Tuesday, February 10, 2009

Too Big To Fail? Make Them Smaller!

There are too many companies in our country which are "too big to fail". Practically all nationwide banks, now extinct big investment banks and some industrial corporations are in this category. Lehman Brothers collapse proved that for investment banks, and federal bailout of GM (GM) and Chrysler was done on the premise that bankruptcy of either of them can bring huge number of companies down. The other companies too big to fail are Boeing (BA) and General Electric(GE). Expect a bailout if something goes wrong there.

Is it possible to reduce number of companies too big to fail? Most of companies in this category are banks. What happens when small or even medium bank fails? It's quietly taken over by FDIC. So maybe increase banking regulation just a little bit and set an upper limit to the size of the banks so they are never too big to fail and always small enough to be taken over by FDIC? International operations are important here, so these limits shouldn't be set on international operations of the banks. And to make level playing field, restrict US operations of big foreign banks to the same level. No need to set this level in absolute numbers, percentage of US banking industry would do nicely.

Industrial companies are different. In some cases scale matters a lot. In aviation it became absolute, with only two companies in the world making big passenger planes (Boeing and Airbus). In other industries size is not that important. Looks like autos are up to a big restructuring, and I already wrote that GM must die, maybe with help of government here. GE should not exist in its current shape, time of conglomerates ended in 1950s.

I am usually not a big fan of regulation. In most cases it's wrong. But in some cases we need regulation and in some cases we need to increase it, otherwise we have situation like now, when the only solution is nationalization of losses, profits remaining private. Let's reduce losses.

Full disclosure: at the time of publication author did not have any positions in above mentioned companies. Positions can change any time.

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