"Too Big to Fail" - Solutions?

Great Debates
1

I think we all remember the phrase, “too big to fail,” from the 2008 financial crisis. Financial institutions were saved from ruin, because it was deemed that their complete failures would be more detrimental to the economy than the money spent to prop them up, Fair enough, I guess. I can see the logic in that.

As far as I can tell, this is still the state of things in the banking world (in fact, my longtime bank, SunTrust, has merged with BB&T, so there is now one fewer large bank in the world). I am not aware of any significant change, but I would love to find out I am wrong.

What made me think about this again was all of the crap coming out regarding the Boeing 737MAX and now the release of internal communications indicating a corporation with some serious, serious problems. Ideally, Boeing would suffer huge financial costs, possibly leading to bankruptcy. But, as far as I can tell, they are also, “too big to fail.” They are the only American company making large commercial airliners (and their military cargo/tanker versions), they manufacture a significant portion of our military aircraft (including the F-18, the F-22, the C-17, and the Chinook helicopter), and they are a big part of our space program. LockheedMartin is their only real competition on the military side of things. From a National Security perspective, we can’t let them fail on their own merits right now.

I left college in 1989 intending to work in the aerospace field, and if I wanted to work on military aircraft, I could have gone to Boeing, Lockheed, Martin Marrietta, Grumman, General Dynamics, Sikorsky (then part of UT), Bell Helicopter, Northrop, and I’m sure a few others I am forgetting right now. They have all been consolidated into either Boeing or LockheedMartin, or they are gone entirely. We have allowed ourselves to become reliant on exactly two companies to manufacture the vast majority of our military aircraft.

So…what can we do about this? Are there currently regulations/laws that could permit either breaking up these large conglomerates, or at least preventing further mergers, but they are not being used due to a lack of political will? Or is there significant legislation that would have to be passed as part of a remedy?

What criteria do you use to determine if a company is “too big to fail.” How do you develop objective measures to try to prevent over-consolidation?

Sorry if this seems a bit disjointed; it’s something I’ve been thinking about for a while, but I have neither government nor significant business experience to form much of an opinion, other than that the current state of affairs seems unsustainable (and I’m not just talking about these two industries; they’re just the ones foremost in my mind).

2

In my limited understanding, banks and other corporations that get “too big” could be broken up by legislation, but not under current law. IMO they should be broken up into smaller companies if they have any sort of monopoly, or if they are so big that their collapse would seriously harm the economy.

3

The problem with banks is that they are so interconnected that the failure of one has a ripple effect in the financial system. Boeing is not like that. If the commercial division failed, they would be able to sell off the defense division, with little or no ill effects. The commercial division could probably emerge from bankruptcy in reasonably good shape, worst case.
The cause for either splitting up or strictly regulating big banks is that they can take the economy with them. I don’t think that’s true for other big companies. There might be reasons to split some of them up, but that isn’t one of them.

4

Actually, Boeing is such a big part of the US economy that its failure would have ripple effects. Certainly by itself, it’s a big contributor to US foreign trade.

5

Monopolies (and kin like cartels) are generally bad. Everybody agrees on that except the kleptocrats themselves, their captured regulators, and some fringe post-rational libertarians. (And note that the heavy financialization of the U.S. economy dictates oligopolic behavior.)

Boeing itself recently had a competitor. (In fact some say it was surrender to the less quality-conscious culture of McDonnell-D that caused Boeing to slack off.)

With the banks, note that Lehman and Bear are gone, Merrill Lynch merged off, etc. — I’ll guess the over-concentration is worse than ever.

Are today’s big banks indulging in the sort of wild gambles that led to heavy losses in 2008? I don’t know. But low interest rates mean that ordinary commercial banking will have low profit margins: I’m sure the banks have some profit-making enterprises not conducive to the public interest. If (or rather when) another major company needs to be bailed out, I hope the U.S.G. follows my advice, and sets the terms to maximize value for the taxpayer, as a white-knight investor.

6

That’s true if they closed the factories and sent everyone home. But that is not likely to happen even if they go bankrupt.

7

It’ll happen if people stopped buying their planes.

8

Chances are, you wouldn’t be aware of significant changes in the banking world unless you worked in the industry. The 2008 financial crisis was caused by the proliferation of RMBSs, CDOs, CMSs and other exotic financial instruments. Basically bundling up shit mortgages and passing them off as highly credit-worthy bonds. Shit no one heard of outside of Wall Street before the financial crisis.
In the past, there used to be anti-trust legislation to break up monopolies. For example, Bell in the eighties…which subsequently has mostly consolidated into Verizon and AT&T. Or Glass–Steagall which separated investment banks from your commercial bank and the similarly useless Dodd-Frank Act.

The thing is, no one likes to say “your company is making too much money, we need to break it up!” At least, not until it collapses under its own incompetence.

9

A poster in a nearby thread suggested that firms taking government bailouts should have their management and directors replaced and banned from any similar positions. Extend that to bankruptcies above $X valuation.

10

The vast majority (70%) of Boeing stock, is held by institutional investors, which fund people’s retirement accounts like 401Ks and Pensions.

Why should current and future retirees take the hit?

11

Many of the super-rich have income sources independent of publicly-traded stock prices. For example, when a big corporation is in dire straits, the top officers often walk away with multi-million dollar bonuses or “parachutes.”

