Friday, June 19, 2009

Too Big To Fail

Nothing makes me cringe more than when I hear the words "too big to fail". Too big to fail is a new and horrible concept. It basically says that there are certain companies that pose systemic risk to the United States economy if they were to fail and file for bankruptcy. Obama's new regulatory plan addresses companies that are too big to fail by regulating them in new ways, while leaving out new regulations for Fannie Mae and Freddy Mack. The new regulations also fail to address the fact that the FHA has become the new sub-prime lender of choice with 3.5% down loans to people with poor credit in a crashing housing market. I guess we never learn a thing do we?

I have a better idea about how to deal with companies that are "too big to fail". The answer is not regulating them. The answer is not letting them exist. Why does America need companies that are too big to fail anyway? What purpose do they serve to us? We should have been thinking about this one a while ago when we let them merge into the size they are now. So rather than regulating them, I say we figure out what companies are already to big to fail and break them into smaller fail-able pieces, and stop letting companies merge into massive too big to fail size. I would say that AIG, Fannie, Freddy, Citi and B of A are in the too big to fail camp and need to be dealt with sooner rather than later. So how about just taking care those five, and then saying that the United States will never bail out a company of any size again, so don't come asking. Capitalism requires that weak companies can fail so that their workers and assets can be recycled by better and stronger companies. This way the overall economy grows as productivity is increased. Artificially keeping failing companies alive can only lower productivity, because resources are not being allocated properly. To grow the economy companies must be allowed to fail big or small. All this government intervention disguised as helping the economy can only do harm.

This all gets down the the flawed notion of growth through acquisition. Small companies usually can grow fine on there own. Medium sized companies can grow on their own, and can also pick up some efficiencies through acquisitions. For fortune 500 companies it starts to get pretty hard to grow at any kind of pace on your own due to their sheer size. So to satisfy the board and stock holders many try to continue to grow for the sake of growth and go out and buy more and more companies that are less and less a good or productive match. The CFOs love this because it allows them to cook up the books during the acquisition period and during the wind down period later on (when the acquisition officially fails), smoothing out earning as required. The ability to take liberties with your financial statements has got to be one of the main reasons big public companies continue to acquire. I do not think that it is a highly profitable or efficient thing for a company to become massive for the sake of being massive, so lets just stop that notion now. Not in America. Stop approving mergers for companies that are trying to become to big to fail, and the problem is solved and capitalism can do its work.


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