Risk and Ownership Structure

William Gruver at TNR gives some similarities between the 1920s and the period before the latest recession. He focuses on Goldman Sachs and shows how the change from private partnership to public company increased the company’s (and industry’s) taste for risk by limiting the liability of executives.

When taking on too much risk can blow up the entire economy (or very nearly so), any regulatory response must address this. This could be done either by giving executives (and traders) more personal risk, or by limiting the upside of taking on so much risk (by reducing potential profit). I think I come down for the second, but presumably both would work.

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