Complexity

An interesting item came across my desktop from Richard Herring, Professor of Finance at the Wharton School. He notes that "the 16 largest financial institutions control 2.5 times as many subsidiaries as the 16 largest non-financial firms. One of the most complex financial firms controls 2,435 subsidiaries, half of them chartered in other countries. Many such subsidiaries are formed to "minimize regulatory burdens" or reduce tax bills," he says. "Such complexity makes it difficult for anyone -- including regulators and the companies' own managers and directors -- to fully understand all the risks the firms are taking, or how those risks might interact with ones other companies are taking."

Here are some thoughts. Let's simplify a tax system that encourages and allows such non-productive activity like creating a network of 2,435 subsidiaries whose purpose is to transfer income from the Treasury to management and shareholders. Second, having just spent some time with a few directors of large financial services company, I hate to say, and I include myself, that they would be hard pressed to find pockets of radioactive risk inside of a corporate rabbit warren like the one Professor Herring cites. Unfortunately, in the case of TBTF financial institution, the directors failure soon becomes a taxpayer burden, and this chain also needs to be broken by sensible, basic regulation.