Most Americans with a 401K have relatively little wealth tied up in stocks, let alone in a single specific stock.

But if we replace your “people” with “people whose wealth is in the top 5 percent” your statement hints at a major problem in financialized post-rational America. Through such funds, the middle-class has been co-opted to serve as accomplice or hostage to Big Business.

This is one reason why the serious OWS was treated as laughable, while the laughable Tea Party is still treated as serious. For another example, I recall mentioning a possible economic crisis to a middle-class relative. Her only reaction was concern for her Fannie-Mae stock.

12

And these peopled in particular have done very well in the past 10 years or so. A hit on Boeing stock is not going to make anyone sell their mansion.

13

This probably won’t be a particularly popular view, but I think they should have been allowed to fail. I believe that people and the economy are much more adaptive than we think. I think the cure was worse than the disease. If we would have allowed them to fail, it would have been very bad, but it isn’t like banks (as a concept) were suddenly going to disappear. Different banks would have quickly risen in the aftermath to take the place of those that failed. We would have a more resilient financial sector as a result. Some billionaires would have gone broke, but a few billionaires going broke every now and then is probably a good thing, just to remind them that they can. While of course, I cannot fault anyone from taking the actions they did, I can certainly understand why politicians globally acted as they did, I wish they hadn’t of bailed them out.

14

Assuming that by “fail” you mean that the banks whose immediate solvency was in question would have gone into bankruptcy with assets frozen, that would have been an utter disaster. Much of the world’s financial system would have screeched to a standstill. Non-financial companies are dependent on banks of course, and the dependence is greater than it was in 1929. Absolute disaster.

What I think should have happened: The banks should have been required to raise new capital, e.g. via IPO, until their solvency was guaranteed. The banks would have been saved, but a moral lesson sent.

In September(?) 2008, Warren Buffett’s company purchased $5 billion of Goldman Sachs preferred stock, paying 10% dividends in perpetuity. This was rather a sweetheart deal. Why couldn’t I get some of that? :slight_smile: Why couldn’t the U.S. taxpayers, via the Dept. of Treasury, get some of that? Buffett has said he wouldn’t have made this investment without confidence that the U.S. Treasury would orchestrate a big bailout. The sudden infusion of $5 billion of hard cash was useful to Goldman Sachs but the psychological boost from Buffett’s seal of approval may have been more important.

But what about the other banks whose credit was in doubt? There was one white knight investor with pockets much deeper than Buffett’s: the U.S. taxpayer.

Issue common stock or preferred stock? Which banks would be bankrupted, which merged off, which sustained with fresh capital? Let’s not quibble about the details. The simple fact is that Buffet got a sweetheart 10% deal, while the taxpayer was left holding the bag.

Buffett had a duty to his stockholders to get a good deal. What happened to the SecTreasury’s duty to taxpayers? The Feds helped JPMorgan Chase get a quick multi-billion dollar profit on the Washington Mutual takeover. They made sure Jamie Dimon was still a billionaire when the dust settled. Et cetera. But homeowners and taxpayers were treated as rubbish to help Wall St. bankers keep their billions. Shameful.

15

Of course, this is all simply my opinion. Until I invent a time machine and an army of killer robots to impose my will I cannot prove I’m correct, but I’ve already said too much.

See, I don’t think it would have screeched to a halt because there would have been too much of interest in not having it screech to a halt. People and organizations would have very rapidly adapted. There would have an entire world of people working to ensure that it didn’t happen. Kind of like Y2K in a sense. That’s not to say there wouldn’t have been short time pain. Probably a LOT of short term pain. It would have been disaster for some for sure. The government could certainly have stepped in to help anybody being too adversely affected through no fault of their own. I think despite what Buffet has said he and others like him would have got incredible deals, and they would have taken them once the price reached a point where the risk was worth the reward.

I think we’re headed towards the exact same financial meltdown. And why wouldn’t we? The lesson we sent was heads you win, tails we lose (and you win).

Again, solely my point of view

16

Also, just to reiterate. I cannot fault politicians for acting how they did. It would have taken balls of neutronium to do nothing and probably, for the most part, would have cost anybody doing nothing re-election. It is very easy for me, a person with no time machine and killer robots, to say “Bah, let them fail!” when there’s no real consequence to it. :wink: It that same situation, with the same decision to make, I’d probably have done the bailout.

17

The bailout is one thing. What seemed and continues to seem objectionable is that virtually no one was prosecuted for the financial crimes that led to the 2008 crisis.

18

Who should be prosecuted and for which crimes?

19

I have no idea but the perception was that a lot of very wealthy people fucked up the economy without any personal consequences.

20

And that’s kind of what they did.

What does that mean exactly? Should the government bail out people who took out mortgages for homes they couldn’t afford? Mortgages brokers who lost their jobs when the market collapsed? People who work at Bear Stearns or AIG in business units unrelated to financial crisis?

Do you really understand what the “short term pain” would be? With the potential collapse of the financial system, businesses can’t take out loans to invest in growth or in some cases, even make payroll. That would then spiral into more “long term pain” like the Great Depression.

FWIW, the US Government and taxpayers made around $22.7 billion profit from the bailout when the US Treasury sold off the last of its shares in 2012.