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. Continue reading

Advertisements

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