A Company Is Too Big to Fail? Make It Smaller 20 comments
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There are too many companies in our country which are "too big to fail". Practically all nationwide banks, now extinct big investment banks and some industrial corporations are in this category. Lehman Brothers' collapse proved that for investment banks, and the federal bailout of GM (GM) and Chrysler was done on the premise that bankruptcy of either of them can bring huge number of other companies down. The other companies that are too big to fail are Boeing (BA) and General Electric (GE). Expect a bailout if something goes wrong with them.
Is it possible to reduce number of companies too big to fail? Most of companies in this category are banks. What happens when small or even medium bank fails? It's quietly taken over by FDIC. So maybe increase banking regulation just a little bit and set an upper limit to the size of the banks so they are never too big to fail and always small enough to be taken over by FDIC? International operations are important here, so these limits shouldn't be set on international operations of the banks. And to make level playing field, restrict US operations of big foreign banks to the same level. No need to set this level in absolute numbers, percentage of US banking industry would do nicely.
Industrial companies are different. In some cases scale matters a lot. In aviation it became absolute, with only two companies in the world making big passenger planes (Boeing and Airbus). In other industries size is not that important. Looks like autos are up for a big restructuring, and I already wrote that GM must die, maybe with help of government here. GE should not exist in its current shape, the era of conglomerates ended in the 1950s.
I am usually not a big fan of regulation. In most cases it's wrong. But in some cases we need regulation and in some cases we need to increase it, otherwise we have situation like now, when the only solution is nationalization of losses, while the profits remain private. Let's reduce losses.
Full disclosure: At the time of publication author did not have any positions in above mentioned companies. Positions can change any time.
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Interesting perspective. So then, if GE,GM, and Boeing are "too big", what about foreign companies such as Toyota, Honda, Fuji Heavy Industries, etc? Try this. Maybe it's not the size but related to one of your other statements:
"--> I am usually not a big fan of regulation. In most cases it's wrong. But in some cases we need regulation and in some cases we need to increase it, otherwise we have situation like now <---"
You look young enough to not have been around in the 1950's or even 1960's. That era had it's problems too, but growth and prosperity were the norm, even with occasional inflation. The thing that we had then was much more regulation. Look what deregulation has done for the airline industry, energy business (oil), as well as Wall ST. and banking/finance/invest... businesses.
We even have problems with bacterial toxins in our food ( peanut butter) because FDA manpower and regulations were reduced a great deal starting mainly in about 1980. This continued over several administrations over the years. Indeed, look at where it got us. It is usually businesses that are shady or trying to be unscrupulously opportunistic to maximize their in-pocket profits that are concerned with regulations. With no too little ( like now) or no regulations society pays a much heavier toll later. Unfortunately , a portion of mankind is always unscrupulous, greedy, shady, or worse. Throw in garden variety stupidity and ignorance and regulations are needed. Much more so then we have now for sure IMO.
layoffs and debt which eventually bankrupts the merged company.
It happens over and over again. The only winners are tha CEOs
and Bankers. The losers are the workers and shareholders
The root cause of this crisis if leverage....and money injected into the system......this was then loaned out to people who shouldn't have gotten the loans. Its clear that in 1999 under the clinton administration and the fed reserve....that the housing boom began.....it started with a small policy change that blew up. The lending standards are set by fannie and freddie....and these companies were lending to people with 500 credit scores (6 lines of credit...and only making 1 payment on-time).....and then they leveraged up 100 to 1 in some cases 130 to 1 while under the eyes of the government.
And you are asking for more regulation.
The problem is regulation......let banks fail...get rid of all government interventation......an... companies will have to survive on their own.....there won't be lending to people who don't deserve it.
How about we try capitialism for once. And captilism would never have interest rates this low......no way.
We are just setting up which could be a bigger crisis in the future....which perhaps could be a currency crisis......that is if the government dumps new money into the system and forces banks to lend to whomever again.
