Companies That are "Too Big to Fail" are Too Big

The US government just bailed out AIG for the 4th time since September. The stated price tag to date is $160 billion but the Feds have effectively chosen to underwrite all AIG losses, regardless of size, going forward. This will not be the last AIG bail-out and little good has come from the first four.

This policy of perpetual bail-outs is underwritten by the Government’s assertion that AIG and its compatriots, including Bear Stearns, Fannie Mae, Freddie Mac, Citigroup, Bank of America, GM, Chrysler, et al, are “Too Big to Fail” (“TBTF”).

There is little reason to believe that this idea of Too Big to Fail is valid. There are far too many politically expedient reasons for bailing out union dominated industries and partially nationalizing the housing, lending and banking industries to believe that our politicians are acting in the economy’s long term best interest.

Irrespective of the net benefit or damage of such policy, it is abundantly clear that the government should terminate this practice after our current crisis is resolved and act to prevent the necessity of such interference.

If a company is Too Big to Fail, then it is simply too big! The overt understanding that companies, regardless of size and influence, will be allowed to fail will produce immense benefit, remove intended and unintended economic distortions and re-impose market discipline on its participants.

In most cases of companies deemed worthy of the offending moniker, the government has overtly allowed the entity to reach TBTF status.

For example, the government reviews all mergers and acquisitions of size to determine whether the transactions would be anticompetitive. Obviously if a merger results in a company that is TBTF, the result is not only anticompetitive but risks economic disaster and puts taxpayers directly on the hook should the company run into trouble. All such transactions should bluntly be prevented going forward. The acquisitions executed by Citigroup and Bank of America, which were assembled by piecing together hundreds of companies, should be rejected by regulators.

Furthermore, many of these TBTF entities were directly controlled, influenced or regulated by the US Government. No commercial bank, lender or GSE operated, raised capital, grew, increased its leverage ratios or expanded its product offerings without direct and indirect government approval. Regulators control leverage ratios, approve capital raises, review business practices, etc…

This is especially evident in the case of the GSEs. The argument has credibly been advanced that Fannie and Freddie should never have existed. Once created, they should have been meticulously limited in size and scope. By affording the GSE’s a government guarantee and allowing each to raise capital at preferential rates backed by the full faith and credit of the US government, it was inevitable that both would eventually grow to monopolize the house lending industry. The government inappropriately used Fannie and Freddie as policy tools to effect social change, dramatically distorted the housing market through this interference, are presently using the nationalized entities in a disastrous attempt to prop up housing prices and continue to expose taxpayers to previously unimaginable losses. I presume all in the name of Too Big to Fail.

It is irresponsible, disortionary, inefficient and costly to continue to allow, and in many cases promote, the development of companies that are so important to the economy that their failure would destabilize the global economic system, yet are so fragile that these companies can not endure inevitable downturns in their respective industries.