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To Big To [Be a company]

Discussion in 'Political Discussion' started by PatsFanInVa, Mar 6, 2009.

  1. PatsFanInVa

    PatsFanInVa PatsFans.com Supporter PatsFans.com Supporter

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    Mesdames et messieurs,

    I read a very concise point the other day, and I don't remember its author, but it goes like this:

    If it's too big to fail, it's too big to be private enterprise.

    It seems like this pretty much unites viewpoints across the political spectrum.

    In other words, if we know we will not and cannot let an institution collapse, we are implicitly backing it through the government. This is quite obviously the case with AIG.

    But deregulation was the vehicle by which global leveraging to the point of insantity was enabled, particularly in the housing sector via residential financing that divorced any metrics or accountability from the loan originator, as a system took hold wherein the originator was never the servicer, because the loan itself became a financial instrument akin to a stock. Our financial system spawned entities "too big to fail," which inherently cannot be tolerated in private hands, because they are aware of being "too big to fail," which resulted in the great "Paulson Put" of 2008 (i.e., the foreknowledge that a bailout was a certainty... for all but Lehman. Sorry guys, you went first.)

    We can enact this principal in a weak form, by demanding a government insurance fund equivalent to FDIC for any entity or species of entity that may fall into this category, into which participants must pay premiums against the eventuality of the use of the fund. We can track the "what if" metrics against the top companies on a rolling basis. We can set up regulations reinstituting cross-sector and intrasector firewalls, like Glass-Steagall after the Great Depression, famously thrown out in the late 90s. But what we cannot do is simply ignore this most basic, salient point:

    If it's too big to fail, government has intrinsically accepted the risk of failure, allowing the company itself to garner all the rewards of its behavior before bailing in the bad times, and demanding government pick up the tab.

    The auto companies are like AIG in this respect, just so the right wing feels it is invested in this premise.

    Of course the strongest response to this premise is to assert that a company that is too big to fail, should inherently be nationalized to begin with. I don't see that as a true solution, but I do see prevention of a repetition of our recent mistakes (last 3 decades or so) as absolutely indispensible.

    Thoughts?

    PFnV
     
  2. PatsFanInVa

    PatsFanInVa PatsFans.com Supporter PatsFans.com Supporter

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    No takers? One more time:

    If it is too big to fail, it is too big to be in the private sector. Since "too big to fail" is by acclamation the point at which government is the ultimate backer of a business, that business should be prevented from growing to that point through appropriate regulation, or simply nationalized, in defense of the regular guy taxpayer -- so he is not made to pay for the business failing, while fat-cats collect when the business thrives.

    It seems that this is the only way to preserve the basics of capitalism, which, whatever else you say, is the baseline system we have worked under for centuries.

    So: Who here is Capitalist, and will prevent business from becomming "Too big to fail"? Who here is Socialist, and will demand that businesses get as big as they want, and be backed by the government?

    Regulation or nationalization is the only way to keep government from supporting business at the expense of the average guy. This is clear from the cases of the largest behemoths (AIG, auto companies, etc.)

    Regardless of their histories and their particular problems, if they can be allowed to fail, capitalist mechanisms can function. If they cannot be -- and all experts agree, some cannot be -- it is simply a lie that companies should be able to grow to any size they want. They must be regulated.

    So weigh in: Are you a pinko commie redistributing taxpayer money into the pockets of the future AIGs, or do you support robust regulation of big business?

    PFnV
     
  3. mcgraw_wv

    mcgraw_wv In the Starting Line-Up

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    I was thinking about this as well...

    I heard the AIG to big to ____ and thought, Didn't we put in place anti-monopoly laws in place to prevent exactly this?

    I mean, nothing should be allowed to be too big to fail, the only excuse for super companies is they say efficiencies which reduce costs... Well those cost savings just went RIGHT OUT the window with the amount of money taxpayers are pouring into them now...
     
