Saturday, September 27, 2008

Redefining "too big to fail"

Painting 'Behemoth and Leviathan 'by William Blake (1823), via Wikimedia Commons

It seems to this blogger that the concept of "too big to fail" needs to be thought through and an agreed upon definition arrived at, and this not especially for the current crisis but in anticipation of the next! (Note: this blogger is assuming that the 'business cycle' is not going to be abolished any time soon, even though every so often business begins to believe that this is actually possible and that they have discovered some magical model that is exempt from it!) After all what exactly does it say that companies that currently are so close to fitting the description of "too big to fail" are being swallowed up by other companies.

OK, so Bear Stearns was so big (and its tentacles were so deeply intertwined with so many other parts of the financial system) that when it began to fail the U.S. government stepped in and facilitated its purchase by JP Morgan Chase rather than allowing it to fail. Bear Stearns was deemed "too big to fail"... Subsequently JP Morgan Chase also acquired WaMu when it failed. Surely, by definition, JP Morgan Chase is now also "too big to fail"!! Similarly, Bank of America purchased Merrill Lynch, is it now also "too big to fail.'

It seems to this blogger that the government's response to saving the companies "too big to fail" is to facilitate the creation of even bigger companies that presumably then also become "too big to fail." Is this really a good idea? Taken to its (very exaggerated) logical conclusion and looking a few decades ahead, after the next few bubbles there will be one BIG financial company! Then what that one fails, it's time to turn off the lights...

Note: (From Wikipedia) "In Jewish belief, Behemoth is the primal unconquerable monster of the land, as Leviathan is the primal monster of the waters of the sea and ZIZ the primordial monster of the sky. There is a legend that the Leviathan and the Behemoth shall hold a battle at the end of the world. The two will finally kill each other, and the surviving men will feast on their meat. According to midrash recording traditions, it is impossible for anyone to kill a behemoth except for the person who created it, in this case the God of the Hebrews." Hah, behemoth is "too big to fail."