We are trying to reinflate the bubble.....while they talk out of both sides of their moouths. (raise reserve requirements...while increasing lending)....especially at a time where banks are blowing through their cash with losses.
haha.
As a practical matter anit-trust legislation has not been enforced meaningfully for many years, partly with a view toward world competition and the belief that US enterprises needed to be big enough to compete on the global stage.
Our current problems stem from a lack of regulation - CDS for example, SEC laxity in enforcing existing legislation, lack of oversight of the investment banks, etc. Human beings are incredibly selfish, greedy, and indifferent to the effect their actions have on others. I am so sorry, but that is why we need comprehensive regulation of the financial system.
As the oldest man in the world (woke up feeling that way today - gotta replace that mattress) I reluctantly agree w/ you both, which I suppose is technically impossible because you disagree on size. Well, my wife cast the final vote: size matters.
For example, how would more regulation have changed things at GM, GE, Chrysler, Fanny & Freddie? What would our corrupt government have regulated? The kinds of cars they produce? Who would have stood still for that? They were all - as well as those companies you mentioned + XOM + IBM + T & others - just too big to be allowed to fail. And their failure would have compounded the problems more of their workers than of their executive suites & all the other Champagne Shirleys milking those companies for all they were worth. And now there's no milk left! (I guess I should be talking about geese & golden eggs, a favorite w/ right wing apologists, but somehow I got going w/ cows.)
And with regard to regulation in a system in which Government & business were partners before FDR & again partners after the dismantling of the New Deal - which dealt very specifically with the problem of size as well as control of the monopolies that needed to be monopolies - the regulators can't be trusted! Look at the FDA: their top bureaucrats function w/ one eye on their paper work (they have nothing to do w/ test tubes; that's all outsourced to private companies BY THOSE APPLYING FOR APPROVALS! If they don't get the results they want, they're free to apply to another "independent" lab; [guess which labs get the most business]), the other on their careers, & the third on what position they'll fill in the very companies they're paid to regulate, once they retire! No wonder there are so many dangerous drugs being prescribed that function in the system no one knows how. Just read the flyers that comes with the prescriptions.
The whole system has to be restructured. And there really isn't any way to do that short of a revolution. And we, as a people, are no more revolutionary today than we were in the 1770's. I think as most of us know, the American Revolution was not a majority uprising. Tories, their sympathizers, & those who sought accomodation with King George rather than rebellion, far outnumbered the revolutionaries. Happily for the first two groups, there was Canada, but they didn't escape expropriation by the "revolutionary riff-raff."
Maybe some very serious demonstrations by the disenchanted will help move the machine.
Best,
SOB.
On Feb 11 08:55 AM Thadeus Thornton III wrote:
> @ Filonov
> Interesting perspective. So then, if GE,GM, and Boeing are "too big",
> what about foreign companies such as Toyota, Honda, Fuji Heavy Industries,
> etc? Try this. Maybe it's not the size but related to one of your
> other statements:
> "--> I am usually not a big fan of regulation. In most cases it's
> wrong. But in some cases we need regulation and in some cases we
> need to increase it, otherwise we have situation like now <---"<br/>
>
> You look young enough to not have been around in the 1950's or even
> 1960's. That era had it's problems too, but growth and prosperity
> were the norm, even with occasional inflation. The thing that we
> had then was much more regulation. Look what deregulation has done
> for the airline industry, energy business (oil), as well as Wall
> ST. and banking/finance/invest... businesses.
> We even have problems with bacterial toxins in our food ( peanut
> butter) because FDA manpower and regulations were reduced a great
> deal starting mainly in about 1980. This continued over several administrations
> over the years. Indeed, look at where it got us. It is usually businesses
> that are shady or trying to be unscrupulously opportunistic to maximize
> their in-pocket profits that are concerned with regulations. With
> no too little ( like now) or no regulations society pays a much heavier
> toll later. Unfortunately , a portion of mankind is always unscrupulous,
> greedy, shady, or worse. Throw in garden variety stupidity and ignorance
> and regulations are needed. Much more so then we have now for sure
> IMO.
