It probably doesn't make sense to allocate ALL of AIG's losses to shareholders, just enough to create some disincentive.
Also, with this mechanism, the market would figure out over-leveraged companies with liability exposure and beat down the share prices.
Finally, maybe the answer is to allocate losses not to shareholders, but to officers, directors, and highly compensated employees, bounded by the company compensation to each person.
In other words, if you create a "too big to fail" company that fails, you might start to be personally liable for what the company's paid you in the past, and has promised to pay you in the future. The idea, again, is not to get back all of the loss, but to dis-incent extreme, leveraged risk taking by management.
These people didn't create a too big to fail company, they were hired by a too big to fail company. When I'm taking a job as an engineer I should have to inspect all the books to make sure they're clean or else I could lose all my personal savings? Forget it.
Don't allocate it to the shareholders at all. Allocate it to the executives. Arnold Kling got there first with a proposal that institutions that are obviously "too big to fail" and as such have a government guarantee should be bound by a spirit-of-the-law (S)contract, rather than the letter.
"I would like to see managers of government-protected institutions take an oath to safeguard the soundness of their companies. I would like to see them subjected to prison terms for violating that oath. The oath is a general promise, not satisfied simply by staying within the boundaries of L regulation.
I believe that S regulation would change the motives of bank managers. They would be looking for ways to avoid failure, rather than for ways to stay within the letter of the law."
It probably doesn't make sense to allocate ALL of AIG's losses to shareholders, just enough to create some disincentive.
Also, with this mechanism, the market would figure out over-leveraged companies with liability exposure and beat down the share prices.
Finally, maybe the answer is to allocate losses not to shareholders, but to officers, directors, and highly compensated employees, bounded by the company compensation to each person.
In other words, if you create a "too big to fail" company that fails, you might start to be personally liable for what the company's paid you in the past, and has promised to pay you in the future. The idea, again, is not to get back all of the loss, but to dis-incent extreme, leveraged risk taking by management.