  4. wistahpatsfan

    wistahpatsfan Pro Bowl Player

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    #75 Jersey

    That's why Ma Bell was broken up, right?

    AIG needs to be forcibly broken up.
     
  5. PatsFanInVa

    PatsFanInVa PatsFans.com Supporter PatsFans.com Supporter

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    As I understand it, they're on that. AIG Insurance and AIG Holdings are supposed to be divorced from one another, and good riddance to the "financial supermarkets." Hopefully we put the firewalls back in, and try to cure the madness of buying and selling what's not understood.

    What we truly need (preferably) is a localization of risk to the extent that it cannot be passed on without penalty for bad decisions, bubbles notwithstanding. Loans as a form of securitization for leverage? No thank you.

    PFnV
     
  6. PatsFanInVa

    PatsFanInVa PatsFans.com Supporter PatsFans.com Supporter

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    Amazing the cowardice this simple notion has brought to the fore. Kudos for you guys who answered. I see I got one-starred for bringing up the obvious contradiction inherent in deregulation-as-religion, to wit, once more:

    - Unregulated growth and sector-crossing can create an entity "too big to fail"

    - Such an entity is implicitly backed by the government.

    - As such, deregulation to this extent is a crypto-socialist program

    - The mechanisms of capitalism cannot function if entities are allowed to become too big to fail

    - If it's "too big to fail," it's too big to be in private hands (by dint of the implicit government backing.)

    All deregulation does is creates profits for the wealthy in the good times, and huge drains on the public sector in downturns.

    Show yourself, one-star cowards. Respond.

    PFnV
     
  7. Stokes

    Stokes In the Starting Line-Up

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    I'm having a hard time wrapping my head around it all. Part of me recognizes that sometimes companies become to important to the public to be allowed to fail, and some regulation of those companies is necessary. I would say that there is no company that is too big to be privately owned though, as long as a monopoly does not exist. Part of me thinks that had these huge institutions known they wouldn't have a government safety net if they failed, whether it be from a government bailout or from politicians they had essentially bought that they may have been more inclined to self-regulate. That was the real problem as I see it, that it was easy to take major financial risks for 2 reasons; there was going to be a safety net if it didn't work, and there was little risk to the executives in power that were making the risky decisions, they were going to get paid whether it worked or not. I had mentioned in another thread the idea that rather than have the government limit executive pay (an idea I strongly disagree with), that maybe find a way to make execs personally liable for their company's failures. I'm not sure how that would work mechanistically, but I like the idea of returning a measure of responsibility to the execs who currently can take their golden parachutes and bail out of the mess when it starts going down, leaving the common folk to crash and burn.

    I hadn't replied before as I just didn't have much of a sensical point to make (as you may be able to see from this post). You successfully baited me into babbling about it though, congrats.
     
  8. Leave No Doubt

    Leave No Doubt PatsFans.com Supporter PatsFans.com Supporter

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    My only opine is that if a company's failure will crash an entire economy, then it's been allowed to become too big. No one corporation should hold that kind of power and as far as AIG's concerned I hope they sprint towards breaking it up. It's own CEO (or whatever his title is) said he hoped that would happen.

    I didn't reply before because economics just isn't my thing. The One-Star Bandit is alive and well tho LOL:rolleyes: FWIW I really don't think too many people pay much attention to random star-ratings, at least I don't. Like I said in another forum, I've read some very overrated 5 stars and some good 1 stars, so don't let that bother you.

    Just my 2:D

    PS: I gave it 5 stars just to prove a point ;)
     
    Last edited: Mar 9, 2009
  9. Leave No Doubt

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  10. PatsFanInVa

    PatsFanInVa PatsFans.com Supporter PatsFans.com Supporter

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    I'd take issue with particular points here and there, but I agree with Nader's final line. By the way guys thanks for responding, and I really don't have too much of a personal crisis over Dr. One-Star... I do like it when it at least looks like someone who can actually read or write might be involved in the one-starring, of course, but it is what it is.

