- The Big Picture - http://www.ritholtz.com/blog -

Too Big to Fail: Special NYT edition

Posted By Barry Ritholtz On June 21, 2009 @ 10:40 am In Bailout Nation,Bailouts,M&A,Regulation | Comments Disabled

If they are too big to fail, make them smaller.”

-Nixon Treasury Secretary George Shultz about Fannie Mae and Freddie Mac

>

This Sunday NYT seems to be all about one of our favorite crisis whipping boys: The concept of TBTF — “Too Big to Fail.”  There are numerous articles, stories, blog posts on this pernicious policy, including our own “Too Big to Succeed” meme (aka chapter 18: Too Big to Succeed? in Bailout Nation [1]).

• Gretchen Morgenson asks: Too Big to Fail, or Too Big to Handle? [2]:

Rather than propose ways to shrink these companies and the risks they pose, the Geithner plan argues instead for enhanced regulatory oversight of the behemoths. This suggests the taxpayer safety net will be larger after our national financial train wreck, not smaller.

More than two years after the crisis began, “too big to fail” remains “too problematic to address” with anything other than more souped-up regulation. Given that earlier efforts at policing these entities failed so miserably, why should anyone think that a new-and-improved regulatory approach will fare better?

• Eric Dash asks If It’s Too Big to Fail, Is It Too Big to Exist? [3]:

Today, amid the wreckage of the gravest financial crisis since the Great Depression, bigness is one of our biggest problems. Major banks, the Detroit automakers, the financial basket case that is the American International Group — the only reason these giant, sclerotic companies are still standing is that they have been deemed “too big to fail.”

Or, more precisely, too big to be allowed to fail. Policy makers fear companies like these are so enormous and so intertwined in the fabric of the economy that their collapse would be catastrophic. Hence, all those multibillion-dollar, taxpayer-financed bailouts.

In its overhaul of financial regulation last week, the Obama administration proposed several measures to try to contain the biggest of America’s big banks. But it stopped far short of calling for the dismantling of those institutions.”

Paul Krugman gets meta on the idea — Too big to fail FAIL [4] — and surprisingly argues that we can never eliminate TBTF:

“I’m a big advocate of much strengthened financial regulation. One argument I don’t buy, however, is that we should try to shrink financial institutions down to the point where nobody is too big to fail. Basically, it’s just not possible . . .

So I think of the pursuit of a world in which everyone is small enough to fail as the pursuit of a golden age that never was. Regulate and supervise, then rescue if necessary; there’s no way to make this automatic.”

I totally disagree — size is problem, for it not only creates companies too large to effectively practice risk management with, the mere size creates other issues.  The fact that CitiGroup was able to get Glass Steagall repealed, but did so by forcing the government’s hand via a technically illegal merger is quite telling.

When companies get to be that large, their vast wealth buys influence and power and corrupts the political system. Despite the crisis caused by the banks, just look at how successful their lobbying effort was. Their enormous pushback effectively neutered any true regulation of the finacial sector.

I think that from now on, I will be referring to the President as Barack W. Obama — since he is adopting Bush’s economic policies, he might as well as adopt his middle initial.

>

Previously:
Too Big To Succeed . . . [5] (January 14th, 2009)

http://www.ritholtz.com/blog/2009/01/too-big-to-succeed/

Obama Reform Plan Fails to Fix Whats Broken [6] (June 18th, 2009)

http://www.ritholtz.com/blog/2009/06/obama-reform-plan-fails-to-fix-whats-broken/

Sources:
Too Big to Fail, or Too Big to Handle? [2]
GRETCHEN MORGENSON
NYT, June 20, 2009

http://www.nytimes.com/2009/06/21/business/21gret.html

If It’s Too Big to Fail, Is It Too Big to Exist? [3]
ERIC DASH
NYT, June 20, 2009

http://www.nytimes.com/2009/06/21/weekinreview/21dash.html

Too big to fail FAIL [4]
Paul Krugman
June 18, 2009, 9:10 PM

http://krugman.blogs.nytimes.com/2009/06/18/too-big-to-fail-fail/

See also:
Too Big to Fail’ Policy Must End, F.D.I.C. Chief Says [7]
Dealbook, June 19, 2009

http://dealbook.blogs.nytimes.com/2009/06/19/too-big-to-fail-policy-must-end-fdic-chair-says/

Chief Says BlackRock Isn’t ‘Too Big to Fail’ [8]
Dealbook, June 17, 2009

http://dealbook.blogs.nytimes.com/2009/06/17/chief-says-blackrock-isnt-too-big-to-fail/


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2009/06/too-big-to-fail-special-nyt-edition/

URLs in this post:

[1] Bailout Nation: http://www.amazon.com/exec/obidos/ASIN/0470520388/thebigpictu09-20

[2] Too Big to Fail, or Too Big to Handle?: http://www.nytimes.com/2009/06/21/business/21gret.html

[3] If It’s Too Big to Fail, Is It Too Big to Exist?: http://www.nytimes.com/2009/06/21/weekinreview/21dash.html

[4] Too big to fail FAIL: http://krugman.blogs.nytimes.com/2009/06/18/too-big-to-fail-fail/

[5] Too Big To Succeed . . .: http://www.ritholtz.com/blog/2009/01/too-big-to-succeed/

[6] Obama Reform Plan Fails to Fix Whats Broken: http://www.ritholtz.com/blog/2009/06/obama-reform-plan-fails-to-fix-whats-broken/

[7] Too Big to Fail’ Policy Must End, F.D.I.C. Chief Says: http://dealbook.blogs.nytimes.com/2009/06/19/too-big-to-fail-policy-must-end-fdic-chair-says/

[8] Chief Says BlackRock Isn’t ‘Too Big to Fail’: http://dealbook.blogs.nytimes.com/2009/06/17/chief-says-blackrock-isnt-too-big-to-fail/

Copyright © 2008 The Big Picture. All rights reserved.