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May 5, 2013

Prevent Mega Bank Bailouts


I had a really strong reaction to an article about mega banks that are too big to fail.  The only way to make sure there are no more mega bank bailouts is to make sure that mega banks are sufficiently capitalized that they can absorb massive losses and that their management has mega incentives to be careful.  The 12 mega banks ought to have 8 to 10 percent of assets in equity capital or convertible bonds that can be turned into equity when needed to absorb losses.   If stock and convertible bond holders are on the hook for a really big chunk of losses, they will force management to be much more careful.  Also, mega bank management compensation above that of the president of the United States and all of the outside directors' compensation should be reclaimable back 3-5 years in the event that a bailout is needed for any mega bank that's too big to fail.  Requirements like this will reduce the number of mega banks, or at least make sure their managements and stock and convertible bond holders have a LOT of skin in the game.  Bottom line is make moral hazard a lot more painful for all involved.

Original Article on the Mega Banks:

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