The Need For A New Approach To Regulation

I figured the above was apropos of the news around AIG’s (AIG) huge loss and the Government’s “revised” rescue package; mind you I’m not characterizing the AIG situation in exactly the same manner as the comic panel, but it certainly feels that way now doesn’t it?

There is no point in revisiting what led AIG to this point as I did that last week here; however I will say that the situation begs for a new approach to corporate government and regulation. Namely that companies need to be monitored not only in terms of how well they’re adhering to the “rules”, but in terms of the amount of risk they pose to the economy if they were to go belly up, need a rescue, etc. The reason I’m advocating for “risk monitoring” is because while  business is often multiple steps ahead of the politicians and regulators, it’s much easier (especially if the people doing the monitoring come from the business world) to asses the  amount of risk a particular company poses for the economy.

While placing caps on how large certain companies can get it’s something that will make many people (myself included) cringe, the fact remains that without the caps we’re allowing the creation of singular entities that have the capability of taking down large swatches of the economy with them if they run into severe difficulties.

After all we already have limits on the % of the nation’s deposits a bank can obtain via acquisition (granted those rules have been ignored lately), and the FDIC can seize banks if their capitalization levels fall below a certain point so they don’t fail and cause a panic. Why can’t we take similar steps with other types of companies and place a cap on their growth, so that the health of the economy isn’t depending on a small number of executives always making smart, rational decisions?

I guess on a go-forward basis we have to ask our selves the policy question: “is our belief in free market ideologies so strong that we’re willing to suffer the consequences of allowing future companies to become the next Mortgage GSE(s), AIG, etc, instead of reigning them in to protect the stability of the overall economy?”

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article.

Posted in Categories: Contributor, External Research, Financial, Stocks.

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