Moral Hazard

I think that the concept of “too big to fail” still exists today, as the financial services industry is still an oligopoly with few banks controlling the fate of the economy.  If, for example, a company like Citigroup, J.P. Morgan, or Bank of America were to go under at some point, the economy would fall apart.  Though it has tried to address the concern that banks could dismantle the financial system by regulating proprietary trading, capital requirements and others, the government has not addressed the problem of “moral hazard,” where investment banks take bigger risks because they are dealing with other people’s money and not their own.  The way to reform the banking system is to shift the risk to those that make the decisions to take the risk in the first place.  Continue reading


Too Big-headed to Fail

After watching “Too Big to Fail”, it is clear to me that this notion still exists today. The last piece of information you are left with is that 10 banks hold 77% of all American assets. Wow. These banks own more of our tangible country than the government does. These banks cannot fail. With our nation’s money invested in keeping them alive, another downward spiral will cause the government to loose all the money they had to save the banks this time around. The banks failing in the film were too big because they were responsible for pensions, salaries, life’s investment, college funds, etc. If these banks went under, too many lives would be affected. But now, it’s not very different. All of those same concepts apply but now the government’s money is invested. The banks cannot fail, because then our economy fails. The government would be too low on cash.

An issue I also saw at the end of the film was that the banks are not the only entities that are too big to fail. Our government seems the same way. Only the government seems too bigheaded to fail. In the movie, Paulson “stuck to his guns” about not giving bailouts and instead placed government investments into the banks, just so that he could keep his word. We even see it today with other issues as our government is “taking a break”. People cannot compromise and find solutions because they are stubborn. Yes, it is important to stand up for what you believe, but when your position effects the lives of an entire country, sometimes you need to think of the best interests of the general good, not what you personally believe to be good.

Getting Bigger and Bigger

First I wanted to say that I have wanted to watch the movie “Too Big to Fail” for a while now, so I was happy to see that it was the topic of our blog post. Back in 2008, major banks and insurance companies AIG were considered “too big to fail.”  Since 2008, these firms have only become bigger with the Bank of America-Merrill Lynch, JP Morgan Chase-Bear Sterns, and Wells Fargo-Wachovia acquisitions. To me, obviously if they were considered too big to fail then, there are certainly still too big to fail now. In the film, Timothy Geithner explained to Hank Paulson that an option to save some of these banks is to work out an acquisition deal between two of them. Hank looked at him puzzled and said something along the lines of “you want to make the banks that we have considered too big to fail even bigger?” It is counterintuitive, but given the situation it was the best move. Although they are bigger, added regulation will help to oversee that the banks are working ethically. So even though the banks are getting bigger and bigger, they can be more easily monitored. With the added regulation, it would be almost impossible for a company to put itself into a position to fail.

Although the notion of too big to fail still exists today, it is definitely not as concerning to me presently because of the added regulation. The companies that are too big to fail are closely monitored and would be unable to fall into the same situation as 2008. The only thing that I worry about, that hopefully won’t happen in my lifetime, is that the same cycle of deregulation and corporate greed will occur.

Too Much to Handle

The idea of a firm being “too big to fail” is one that resonates clearly throughout the film and certainly applies to the present as well.  The film delves into a perspective of the financial world where decisions had to be made in a timely matter, and as the institutions involved watched the financial system come apart at the hinges, there was a distinct compounding effect as a resolution was reached.  With the government intervention and following behavior from the banks, it is evident how much influence these institutions hold in our economy.  Relying on trust was shown to be a tricky and unpredictable aspect, while still necessary to provide a foundation for which the financial system is based.

While trust was not always present, a solution for the banks still came after stubborn refusals to cooperate.  Knowingly watching Lehman fail as they did, with no lasting repercussion, followed by the capital infusions undermined the intended message of keeping private sector problems private.  When government intervention is necessary on such a scale to stop a downward spiral, its hard not to justify the notion of “Too big to fail.”

The situation today hasn’t changed considerably, and the power held by such a small group of banks represents a plethora of factors involving most members of society.  The last thing we want to experience is a market condition like the one in the film again, and the need to support private firms with public money may be an unavoidable reality of the world today, and the film ominously describes the impending problems that would result otherwise.  The notion of “Too big to fail” is true whether or not we like it, as the film showed, since other solutions couldn’t provide resolution.  We may have simply stuck with a mindset of “if it’s not broken, don’t try to fix it” but a similar situation today would certainly require measures similar to the film, and reinforce the notion of “too big to fail” in the present day.