I appreciate your thoughtful analysis.
There are roles for government and there are roles for private enterprise. We should respect these.
Free markets function very well when demand and supply are relatively well balanced. Not allowing some companies to fail introduces imbalance. You can add a bunch of other examples as well.
The problem is that we have created private companies that really provide public utility services. For instance, if an electric company goes bankrupt, the customers are not forced to go without electricity. Public utilities are so important that we regulate them in order to prevent loss of service.
Since banks provide such public utility services, we will keep them functioning even when they are bankrupt. In exchange, they require much more effective oversight than they have received in the recent past.
I doubt we'll ever find the ideal balance between free markets and regulation, but it's important to acknowledge that both are needed.
But don't worry. Adam Smith's "Invisible Hand" is already hard at work.
When the smoke (and mirrors) clears, Detroit, the so-called "Money Center" banks, and the entire U.S. economy will be cut down to size appropriately.
According to this recent article in Seeking Alpha: seekingalpha.com/artic..., it would seem to that GM is making money and selling GM-designed cars and technologies in China. Click on the link to view.
Teutonic
On Feb 12 04:39 PM 303820 wrote:
> MR Filonof...who the hell made you an expert...it's anti Americans
> like you that destroy this country...you want GM...GE AND BOEING
> to die...how about killing TOYOTA and AIRBUS... How about the politicians
> in Washington protecting the working stiffs of this country like
> other country protect their own workers by manipulating their currencies
> and sticking heavy import tax on our product...How many American
> cars do the Koreans buy?...How many American made cars do the Japanese
> buy? How many American cars do the Chinese buy? what I would like
> to know is ... what are you guys getting for bad mouthing every thing
> that's American...GM's problem is not it's products...it's problem,
> is people like you.Spreading negativity about every thing that's
> American!
GM is making cars in China for the Chinese market...Are the Chinese buying any American made cars?
I looked over that article on the link I quoted you, and I noticed that you also commented on that article as well.
My answer to your question is very short - No, the Chinese are not and will not buy American-made cars (that are assembled in the U.S. with American labor). Our unionized rate is well over $20 an hour plus benefits. Their rate is probably well under $3 an hour. With such a huge disparity, they (the Chinese) would simply claim that they could not afford the price of our car and would insist that they be assembled in China with Chinese labor.
The interesting thing is that if we (GM, for example) do not move it to cater to the Chinese, someone will, you name it, the Germans, the French, the Japanese, the South Koreans, all our competitors.
On Feb 12 07:21 PM 303820 wrote:
> Teutonic:
> GM is making cars in China for the Chinese market...Are the Chinese
> buying any American made cars?
I don't have a problem with GM building cars in China for the Chinese market...I have a problem with corporate America building products in countries where workers are pay survival wages and then shipping it to USA!
Chinese factory workers make less then $100 a month and work 12hr days...they do not buy the product they make 'cause they can't afford it!
The same could be said with our opening our colleges to educate and train hundreds of thousands Chinese students. Many western countries like Canada and the UK have surplus capacity in their higher education system. If we don't then the next generation of top Chinese government heads and CEO's would be exclusively Canadian and UK trained, and their would invariably favor those countries in their business decisions by reason of affinity.
I used to think the same as you do. Maybe the world would be better if it is controlled by a computer - that is the Science Fiction novel I am working on and will be completed when I retire to be made into a Hollywood Movie.
On Feb 13 03:24 PM 303820 wrote:
> ?
China was the first to own 2 Hemmers when first produced.
Even before Arnold got one.
Concerning BA, it's no damn good any more. The union killed it.
Same as GM as end result. As shareholder, hate those guys.
You are so thoughtful indeed.
But with unions, still no good even for
smaller company. They damage it the same.