Wednesday, April 8, 2009

Too Big To Fail

One of the more interesting phrases coined of late is the term “too big to fail.” Use of the term gained traction following the troubles of large U.S. banks and American International Group. The concept that some companies are just so important to the U.S. and international financial services systems that they can’t be allowed to sink is one I get.
What is a little more difficult to grasp is just how this newly minted phrase will morph in discussions in Congress over how financial services should be regulated. One of the comments that I found particularly interesting and just a tad disturbing was made last month during a hearing on systemic risk held by the House Capital Markets, Insurance and Government Sponsored Enterprises financial services subcommittee. Now why should a comment made a month ago still be of interest? Well, because it was so counter to the entrepreneurial spirit of this country.
One of the suggestions made by a panel member was that the “too big to fail” issue could be diffused by requiring spin offs of pieces of a company when they reach a quarter trillion in size. Perhaps it was just a comment made in a concerned moment. Many of the comments being made in Washington may be just balm for financially wounded constituents.
But what if comments or more importantly, true beliefs in such views show up in the call for a systemic risk regulator or in an optional federal charter bill. Given the current mood, it could very well happen. That would put an interesting spin on OFC.
And, how do you define “big” and “too big”? I’m looking at the Empire State Building right now and it looks big to me. But for King Kong, maybe it’s not so big. How do you measure big? By admitted assets, premium, or by market cap? Should it be some combination of the three?
It also begs the question of what is small. How about smaller insurance companies? If you’re a policyholder with a troubled company, your carrier is too big to fail regardless of its size. And, even with the safety net of the guaranty funds, your policy is too big to be part of a seized company regardless of how modest a contract it may seem to others.

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