Examining the Too Big To Fail Argument
Posted: Monday, February 09, 2009
by Joseph Jagde
Governments around the world are supporting and propping up giant financial institutions as too big to fail. The argument goes, that there is a domino effect to the toppling of any one of these dominant financial companies and there is a lot of truth to this concept. Companies such as Citigroup are the lending institutions for concerns on a world wide basis. It is not only U.S. interests but the whole global economy that has ties to the health of these institutions.
More and more, it is clear that a large amount of money is controlled by relatively small blocks of people, who are moving markets. There is somewhat of a tilt towards they themselves saying, I am too big to fail, I do control large segments and I have to be supported no matter what. So this way, the argument goes into sustaining the model of a few controlling mass sums of money and being too big to ever fail.
What then happens is the actions they take become distorted as far as risk taking, in that, because they are too big to fail, they can take more supreme risks in their dealings.
It is interesting that this argument has such ready application to large rich firms, yet isn't really applied to other things.
Maybe we could say, the idea of universal health care is too big to fail as the investment in the health of the nation cannot be a failure.
Outreaches to other countries, are too big too fail, because we can't let human kind be immersed in widespread poverty and sickness that otherwise could be helped by an interjection.
A social safety net for the displaced little guy, is too big to fail as we don't want people out on the streets on breadlines.
But, you can see how the argument too big to fail has been stretched and also maybe used as a cover. The talented are too big to fail and too big not to give astronomical bonuses to, even in the face of bailouts, layoffs and titanic losses.
The headliners or brand name companies are too big not to be headliners or big brands anymore.
And the big financial companies are too big not to be allowed to put astounding sums of money at risk, from an investment pool of others who also buy into the idea that they are handing money over to others who are too big to fail, whether they as they believe of themselves that they are too smart to fail, too connected not to be connected, too much of a leader not to be the leader.
There are within bank examples of this. A major German based bank lost over 5 billion dollars for the year and 1.8 billion of that loss was identified as coming fro the trading department. As the losses started to come, the head of the trading department wanted even more money to trade or bet to get out of developing quandaries that weren't in the original forecast in trading models. His argument was that he always had control of the scene and should be given more and this argument closely resembles the too big to fail argument. So, the bank did shut down the department and perhaps smartly quit while they were behind and actually showed this trader the door. It is i nteresting to see that big and then too big to fail becomes in various forms an argument that is showing up all over the place and even within departments of companies.
Even the idea of packaging mortgages was argued as being something that was too big to fail or too big to have core risk of a climate wide failure. Yet this argument has been shown to be errant in this case but the explosion of this market was to a degree predicated on a too big to fail concept that maybe was just worded a slightly different way and given to more of a too big of a diversified risk profile to fail.
The answer isn't exact, but at least there needs to be a greater awareness of what this too big to fail argument actually is and why it seems to mostly apply to the ultra rich and not the poor or the medium income people whether here in this country or elsewhere.
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