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Thursday, February 4, 2010

Repeating: The Fallacy of "Too Big To Fail"

I saw another reference to "Too Big To Fail" in a local blog (link here) which of course goaded me into another tirade. Maybe the blog author will post my long-winded comment. In the event that he doesn't, I thought I'd do a small dump here.

The big issue with "Too Big To Fail" is that it is a sound-byte solution to the wrong problem. The issue isn't the size of a company, the issue is a lack of effective risk management and regulation. What many people don't know is that the Securities and Exchange Commission basically outsources financial services industry regulation to the industry itself. The concept is that of the "Self Regulatory Organization", which is a fancy way of saying "fox guarding the chicken coup".

Of course politicians love "Too Big To Fail" because it sounds good. Who isn't against those "big bad insurance companies/banks/etc."? However admitting that there have been decades of ineffective regulation is not exactly a win for Washington DC politicians, especially those who are well entrenched.

Don't buy the fallacy of "Too Big To Fail".


Tom Borthwick said...

The "too big to fail" moniker may be a political buzz term, but it isn't undeserved.

Your argument that irresponsibility is the problem is indeed accurate, but when banks become mega in size and scope, the likelihood of fraud sets in.

The size of a company is directly relative to the damage it could do if fraud is perpetrated.

In a capitalistic system, greed is an oft-rewarded virtue and taking advantage of either lax regulation or confusing financial products, etc. is further enabled by size. Obfuscation and purchasing power (i.e. lobbying, lawyers, etc.) grow with company size as well.

When these companies engage in fraud (only two people have been charged in the crisis, and both were acquitted by the way) the impact is exacerbated by their market share.

Hence, "Too big to fail". Sure, you could say something like "So big that systemic corruption causes financial meltdown" but the former label sounds better.

Looking forward to your thoughts (love your blog, btw!)

Stephen Albert said...

Tom...I'll respond in a separate post, as I absolutely hate the comments editor in

Thanks for reading...

- Steve