Too Big to Fail, or Too Metastatized?

The idea of a company being "too big to fail" is wrongheaded. And I don't mean that no company should therefore require a bailout/bridge/whatever. No, it's just that focusing on size as the main metric is wrong.

What we really want to know is, How quickly will Company X's troubles spread through the economy, if it fails, and with what consequences? In other words, we should be more concerned about spread and lethality than about size, per se. Sure, they're often correlated, but I'd let GM (GM) fail -- it would be tragic and painful, but non-lethal -- while letting AIG (AIG) fail (a company half GM's size) would have been a very, very bad idea.

So, what is the right way to think about this? Well, lethality, spread and the like are biological in nature, and it is the ability of some financial services firms to cause immunological havoc in the societal host that is the problem here. We should, therefore, be much more worried about companies that are "too metastasized to fail" than companies that are merely "too big to fail". It's time to change our thinking.

Comments

[Doug Korthof:]

The real question is, can GM be saved WITH CURRENT MANAGEMENT??

Just throwing more money at execs who have proven to be failures makes little sense. If an exec is worth the million $ salary, they won't make mistakes like betting on gas-guzzlers (and crushing the EV1) despite harbingers of the upcoming oil price spike.

It's no mystery that GM screwed up; the big issue is whether the screw-ups aren't still running the operation.

2008 Sep 24 04:15 PM

[VivaVegas:]

Great analysis and right on the money. Why was Lehman allowed to fail?because it was an investment bank by rich people for rich people. Some guy who's net worth suddenly went from $30 million to $15 million is not going to end up on NBC, CBS, CNN or FOX. Some guy who's house was destroyed by hurricane Ike and who now has no insurance because AIG went under will.

2008 Sep 24 04:21 PM

[whidbey:]

You miss the point altogether. The failure of a business occurs because it can not get sufficient working capital to avoid bankruptcy. So that means before the business fails the credit system has failed or denied the firm capital. Right now GM is more likely to fail from being unable to roll over its debt, then due to its competitiveness in the marketplace, which might also be fatal if it lasted long enough. We have a frozen credit system and that will finish all businesses who need credit to reach the market or sell to consumers. We have a problem and buying MBS is just the least of it. We need oodles of liquidity to keep things moving. That means inflation, one way, or another. Best.

2008 Sep 24 06:38 PM

[marketwatcher2:]

GM is one huge operation that is very labor intense. The failure of such a large operation would wreck havoc with the economy through failed debt on mortages, credit card debit and auto loan debt not to mention the unemployment status which is already at a major peak. As far as making a statement that GM failed to manage; It's more like our Private Financial sector failed to manage. Just maybe a little regulation will help.

GM has a brilliant CEO who not only has to manage US operations but now also a Global Operation. What is a fair salary for that kind of responsibility when you as a CEO have no control over an energy policy, currency exchanges, bank financial failure and Foreign Politics operating in the US for trade agreements in their favor?

GM can't fail it's a major part of our economy. Put some regulation in place to control the Banks and get affordable Capital back to business.

2008 Sep 24 07:23 PM

[madasiwannabe:]

GM painted themselves into a corner. They produced an inferior product for many years and failed to remain competitive. They were virtually shut out of the daily driver market and were more than content to rely on the truck and gas hog SUV market. Better option would have been listening to the market and learning from their competitors. GM also makes a slew of hybrid/electric/hydrog... vehicles that are not available in the US. Now they want the taxpayers to give them 25 Billion for research? Give me a break.

GM came up with creative incentive and financing programs over the years to get people behind the wheel. These same programs destroyed resale value, further chasing away the market. Now it has come to the point where they can't sell a vehicle without slashing the price. Not a liquidity issues; it's a stupidity issue.

The market is not crule, it's darwinian. If you fail to evolve or forget why your in business, prepare to become extinct.

2008 Sep 24 08:28 PM

[Mister Jimmy:]

The difference is that Asian automakers are heavily subsidized and supported by their governments. In contrast, the U.S. auto industry is challenged by a mismanaged Federal bureaucracy. This week's approval of Federal loans are needed, and deserved.

2008 Sep 25 08:56 AM

[Paul Killinger:]

The $25 billion (they asked for $50) for "research" by the Detroit 3 is a thinly veiled attempt by the Democrat Congress to buy the votes necessary to win the upcoming election. Anyone who likes this should vote for them. You'll be assured of more of the same.

If you doubt this, why aren't the Democrats demanding the same executive compensation limitations on the Detroit 3 they're so hell bent on imposing on Wall Street? At least the bank bailout has a chance of being successful and actually making money for the Treasury.

The Detroit 3 bailout isn't even a loan, just a GIFT to three outdated industrial companies headed for the ash heap.

2008 Sep 25 11:29 AM

[Paul Killinger:]

Jimmy,

I will concede the myriad ridiculous plethora of federal regulations imposed by the Democrat Congress has a great deal to do with why the U.S. auto manufacturers are struggling for survival.

But, just think, the rest of our domestic economy is handicapped by this same nonsense. What we're resorting to then is trying to save our industrial sector by handouts from the same government that killed them in the first place.

Look at the new domestic technologies that are successful. The government just hasn't gotten around to regulating them out of business yet. The others have had to leave the U.S. to survive.

But until we put the blame for this where it belongs, we're simply repeating the behavior that got us to where we are now in the first place.

2008 Sep 25 11:47 AM