by Mike Masnick

Filed Under:
bailout, too big to fail

Why Aren't We Trying To Solve The Too Big To Fail Problem?

from the getting-it-wrong dept

Last year, with all the talk of companies being "too big to fail" and governments bailing out such companies left and right, we had what seemed like a simple suggestion. Recognizing that it is possible for a company to be "too big to fail," in an intertwined economy, because the fallout would create even more problems, we suggested that a requirement for taking government money would be to become small enough to fail. That could mean spinning off parts, selling off parts, shutting down parts, exiting businesses, shrinking businesses -- whatever. There just needed to be some sort of guarantee that within a certain time frame, the company wouldn't be so tied up that if it failed it would bring down the rest of the economy. And, if a company didn't want to deal with those restrictions, then fine, it didn't need to take gov't bailout money.

The idea didn't get much traction (not surprisingly), and now some are pointing out that the opposite seems to be happening. Our solution to dealing with companies that are too big to fail has been to make them bigger and bigger, and pass off the question of "too big to fail" to other politicians in the future -- at which point the problems will likely be even bigger and harder to deal with. Propping up companies that are too big to fail, without a clear path towards making them small enough to fail, is a recipe for a future disaster.

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  1. icon
    Jason Buberel (profile), 13 Mar 2009 @ 4:55pm

    What is the 'Too Big' litmus test?

    I too like the idea of periodically assessing companies for 'Too Big To Fail-ness', but I have not been able to come up with a formula that could be neutrally and fairly applied to any company in any industry.

    Some hairy points to consider:

    1. If a company fails in isolation (other companies in the same market are not failing), does the test need to be different from when entire markets start to fail?

    2. What is the process by which companies that fail the 'Too Big' test are divided into parts that are no longer too big? Is the Board of Directors given a 90-day warning? Does the federal monopoly monitoring/compliance department dictate how the downsizing occurs?

    That being said, these are solvable problems - just very hard ones. The intuitive appeal of this concept makes me nervous though....

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