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News Too Big To Fail

  1. Mar 15, 2009 #1

    j93

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    Does anyone know if any economist are studying the implications of this concept? I have never heard of economic theories with assumptions that there are multiple businesses that cannot faile due to their size. There are also questions about the implications is has for the actions of CEO's of these companies obviously this would encourage them to take higher risks. Effectively this concept also creates more companies in this category by offering bailout money to large companies which they can use to takeover smaller companies therefore creating more companies that are "too big to fail".
     
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  3. Mar 15, 2009 #2

    turbo

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    The phrase is inaccurate. The philosophy is that some business are too big to be allowed to fail, implying that corporate-welfare or some other intervention must be undertaken to prop them up when their managers make bad decisions.
     
  4. Mar 15, 2009 #3

    j93

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    Exactly but the government never takes it over ala Fannie Mae so the phrase is effectively accurate unless the government fails because its pretty much the same company only leeching for survival off the government but once its healthy its back to being owned/run by the same individuals.
     
  5. Mar 15, 2009 #4

    Astronuc

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    Staff: Mentor

    The US government (Treasury & Federal Reserve) actions have been somewhat inconsistent.

    Fannie Mae and Freddie Mac were put into Conservatorship, while AIG received captial (cash) injection - all considered too big to be allowed to fail. The concern was with there collapse, the entire global financial system would collapse - as opposed to a partial collapse.

    Bear Stearns and Lehman Brothers were allowed to fail - and the consequences were considered more limited (i.e. not as big an impact if AIG failed).

    Apparently the current situation is unprecedented, although there are similarities to the Great Depression and other recessions.
     
  6. Mar 15, 2009 #5

    j93

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    I guess the title is not descriptive enough. I meant companies like AIG or Citibank who just receive money because they are considered "too big too fail" but are not taken over. These are the type of companies of companies I was referring to in OP and those that I believe that are the most interesting because they are like regular corporations but with a special property that they are not allowed to fail but are not taken over.
     
  7. Mar 15, 2009 #6

    Astronuc

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    AIG and Citigroup are regular corporations, as are other financial companies, e.g. Bank of America, JP Morgan Chase, . . . .

    Fannie Mae and Freddi Mac are Government Service Enterprises, which although not guaranteed by the US government, nevertheless were taken into Conservatorship, which effectively means the US government is supporting (guaranteeing) them.

    One would have to read the minds of Paulson, Bernanke, Geithner et al to understand the reasoning behind the actions taken with respect to taking over some companies and not others, or bailing out AIG and not Bear Stearns or Lehman Brothers. In recent revelations, it seems AIG has greater liabilities (obligations/ losses) than first understood.

    It's still unclear with respect to current writedowns or losses. Citigroup CEO Vikram Pandit released an internal memo - Text of Citigroup memo sent by CEO Pandit - that was leaked to the public. It had the effect of reversing the fall of the Citigroups shares and the Dow. On the other hand, it did not discuss other potential losses, nor the fact that the company has received billions of subsidies (capitalization).
    http://marketplace.publicradio.org/display/web/2009/03/10/pm_citigroup/ [Broken]
    http://biz.yahoo.com/ap/090315/wall_street_week_ahead.html
     
    Last edited by a moderator: May 4, 2017
  8. Mar 15, 2009 #7

    j93

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    Youre right they were originally inconsistent but it seems like nobody ever mentions of taking any companies into a government conservatorship. I am wondering what that would mean for the basis of capitalism the idea that you can have companies that fall into trouble they are always given a lifeline based on their size.
     
  9. Mar 16, 2009 #8

    Astronuc

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    Here is some thinking about AIG and the potential consequences of its failure, or the failure to intervene and prevent its failure.

    As A.I.G. Lists Firms It Paid, Anger Boils Over
    http://dealbook.blogs.nytimes.com/2009/03/16/as-aig-lists-firms-it-paid-anger-boils-over/
    So far $170 billion has been put into AIG, and a lot of that has been paid to companies like Goldman Sachs, Société Générale, Deutsche Bank, Barclays, Merrill Lynch, Bank of America, . . . . Some of the companies, ones based in US, have also received injections of capital from the US Treasury.

    AIG report on payouts:
    http://graphics8.nytimes.com/packag...bailout-disclosed-counterparties/original.pdf

    Truly a global economy suffering from a global mess.
     
    Last edited: Mar 16, 2009
  10. Mar 18, 2009 #9

    Astronuc

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    Staff: Mentor

    AIG chairman inherits retention bonus mess
    http://news.yahoo.com/s/ap/20090318/ap_on_bi_ge/aig_outrage [Broken]
    The 'bailout' to AIG (and other institutions) is supposed to be paid back to the Treasury. In theory, Treasury will then retire debt. :uhh:


    AIG Firestorm Raises Alarm For Other Firms
    http://www.washingtonpost.com/wp-dyn/content/article/2009/03/17/AR2009031703565.html
    Yet - if the government hadn't intervened, it appears that AIG would have failed, and many of its customer, the counterparties in the Credit Default Swaps (CDSs) would have had additional losses on top of the mortgage and securities losses. Left to itself, the world financial markets would have collapsed, and likely the Great Recession would have become another Great Depression.
     
    Last edited by a moderator: May 4, 2017
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