    Stokes, you make a good point about a federal "put", where they double down knowing Uncle Sam is in the background. But I think of it as derived from the ability to link catastrophic failure to their fates, and not just rhetorically.

    When I was a little kid reading actual Superman comics, before that was beyond the average kid's literacy level and Superman migrated to the movies, Lex Luthor invented this device linking his heartbeat to the thermonuclear explosions that fuel the sun. This gizmo made it so if Lex's heart stopped, the sun would go nova.

    So it's not just that they played the feds for patsies; they actually got the leverage on the government, by actually being too big to fail. Oh, they could fail, but the economy would simply go down with them. As in, deal in cash, checks don't work anymore. Take your FDIC insurance and cut up your ATM card, this bank is done. Don't even try to value your real estate; credit is nonexistent because the banks that should be lending not only won't lend except to the close-to-perfect, they don't exist to do the lending anymore. AIG's reinsurance (i.e. to the rest of the finance sector) went into the trillions. We'd be playing shell-games with which defaults could hit a lower trough. Capitalizing a business -- even for payroll? Non-starter.

    Your basic financial apocalypse.

    The numbers make me think this scenario was real, and as much as we hated the bailouts, we'd be looking at much worse right now than if we'd not done it.

    So my point is, it's likely that they really did achieve the status of "too big to fail." Your point's good too: the companies themselves bore no risk while doing so. Everybody bet that the air would slowly seep out of the real estate bubble, but it plain old popped. And suddenly everybody was backing real obligations with assets worth 30% less in a year.

    What to do? Punish the bad actors, of course. Let them go under. But if you do that, everything tanks worse. Way worse.

    I mean, what have we learned? Stokes, you are right too: if there's accountability on the part of a company (in your formulation, an exec,) then the crazy bets aren't in their own best interests. They were looking at what they viewed as an unlikely outcome, but the outcome was utterly catastrophic. I would think the conversations were something like "Well, if that happens the whole shootin' match is over anyway," and they went about their business.

    So we have problems in scale (i.e., a few giants could drag down the whole house of cards,) as well as accountability. That's why I'd love to make mortgage backed securities illegal going forward (just for an example.) I.e., if you write a loan, you are stuck with it. If you sell a loan, the guy that buys it is stuck with it, unless he can sell it in turn. But whoever owns the loan services the loan, and the collateral on that loan is what indemnifies him, not the certainty that the loan can be repackaged and turned into a currency of sorts. I'd also keep investment banks separate from insurance companies (whether the State Farms of the world, or the primarily re-insurance variety, like AIG.)

    I think the key to this is to decentralize, and make each "cell" in the economy responsible for its own activities. This doesn't mean burning the stock market or any other such balderdash... it just means putting back the firewalls.

    But to your point that a company would have to be a monopoly to run afoul of functionality? Lehman's wasn't a monopoly, but by letting Lehman's fail we stepped to the edge of the cliff. The results cascaded through the remainder of the financial sector with lightning speed. I think limiting these behemoths to simple transparent transactions, without built-in conflicts, is the way out of this. It might even be necessary to simple develop a periodic test of whether an institution's failure can precipitate a systemic "domino effect..." Then break that institution up if necessary.

    I would not want to be the guy that crafted the various types of regulation we're talking about. This is very nook-and-cranny stuff. But I do think the Smart Guys should be putting their smarts into this project the moment we establish that we won't be trading canned goods with each other as the most complex financial transaction we can conceive of.

    PFnV
     
    Last edited: Mar 9, 2009
  11. Stokes

    Stokes In the Starting Line-Up

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    Yes, this is what makes my head spin. I agree with your post, which is boring I know. I think trying to define who is too big to fail is one of the first big problems with knowing how to move forward.

