The Fatal Flaw in Capital Allocation: The Shift from a Trust Model to a Transactional Model

Abstract

We have examined the problems to which individual financial firms became subject during the financial crisis. But we also need to consider wider factors that were driving the industry as a whole in the direction that it was taking over a long period of time. To understand this narrative it is necessary to think in terms of how firms compete over time and what happens when the regulatory framework results in the rules of competition being changed — not just in the current period of regulatory change but stretching back to the first steps towards deregulation.