Game Theory explains why the 700 Billion bailout might not work ...
Lets assume that there are only two banks - Bank A and B.
The Fed proposes a bailout in which both Bank A and B sell risk assets to the Treasury. In this case, the result is a more regulated banking industry, with imposed limits to salary, but importantly markets are clear.
However, it is in BOTH banks interest to deviate from that because if Bank A (or B) believe the other is selling their risky assets to the Treasury; they will each be better off holding on to theirs. The reason is simple - when the other bank sells and they hold, markets will still clear and the bank that holds onto their risk assets can sell at the new market prices. This results in increased market share as they:
The likely result? No bank sells voluntarily and markets remain frozen.Lets assume that there are only two banks - Bank A and B.
The Fed proposes a bailout in which both Bank A and B sell risk assets to the Treasury. In this case, the result is a more regulated banking industry, with imposed limits to salary, but importantly markets are clear.
However, it is in BOTH banks interest to deviate from that because if Bank A (or B) believe the other is selling their risky assets to the Treasury; they will each be better off holding on to theirs. The reason is simple - when the other bank sells and they hold, markets will still clear and the bank that holds onto their risk assets can sell at the new market prices. This results in increased market share as they:
- can pay more for talent
- are less regulated
- Don’t have the stigma of selling to the Treasury
1 comment:
Those that are about to be forced into bankruptcy will sell. However, if you're Blankfein and just made $50mm+ last year, would you dump your bad assets for a $400k salary? Don't think so...
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