    I still disagree with the notion from a previous post that an entity that is too big to fail (and I agree they exist) is too big to be privately owned. Remove private ownership and now you've REALLY taken away any consequence of failure. There's always more tax revenue to collect or bigger deficits to run to cover poor management of a government-run entity (yes I know what bailouts of these private firms are costing us, but I'm talking about going forward, presumably with the elusive "regulatory framework" in place).

    Also that heart monitor thing has been copied more recently too, both in the TV show Lost and the movie Spawn (a true classic of modern cinema). And I'm really disappointed resident movie expert RW didn't jump in and point that out before I had to. Shame on you RW, shame on you.
     
  12. PatsFanInVa

    PatsFanInVa PatsFans.com Supporter PatsFans.com Supporter

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    Or we can look at it another way. I think (from memory) you and I are usually on different sides, and I also think I did a lot of baiting to get people to discuss. So it's kind of cool to just sort of work out some things that really, aren't "right" or "left" in the bickering kind of way. It sort of gives me hope when we're seeing some of the same problems. I think it means people from different sides see the same reality sometimes, which gives me hope because most of the time we're all seeing total opposites not even recognizable from the other person's point of view. Good sign.

    On the heart monitor thingie -- I had no idea! Old comic books never die I guess, they just turn into "serious" TV shows 30 years later.
     
  13. atomdomb

    atomdomb Third String But Playing on Special Teams

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    On March 12th the U.S. House financial services subcommittee plans a hearing on mark-to-market accounting rules. Most economists believe this will result in most of the banks in trouble to be well capitalized. I think this is long overdue. I believe that AIG will benefit greatly from this. By the way, I didn't believe they were to big to fail. Also, AIG was kept alive so the government could help to bail out European banks. imo. That's all.
     
  14. Stokes

    Stokes In the Starting Line-Up

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    I always try and see it from both sides, I admit I find it very difficult to do so sometimes, but I think we both fall into the "reasonable" category of poster in this forum rather than the "bomb throwers," which allows us to discuss rather than just bicker.

    I've been really interested lately in why some political ideas work and why some don't in the context of the motivation of the people involved. This is one case where I found it possible that the train went off the tracks because there wasn't much to lose for the decision makers if it didn't work out. A big theme I've been pondering is the role of government in making sure things like this don't happen, and to me it usually comes down to risk/reward and accountability. If the power structure of these corporations knows they're too big to fail, they now have as you say been able to shift the risk/reward in their favor since they know gov't HAS to bail them out of any missteps. Any regulation/oversight we put on these companies needs to IMO re-set the risk/reward to encourage them to make more sensible decisions. I like my idea of holding them personally accountable, and maybe your idea of forcing them to keep loans they make rather than selling them. Both these ideas increase the risk to them if things go sour. I much prefer these kinds of ideas to those that take all the incentive away from being say a CEO like gov't trying to limit compensation. Smart regulation will allow the successful companies to prosper and (gasp!) get rich, thus rewarding them for good decision making, while preventing the kind of jackassery (I think that sounds cool, I don't care if its not a word) that led to the meltdown in the first place.
     
  15. PatsFanInVa

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    In another good sign, Bernanke spoke about how to keep businesses from being too big to fail today, and it read pretty much like this thread (minus the details of the personal responsibility for CEOs and the no-loan-repackage proposal.)

    Bernanke says financial system report is crucial to recovery - Mar. 10, 2009

    Market shot up 6% or so. Of course, there was that 2-month profit statement from Citi too. Whatevah... they're panicky herd animals anyway. I loved Bernanke's timing though. Think he's a Pats fan?

    :D
     
  16. Stokes

    Stokes In the Starting Line-Up

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    If he comes out tomorrow with a new plan to make mortgage backed securities illegal I'm going to start questioning where he's getting his ideas...

    At least he's making some good sense there. Of course as we've been saying the real headache will be trying to figure out what to do about companies becoming too big to fail.
     

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