on meaningless calls to change 'culture,' political leaders need a modern version of Woodrow Wilson’s dictum. Where Wilson was for business but against monopolies, today’s leaders must be for finance but against banking behemoths. The instruments of finance, from risk models to derivatives, are useful when used responsibly. But the structure of modern finance – vast institutions that borrow cheaply because taxpayers are on the hook to save them – is an abomination that must stop.

In 2011 the hedge fund manager John Paulson lost more money than JPMorgan’s London unit. Regulators didn’t worry, because his private partnership is not too big to fail. We need a system in which more institutions resemble Mr Paulson’s: simple enough to be manageable; focused enough to avoid conflicts of interest; and small enough to fail.
Well said, FT.

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