http://www.cogmap.com/blog/2008/09/24/too-big-to-fail/ The Official Blog of Cogmap, the Org Chart Wiki Sat, 06 Mar 2010 17:30:14 +0000 http://wordpress.org/?v=2.9.2 hourly 1 http://www.cogmap.com/blog/2008/09/24/too-big-to-fail/comment-page-1/#comment-1587 Sean Carmody Sun, 28 Sep 2008 23:52:34 +0000 http://www.cogmap.com/blog/?p=217#comment-1587 It's give a simple rule as to what makes a company too big to fail, but it's certainly not simple market capitalisation. The key consideration is whether the failure would create systemic risk for the country as a whole. As you say, if there is a risk that a company could become too big to fail, there should be regulation to stop it. It has long been recognized that banks can pose this risk as the payment system is the oil for the machine of commerce. THis is why banks are heavily regulated (although perhaps not heavily enough!) and a scheme such as the FDIC is part of this framework. It's only recently that people have started to realise that the interconnectedness of global derivatives markets mean that investment banks can also pose systemic risk, hence the bailout of Bear Stearns. It seems that Warren Buffett had a point some years ago when he described derivatives as "weapons of mass destruction" (although people scoffed at the time). You can rest assured that once a new president is elected, the process of enacting new legislation to further regulate investment banks (not that there are many left!) and other financial institutions will not be far off. It’s give a simple rule as to what makes a company too big to fail, but it’s certainly not simple market capitalisation. The key consideration is whether the failure would create systemic risk for the country as a whole. As you say, if there is a risk that a company could become too big to fail, there should be regulation to stop it. It has long been recognized that banks can pose this risk as the payment system is the oil for the machine of commerce. THis is why banks are heavily regulated (although perhaps not heavily enough!) and a scheme such as the FDIC is part of this framework. It’s only recently that people have started to realise that the interconnectedness of global derivatives markets mean that investment banks can also pose systemic risk, hence the bailout of Bear Stearns. It seems that Warren Buffett had a point some years ago when he described derivatives as “weapons of mass destruction” (although people scoffed at the time). You can rest assured that once a new president is elected, the process of enacting new legislation to further regulate investment banks (not that there are many left!) and other financial institutions will not be far off.

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