Confronting Too Big To Fail With Reorganization Bonds

Higher capital requirements and annual stress tests hopefully make another financial meltdown less likely, and living wills might help with the orderly dissolution of individual banks when the next crisis hits, but no one really believes the government will let the financial system collapse if we have another 2007-style failure. Attempts to move beyond too big to fail have a credibility problem. But a proposal from Steven Gjerstad, a presidential fellow at Chapman University, and Vernon Smith, a Chapman University economics professor and 2002 Nobel laureate, could solve the issue by putting shareholders in a first loss position by creating…