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.