Since the 1960's, the foundations of finance have either been pure arbitrage or principal agent relationships. This study leaves the Modigliani -Miller world of pure arbitrage -but not the world of equilibria -and turns the principal-agent world upside down. Here the firrns become principals again and banks become agents in the original sense of the word: they act on an auction market. This new view of credit relationships yields a number of interesting insights. In my opinion the most important result is that too close relationships between banks and their borrowers will reduce credit market...