Too Big to Fail is Too Big


toobig too-big-to-fail

After watching the film, I definitely agree that the notion of firms being  “too big to fail” still exists today, and in more industries than just investment banking. The 2008 financial crisis showed that investment banks are interconnected and rely on each other’s financial wellbeing. In the film, this interconnectedness could be seen after the Lehman Brothers’ bankruptcy filing. Investment banks saw immediate hits to their businesses as a result of the dwindling confidence in the industry. Other firms, such as GE, saw that their operations were affected by the lessening access to capital from investment banks. To the dismay of many, the notion of “too big to fail” means that the government may be required to aid the financial system at large when the market is unstable.

“Main street wants Wall Street to pay… there is no politician who is going to sign off on a bailout. Why would you bailout people whose job it is to make money?”

One result of the financial crisis was the joining of commercial and investment banks. Some argue that the government bailout encourages “moral hazard,” or increased risk taking because of the safety net. The high risk composition of the investment banks’ financial leverage was a defining characteristic of the firms that failed in 2008. For this reason, some speculate that government bailouts will be consistently needed due to the continuation of risk taking behavior as a result of the bailout.

At the end of the movie, one of the government employees says, “I hope they’re using the money the way that we’re asking them to.” This cannot be guaranteed. The obvious solution to this “moral hazard” is to cut down the size of banks. Commercial and investment banks are different in nature and level of risk. Therefore, separating the two can decrease the amount of capital involved in high risk behavior.

Advertisements

10 comments on “Too Big to Fail is Too Big

  1. I think that it is very interesting that you bring up how other companies are profiting by this “too big to fail” attitude. You are spot on in pointing out that there is an interconnectedness between financial institutions and industry leaders. There is almost a notion here that it isn’t just a few financial institutions that are too big to fail, but that really it is our entire economy that may need a bailout.
    But on the other hand, having the spending confidence that comes along with lower interest rates promotes spending and innovation. Who is to say that in this time of economic astray we should have to completely revamp the way we are minded. We are the country we are today because we have the ability to finance some of the best projects and ideas at any given economic climate. We are risky in nature as you stated at the end of your blog, but that has been developed through centuries of confident borrowing.

    • But the confidence that comes from a reasonable idea of how a new project will turn out is much different than confidence that the government and taxpayers will cover bad bets.

      We do not want to loose our dynamic economy, but I don’t feel like these interventions were about that.

  2. I love the cartoons you added at the beginning. The dinosaurs one really captures the phrase in a literal way while hinting that the banks – probably their CEOs – are “dinosaurs” conducting business with an outdated method. Perhaps, the stockholder method? The other cartoon seems to demonstrate the weight the banks place on the public. After seeing the film, investment banks look like they employ people just to make money for themselves more so than their customers, suggested by the quote you use. When government money is given to the banks to help them survive, the taxpayer sees it as giving their money directly to the bank’s executives – exactly what is portrayed in the cartoon.

  3. I think your point about the interconnectedness of these institutions, and the risk of problems impacting the economy as a whole are key. While it may be the banks job to make money, the interconnectedness is what necessitated a bailout. The temporary solution was a necessary plug to the drain that was taking place, and I agree that the issue going forward must be fixed resolutely. Reducing the size of banks and bringing down the enormous risk and potential costs involved with a failure, and protect the fallout that might take place in that event. Avoiding the situation faced in 2008 is crucial, and regulations should be enforced to ensure that a weekend-long meeting isn’t necessary to salvage the finance industry and prevent an economic crisis.

  4. But the bottom cartoon is a fantasy (pitching them over the cliff) that never happened, did it?

    My memory was that as the bailouts were discussed and then passed, it seemed like “bad manners” to suggest that the CEOs and other top executives who oversaw this mess should loose money, jobs, or even investigated for possible crimes.

    What do you remember?

    • Indeed, the second cartoon is a fantasy. I wonder if that cartoon was released when the government was still debating what role it would take in the crisis…
      As for your second question, when all this was happening, I was about 15-16 years old… my understanding of the situation was limited. I do remember being perplexed that a huge business couldn’t keep itself afloat though…

  5. Pingback: Trials and Tribulations of Blogging | Stakeholder Organizations 11

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s