This isn\u2019t a new idea. Until fairly recently, big investment banks such as\u00a0Goldman Sachs or Salomon Bros.\u00a0operated as general partnerships.\u00a0In a general partnership, the partners are liable \u2014\u00a0individually \u2014\u00a0for debts of the firm. With potentially unlimited liability if things went wrong, the partners had an incentive to be comparatively cautious.\u00a0(With corporations, on the other hand, shareholders aren\u2019t on the hook for the firm\u2019s debts.\u00a0The most they can lose is the value of their shares.)\u00a0Without unlimited liability, incentives are different. As Hill and\u00a0Painter note, Salomon\u2019s culture changed very rapidly after it became a corporate entity\u00a0in which the partners, now called \u201cmanaging directors,\u201d weren\u2019t personally at risk.\u00a0Within a few years it went from a staid, conservative business to the anything-goes entity described in\u00a0Michael Lewis\u2019\u00a0Liar\u2019s Poker.<\/em><\/p>\n It\u2019s easy to engage in risky schemes when success gets you a huge bonus, while failure just costs someone else some money.\u00a0One solution would be to require investment banks to be organized as general partnerships.<\/p>\n Hill and Painter suggest\u00a0“covenant banking,”\u00a0in which bankers\u2019 compensation is at risk for bad deals. Not only would they get bonuses when things go well, but they\u2019d have to cough up past bonuses, and salary, when deals go badly for clients.<\/p>\n Such an approach might be required by law, but Hill and\u00a0Painter think that banks might want to do it voluntarily.\u00a0As a client, wouldn\u2019t you rather deal with a banker who stands to lose money if you do?\u00a0Shareholders\u00a0might even demand that their companies do business with such banks, as a way of hedging against risk.\u00a0Wouldn\u2019t it be safer to do business with people whose incentives align with your goals?\u00a0(I always say I\u2019d like my life insurance company to be in charge of my health care because\u00a0it would cost them a lot of money if I died; my actual health care company, on the other hand, might save money if I kicked off quickly.)<\/p>\n Many of our\u00a0problems come from having people in charge who don\u2019t feel the pain when their various schemes go bad.\u00a0As a theme for the coming decade, we could do a lot worse than requiring skin in the game.<\/p>\n Glenn Reynolds writes: \u00a0\u00a0The financial crisis of 2008-09 is over but not gone. We passed laws and regulations that probably won\u2019t help much.\u00a0And despite a lot of harsh words aimed at Wall Street and the banks,\u00a0President Obama pretty much let … Continue reading ![\"Skin](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2015\/11\/Skin-in-the-Game.jpg\")
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