Enhancing the case for "uncorporations"

Larry Ribstein is an extraordinary blogger and law professor. I've been reading him for a few years now, and one of his more radical (and radical is sometimes good) ideas is that "uncorporations"--such as partnerships and hedge funds--are far superior to corporations in performance and accountability.

He extends this principle in the context of the recent Michael Lewis article in Vanity Fair about AIG:

Hedge funds have to “schlep around and raise money all the time” because their investors, unlike corporate shareholders, do not give them permanent capital. While corporate shareholders can sell their shares to other investors at current market prices, sale prices are discounted by the market’s evaluation of current management. Hedge fund investors, by contrast, have rights to get their money back from the company.

In other words, it’s the “capital lock-in” of the corporate structure – which some commentators have credited for the rise of modern capitalism, that is to some extent responsible for its recent fall. For better or worse, corporate cash is stuck for all time, as the AIG ad suggests.

So what should happen now? Should all financial institutions be uncorporations (or owned by the government)? No, but markets have now learned more about the risks of having traditional corporations manage complex financial instruments. And, yes, markets do learn. Consider why, as Lewis observed, hedge funds have to post collateral for trades with their brokers: because they did learn a lesson from Long Term Capital Management.

Of course a new round of SOX-like financial regulation is likely to short-circuit that learning process. But that's another story.