(www.citi.com)

“Every institution has the right to lose all their money if they want to. But no one should have the right to impose externalities on the rest of the financial system. Once a company gets large enough to impact the financial system, shouldn’t it operate under the same systemic risk umbrella in terms of capital, liquidity, and transparency?”

One can easily associate this with Long Term Capital Management, or those large hedge funds and private equity funds of today. He essentially says that any institution, no matter in what organizational format, should be put under the same regulatory scheme if they become too large to fail.

The opponents of Pandit have long said that regulating hedge funds and private equity funds would suffocate their innovation. Others say that the investors are sophisticated and could handle losses. Plus, it’s private money. But what about systemic risk?

The problem with Pandit’s system is the tricky issue of how to decide which institution has become “systematically significant.” People will try to get around that certain point. A regulatory scheme that anticipates problems sounds like a wonderful idea, but it may not be realistic – particularly in the financial industry.