Jim Grant: Let Bankers Fail

With financial legislation pending in Congress, Jim Grant's op-ed in today's Washington Post (HT: RealClearMarkets.com) makes for timely reading (and re-reading). A few parts:

The trouble with Wall Street isn't that too many bankers get rich in the booms. The trouble, rather, is that too few get poor -- really, suitably poor -- in the busts. To the titans of finance go the upside. To we, the people, nowadays, goes the downside. How much better it would be if the bankers took the losses just as they do the profits.

Happily, there's a ready-made and time-tested solution. Let the senior financiers keep their salaries and bonuses, and let them do with their banks what they will. If, however, their bank fails, let the bankers themselves fail. Let the value of their houses, cars, yachts, paintings, etc. be assigned to the firm's creditors.

And this further down:

"The fear of God," replied George Gilbert Williams, president of the Chemical Bank of New York around the turn of the 20th century, when asked the secret of his success. "Old Bullion," they called Chemical for its ability to pay out gold to its depositors even at the height of a financial panic. Safety was Chemical's stock in trade. Nowadays, safety is nobody's franchise except Washington's. Gradually and by degree, starting in the 1930s -- and then, in a great rush, in 2008 -- the government has nationalized it.

Finally, this:

Until 1999, Goldman Sachs was a partnership, with the general partners bearing general and unlimited liability for the firm's debts. Today, Goldman -- like the vast majority of American financial institutions -- is a corporation. Its stockholders are liable only for what they invested, no more. And while there are plenty of sleepless nights, the constructive fear of financial oblivion is, for the senior executives, an all-too-distant nightmare.

The job before Congress is to bring the fear of God back to Wall Street. Not to stifle enterprise but quite the opposite: to restore real capitalism. By all means, let the bankers savor the sweets of their success. But let them, and their stockholders, pay dearly for their failures. Fair's fair.

Obviously, I think you'll want to read the ENTIRE thing. It'll prove well worth your time.

Also, Grant appeared on Pimm Fox's "Taking Stock" program on Bloomberg TV for an entire hour earlier this week. Hope you caught it. It may be archived on the Bloomberg site. I haven't had time to search it. But anyone who didn't see the program should check around this weekend.

Comments

[David]

Funny, I just went searching for that Bloomberg video & found your post listed in the Google search results as well. Here's the link to Jim Grant on "Taking Stock": http://bit.ly/aFZY8F

[John]

Hey, thanks for the link David! Hope you've been well. I haven't been posting much lately,but it's always great hearing from you, my friend.

[David]

Thanks John, good to hear from you! Hope you didn't get too many duplicate comments from me, was having problems getting them to show up so I tried sending it a few times. Glad you got the link though!