The Application of Monoline Insurance Principles to the Reregulation of Investment Banks and the GSEs |
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| Authors: | Dwight M. Jaffee |
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| Affiliation: | Dwight M. Jaffee is the Willis Booth Professor of Banking, Finance, and Real Estate at Haas School of Business, University of California, Berkeley, CA 94720-1900;phone: 510-642-1273;fax: 510-643-7441;e-mail: . This article is an updated version of a presentation made August 4, 2008 at the annual meeting of the American Risk and Insurance Association, Portland, Oregon. |
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| Abstract: | This article explores the benefits of reregulating the investment banks and government-sponsored enterprises (GSEs, namely, Fannie Mae and Freddie Mac) by applying the monoline principle that has been long established in regulating insurers that offer coverage against mortgage and bond default risks. The monoline regulatory principle was created to ensure that losses on a risky insurance line would not endanger other safe lines. The principle is applicable to both investment banks and the GSEs because both sets of institutions have operated with two basic divisions: a hedge fund division that maintained a highly risky investment portfolio and an infrastructure division that carried out activities with high direct value for the overall financial or mortgage markets. The monoline principle involves placing the two divisions in a new regulatory structure whereby the infrastructure division is bankruptcy remote from any losses that might occur within the hedge fund division. |
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