IX — Compartmentalizing risks

Chapitre IX

COMPARTMENTALIZING RISKS: LET NOTHING CONTAMINATE ANYTHING

The current system is a monolithic block. The State manages everything: health, education, unemployment, pensions, culture, transport. When one sector collapses, it contaminates the others. The pension deficit drains the health budget. A public hospital bankruptcy becomes a national political crisis. Everything is linked, therefore everything is fragile.

The system proposed here modularizes risks. Each domain is encapsulated in its own funding mechanism: private health insurance, private unemployment insurance, private education insurance, funded pensions, self-funded autonomous collectives. These modules are sealed. A health insurer’s bankruptcy does not affect pensions. A pension fund crash does not endanger schools. Each system absorbs its own shocks.

The sovereign State itself is isolated. Its budget—justice, police, military, diplomacy, fundamental research—does not depend on social protection vagaries. It is funded by the flat tax, constitutionally capped, protected from redistributive appetites.

9.1 — Legal Sealing

For this encapsulation to hold, two levels of separation apply. First, between domains: a bank cannot own a health insurer, a pension fund cannot control a hospital chain, an education group cannot be backed by an unemployment insurer. Then, within each domain, specific separations prevent structural conflicts of interest.

9.2 — Intra-Domain Separations

The principle: whoever funds does not control whoever spends, whoever produces does not control whoever prescribes or certifies.

Finance (extended Glass-Steagall principle):

Deposit banks ↔ Investment banks: individual deposits do not fund speculation
Insurance ↔ Banks: an insurance claim does not trigger a banking crisis

Health:

Pharmaceutical industry ↔ Health insurance: the insurer does not push drugs it produces
Health insurance ↔ Care providers (hospitals, clinics): the insurer-provider does not ration care to maximize margins
Analysis laboratories ↔ Pharmaceutical industry: diagnosis remains independent of treatment

Education:

Teaching establishments ↔ Educational content publishers: the school does not prescribe textbooks it sells
Certification bodies ↔ Teaching establishments: whoever trains is not whoever diplomas

Pensions:

Pension funds ↔ Retiree service providers (residences, care): the fund does not capture savings it manages
Pension funds ↔ Deposit banks: retirement does not depend on a bank’s soundness

Unemployment:

Unemployment insurance ↔ Placement/training agencies: the insurer has no interest in prolonging unemployment to sell its training
Unemployment insurance ↔ Temp agencies: no closed insurer-placer circuit

This list is constitutionalized. An organic law can add separations, but cannot remove any without 4/5 majority of both chambers.

9.3 — Interfaces Between Domains

When collaboration between domains is necessary, it goes through limited-liability joint ventures or simple service contracts. To prevent these structures from becoming circumvention means, general rules apply:

Each parent entity must retain at least 75% of its activity outside any inter-domain joint venture
The joint venture cannot represent more than 50% of revenues for any parent
Each parent must demonstrate significant activities with third parties, outside the joint venture
An annual stress test verifies each parent would survive the joint venture’s bankruptcy
Losses are shared according to capital distribution, without cross-guarantee or automatic bailout

These rules apply uniformly, regardless of sector or ownership ratio. No exception list, no favorable treatment. Legal structure is free; safeguards are automatic.

9.4 — Compartmentalized Shareholding

Encapsulation would be fictional if the same shareholder could control entities in multiple domains. To prevent this top-down contagion, rules apply:

Beyond 10% stake in an entity of one domain, a shareholder cannot hold more than 5% in any other domain
Multi-domain holdings are prohibited, unless each subsidiary is totally autonomous: no cash pooling, no cross-guarantees, no common executives
A public registry lists every shareholder holding more than 3% in a regulated entity. Cross-holdings are transparent and monitored

The goal is not to prohibit diversified investment—a small investor can hold shares in all sectors. It is to prevent the coordinated control that would recreate, through shareholding, the monolithic block that legal structure has undone.

9.5 — Constitutional Lock

Encapsulation rules—substance thresholds, exposure ceilings, shareholding compartmentalization—are inscribed in the constitution. Their modification requires a four-fifths majority of each chamber (Parliament AND Senate, separately). This is not a technical detail adjustable by changing majorities. It is the very architecture of the system. You do not change a building’s foundations by a show of hands.

9.6 — Resilience Through Separation

This is software architecture applied to the State: loosely coupled modules, with clear interfaces, that can fail independently without bringing down the whole. Resilience is born of separation.

9.7 — Case Study (Empirical Example): The Glass-Steagall Act (1933-1999)

The American Glass-Steagall Act of 1933 imposed strict separation between deposit banks and investment banks [103][104]. For 66 years, this Chinese wall structured the American financial system. Its repeal in 1999 (Gramm-Leach-Bliley Act) shortly preceded the 2008 crisis.

What Worked

Prolonged financial stability. Between 1933 and 1999, the United States experienced no systemic banking crisis [103]. Compartmentalization protected individual deposits from market risks.

Role clarity. Deposit banks collected savings and lent to households and businesses. Investment banks financed markets. Each to their trade, each to their risks.

Depositor confidence. Savers knew their money was not used for speculation. Deposit insurance (FDIC) was credible because risks were contained.

Market discipline. Investment banks, not protected by deposit insurance, bore their losses. No “too big to fail”—they could go bankrupt without threatening the system [104].

Framed financial innovation. Compartmentalization did not prevent innovation but channeled it into structures where risks were identifiable.

What Is Problematic

Progressive erosion. Even before formal repeal, regulators granted increasing exemptions. The wall cracked long before falling [104].

Regulatory arbitrage. Banks created complex structures to circumvent restrictions. Subsidiaries, holding companies, and off-balance-sheet vehicles blurred boundaries.

International competitiveness. European and Japanese universal banks were not subject to this separation. American banks argued a competitive disadvantage.

No constitutional lock. A simple law could repeal 66 years of protection. Congress yielded to banking lobbies in 1999.

Prohibition rather than encapsulation. Glass-Steagall prohibited combination rather than framing it with strict firewalls. Prohibited activities migrated to less regulated shadow banking.

What We Keep from the Glass-Steagall Model

The separation principle between activities with different risks
Depositor protection against market risks
Role clarity enabling targeted regulation
Proof that compartmentalization works for decades

What We Improve

Constitutional lock: repeal requires 4/5 majority, not a simple law
Encapsulation rather than prohibition: joint ventures are possible with strict firewalls (stress tests, absence of cross-guarantees)
Extension to all domains: not just finance, but health, education, pensions, unemployment—with specific intra-domain separations (see section “Intra-Domain Separations”)
Shareholding compartmentalization: prevent conglomerate reconstitution through shareholding

What We Do Not Adopt

Legislative simplicity: a simple law can be simply repealed
Rigid prohibition: our system prefers encapsulation with firewalls
Limited perimeter: Glass-Steagall concerned only finance. We compartmentalize all social domains