If we live in a capitalist society then distressed firms have to raise capital, be acquired or file for bankruptcy.
The condition of a weak institution, as determined by the Stress Tests is of reduced importance unless the firm can disrupt the system in its entirety, as in the case of AIG. The question on the table isn’t can distressed firms avoid collapse but rather can the American financial system avoid collapse?”
In 2008, the goal of the bailout was to nurse the financial system back to health; functioning without additional funding from the government.
It was said that if the bailouts did not occur, the entire system would give way. That means in addition to increased job loss on Wall Street and Main Street, the credit markets would disintegrate, pensions, 401K’s, IRA’s, savings and insurance would be in jeopardy.
Now, the landscape has changed. We are not on the verge of collapse.
If the system can stand on its own, let it stand.
The understandable fear and lack of consumer confidence of the current situation may make progression less orderly, but as long as solid institutions are in existence then the system can to take care of itself, right?
The thought of fading banks is unnerving, but healthy businesses can pick up the pieces; offering consumers a safe haven for their money. The increased clientele of healthy institutions could mean additional staff.
Some of the workers of distressed companies can get new positions at stronger firms.
The ideal situation would be orderly acquisitions with private funds, so as to protect employees and not cause angst amongst consumers. But, even though it’s still too soon to tell, many feel Bank of America (BAC) would be in a better position if it had not acquired Merrill; contributing to the nervousness and distrust over acquisitions. However, Wells Fargo's (WFC) purchase of Wachovia and PNC’s (PNC) acquisition of National City has not created as much speculation or concern.
But bankruptcy is a viable option; it would allow healthy banks to offer services to the clients of troubled firms and provide the opportunity to purchase pieces of distressed businesses at bargain prices. Healthy institutions that don’t want to acquire a mess could incur less risk and more customers.
If indeed the worse is over and we are at a point where the financial industry shrinks, then let it shrink. The now visible hand can go back to its state of invisibility.