Monday, June 22, 2009

What If Regulators Hadn't Bailed Out Bear Stearns?

Interesting article about alternative to the proposed regulatory changes to financial supervision and regulation, "Give Bankruptcy a Chance" by David Skeel, the S. Samuel Arsht professor at the University of Pennsylvania Law School.
But what if regulators hadn't bailed out Bear Stearns? If we conduct this simple thought experiment, it raises serious questions about both the conventional wisdom and the Obama administration's new proposals for regulating investment banks and bank and insurance holding companies. Bankruptcy starts to look much better, although it could use several market-correcting tweaks.
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The bankruptcy alternative would not prevent regulators from regulating. Nothing would stop them from imposing high capital requirements on systemically important institutions, for instance, to make them less risky. But it would give creditors an incentive to pay close attention to the creditworthiness of systemically important institutions. And it would give the managers of these institutions a reason to file for bankruptcy before the house of cards crumbled, rather than running to regulators to beg for money.

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