"Too Big to Fail"

Overheal

When you hear that, the first thing that comes to my mind is "Monopoly". But whether or not AIG was a monopoly, you have to wonder if we are doing the right thing when we are relying on these Pillar-Companies to hold up the economy. I'm not saying change Capitalism but we need to implement more safeguards in that should companies as big as AIG or bigger fail, it will not create global pandemic terror.

After all couldn't the company simply have split itself down into more manageable sub divisions or cells? Why not just turn the company into a family of companies, each one providing a different type of insurance, so that if one of them failed (ie. Motor Insurance) it would not implicate a failure in the Health Insurance sector of the AIG Corporation. Or Was it structured like that? I'm guilt of not having looked into it. Imagine if Time Warner was all in one basket, and imagine of that failed. There are a LOT of companies that are owned by Time Warner. For example.

JohnMc1

I think its safe to say that every American regardless of who they voted for this past Nov is now beyond sick and tired of hearing "Too Big to Fail." Pelosi, Frank, Reid and Dodd and even Geitner had their chance to put restrictions on AIG when they planned the TARP/Bailout bill but they didn't. So its very hollow that they are now crying, shouting and screaming about it and the bonuses now that their Poll numbers are dropping.

Overheal

Very true. But I'm wondering what are the implications for our system of commerce and in what way will he have to restructure the way companies and corporations are allowed to operate? Antitrust and Monopoly laws were one such measure long ago placed on businesses for the good of capitalism and competition. Now, what do we do so we don't have to ever worry about a company being "Too big to fail"?

Sand

Yeah, capitalism and free market theories would generally work best if the market was composed of many, smaller operators rather than a handful of huge entities. Then any one of those operators could be left to burn [ as capitalism dictates should happen to terrify operators into managing their risk properly], without bringing about systematic risk. Seeing as governments are taking control of these institutions they do have a lot of clout in terms of breaking them up into entities small enough to fail and selling them on. It would be a question of political will though to force it through. All these entities will have lobbyists, and for all the talk lobbyists will still have a lot of influence.

banquo

Eh, I study music.

/fails economics thread.

Manic Moran

JohnMc1 wrote: »

I think its safe to say that every American regardless of who they voted for this past Nov is now beyond sick and tired of hearing "Too Big to Fail." Pelosi, Frank, Reid and Dodd and even Geitner had their chance to put restrictions on AIG when they planned the TARP/Bailout bill but they didn't. So its very hollow that they are now crying, shouting and screaming about it and the bonuses now that their Poll numbers are dropping.

Interestingly, restrictions are still being put into place. A large number of those 433 financial institutions that Blue_Lagoon likes to mention were actively encouraged to request the TARP money, and at the time, they figured it was a good idea, so they did. The theory being that the about-to-fail banks needed the money to stay afloat, but the healthy banks would now have even more money to lend out to people to get the economy going again. So they did.

However, the money from Congress became synonymous with 'bailing out the failing institutions' and the 'adding money to help free up the credit markets' bit fell out of the public eye, and a lot of additional restrictions and caveats were added post-facto. Basically, everyone who received the funding, whether they were in good condition or bad at the time began being burdened with all sorts of liabilities and regulations that the healthier banks have started saying 'To hell with this, we're giving the money back to the Government, and we'll loan out whatever we have left. It's not worth it'

NTM

JohnMc1

Restrictions and oversights should have been handled before any bailout money was handed out and the Govt seized control of the banks [Both parties failed us big time here] The provisions should have been put in place before any money was given out [and restriction of bonuses should have been dealt with then. Not now because they are looking for the Political version of the "Cheap Pop" [that's a prowrestling term for saying something that guarantees a cheer from the crowd {ie. name dropping the town they are performing in}]

Overheal

I think we're deviating from the topic here. All this stimulus TARP crap is just an ecopolitical sideshow. Im not so much interested in the consequences of, and the Bailout here. The real question being were they Really too big to fail and if so, in another 20 years what can we do to stop something like this happening in some other fashion. Specifically, what can be done to prevent private (or public) enterprise from being being too big to fail so that the taxpayer will never again have to bailout a poorly run company?

come to think of it this may be the wrong forum for this. Could I get this bumped to Economics please?

nesf

Overheal wrote: »

Could I get this bumped to Economics please?

Done.

nesf

Basic problem with AIG from my understanding of it:

1) It insured an enormous amount of complex financial products like CDOs based on some extremely optimistic models of how uncorrelated they were with each other.

2) Mortgage market took a deep plunge, suddenly these CDOs started not paying out.

3) Institutions started claiming on the insurance they had taken out from AIG.

4) AIG is faced with paying out far more than it reasonable can and stay solvent.


So why shouldn't they let AIG fail? Basically it's because it's insurance was one of things that a lot of other institutions used to hedge against a downturn. So if AIG is left go under, then a cascade effect begins as it can't fully pay out on insurance claims which means companies who responsibly took out insurance against possible losses start going under. Never mind all the other AIG customers who would now find their insurance had just disappeared which includes a lot of private individuals and companies iirc.

The problem isn't so much "too big to fail" as it is "too interconnected to fail".

silverharp

nesf wrote: »

So why shouldn't they let AIG fail? Basically it's because it's insurance was one of things that a lot of other institutions used to hedge against a downturn. So if AIG is left go under, then a cascade effect begins as it can't fully pay out on insurance claims which means companies who responsibly took out insurance against possible losses start going under. Never mind all the other AIG customers who would now find their insurance had just disappeared which includes a lot of private individuals and companies iirc.

The problem isn't so much "too big to fail" as it is "too interconnected to fail".

They should have allowed some form of "hair cut" though , many of the CDO's were just straight forward bets , not hedging any particular asset. Everyone knows that if you break the bank in Vegas no one will come to bail you out.