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Good bankers need not care about systemic risk | 18 comments (18 topical, editorial, 0 hidden)
Re: The strange thing (none / 1)
One of the biggest holes in capitalist theory is that decisions on investment are taken by employees within large organizations. Since their goal is to maximize their own revenue/social position/security, not the returns for the firm, the entire mechanism is skewed from what the theory predicts.

Furthermore, banking seems to me to be one of the most over-concentrated businesses where smaller deals that require expertise are no longer profitable on the scale that makes organizational sense and there is little  competition except for the biggest deals.

by citizen k (sansracine yahoo.fr) on Mon Apr 23rd, 2007 at 08:58:04 AM EST
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Re: The strange thing (none / 1)
Well, I guess in theory the enterprise will design the remuneration package in order to align the interests of the employees with those of the firm. The problem is that the people making those decisions are also employees ...
by Colman (colman at eurotrib.com) on Mon Apr 23rd, 2007 at 09:09:16 AM EST
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Re: The strange thing (none / 1)
This comes down to the structure of the "Corporation" and it's inherent "Principal/Agency" conflict between the owner shareholders and the management.

I believe that the solution to this problem lies in a corporate body which shares the revenues or production between Capital providers and Capital users: the "Capital Partnership" as I call it, is enabled by simple new legal forms like the US LLC and UK LLP.

In this model there are no "employees", merely managing and operating "partners".

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Apr 23rd, 2007 at 12:11:52 PM EST
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Re: The strange thing (none / 1)
Once the organisation gets beyond a certain size you'll have the same problems. Someone is going to have to run the thing and the problems of agency come up immediately.
by Colman (colman at eurotrib.com) on Mon Apr 23rd, 2007 at 12:18:53 PM EST
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Re: The strange thing (none / 0)
The "Open Corporate" LLC/LLP I am developing and implementing is not an "organisation" but a framework within which individuals "self organise".

It's the "chaordic" approach envisaged by Dee Hock when setting up Visa.

Except I envisage (as did he, but the Banks would have none of it) that individuals - as well as intermediaries - would be members of the "chaordic" "partnership of partnerships" or "cooperative of cooperatives" that constitutes the enterprise model that results.

If a managing partner has a pre-agreed share of production or revenues then agency does not come into it.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon Apr 23rd, 2007 at 12:35:50 PM EST
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Re: The strange thing (none / 1)
Employees all the way down. And then note that the managers of the largest stockholdings are also employees and the entire structure looks quite peculiar.
by citizen k (sansracine yahoo.fr) on Mon Apr 23rd, 2007 at 02:45:50 PM EST
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Re: The strange thing (none / 1)
Not only that.
Just consider the US mortgage market. As I understand it (from reading on the Internet) one simplified way of getting a mortgage was:
  • go to a mortgage brokerage
  • they´ll get you a loan from a bank (and a commission for that)
  • the bank then will bundle x loans/mortgages together and sell them to investors.

Mortgage broker and bank both have their money. That´s actually both of the instances that deal directly with a customer. Any risks stay with the investor (not mentioning the clauses for an eventual buy-back).

And they handed out sub-prime and Alt-A mortgages to people with 0% down-payment, no documentation of income, teaser rates or negative amortization.
Why could they do it? Because they got rid of the risk.

So they looked only for market share and their commissions. Employees, mortgage brokerages and banks. Worked fine for a time in a booming housing market.
Now of course, several mortgage companies have declared bankruptcy. But for years, brokers got their bonuses and I suspect the owners of the bankrupt companies didn´t evolve into paupers either.

I suspect the theory didn´t include the possibility of transferring the risk to others. :)

by Detlef (Detlef1961_at_yahoo_dot_de) on Mon Apr 23rd, 2007 at 03:20:44 PM EST
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Good bankers need not care about systemic risk | 18 comments (18 topical, 0 editorial, 0 hidden)
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