Some basic financial concepts and the facts surrounding the 2008/9 economic crisis constitute the first stage of this article.
The analysis of certain characteristics and effects of the Bailouts and of having Too Big To Fail Companies in the market is what follows.
Finally, I will go into different opinions and strategies addressing main issues that are a challenge for the regulation to be enacted in order to prevent these kind crises and deal with the legacy of the bailouts. What to do with Too Big To Fail Companies is part of that approach.
It is a side goal of this article to make the topic in question and the issues arising from it, accessible not only to those with a background in law and finance but especially to people without it.
II. Concepts: Money, Markets, Bubbles, Government Intervention and Systemic Risk
The Economist published an article about the book “Money (Art of Living)” written By Eric Lonergan. In a few lines that review provided the basic understanding of the following essential financial concepts: money, trade, markets, bubbles, and intervention in the markets by the authorities.
Those lines tell the following:
“One person’s saving represents another person’s borrowing (which is also why it is impossible for all countries to run trade surpluses). The money that people deposit in their current accounts is itself a loan to the bank, which uses it to provide credit to other households and companies.”
“TOWARDS the end of Eric Lonergan’s considered treatise on money, he recounts how Pokémon cards, a baffling craze from Japan, spontaneously turned into currency in his daughter’s school playground. Children would swap sought-after cards for food or toys. Bubble-like behaviour soon emerged. Older pupils would fleece younger, less sophisticated ones to get hold of prized cards. Children bought more cards with credit advanced by their parents. Eventually the headmaster was forced to step in and ban trading. Whatever form it takes, the use of money as a means of exchange seems to be hardwired; so too does its capacity continually to distort human behaviour.”
The concepts involved in this story are some of the basic ones involved in the 2008/9 financial crisis.
Additionally, it is important to understand that Systemic Risk –another main factor of the crisis– is a notion “generally used in reference to an event that can trigger a collapse in a certain industry or economy”.
III. Facts: The 2008/9 Systemic Crisis
On May 2008 Bear Stearns, one of the most relevant financial institutions in the market, was acquired by another major bank, JP Morgan Chase, and thus rescued from collapse.
On July and early September 2008 Freddie Mae and Fannie Mae, two government-sponsored companies in the mortgage industry, were aided by the U.S. Government to avoid failure.
On mid September 2008 the U.S. Government decided not to provide financial aid to Lehman Brothers, a major financial entity, which eventually filed for bankruptcy protection.
At that point, the Dow Jones Industrial Average Index entered into a continuous fall reaching 8,400 points by October, 2008, and 6,626.94 by March 6, 2009. During that time, many companies were struggling to survive.
Even though the stock markets began to recover after March 2009, the effects of the 2008 financial crisis can still be seen in the real economy, mainly in the unemployment rate which has constantly increased from 4.9 in January 2008 until reaching 10.2 in October 2009 (the last rate available at the time this article is written).
Because of its effects, the 2008/9 crisis has been compared to the dramatic 1930’s crisis suffered by the United States.
The 2008/9 crisis came as a result of a systemic failure, powered by huge leverage and high volume institutions operating interconnected across the world. The risk of the investments (especially the risk of granting subprime mortgages) was miscalculated –underestimated– and derivatives used for hedging were considered (or expected) to be infallible.
Major companies got into deep trouble. They could go bankrupt if the natural flow of the markets continued. However, those companies were smart enough to convince the authorities that the cost for the economy would be much higher if they went bankrupt than if they were aided by the Government.
It was clear that the society already had a price to pay because of the failure of high risk investments made by profit-seeking major companies.
What would have happened if the markets were left alone to deal with this situation? The Government and many analysts said that the consequences were impossible to calculate, but certainly included bankruptcies of major companies and therefore of their related companies and suppliers. Consequently, massive lay-offs in many industries should be expected. In addition, many of those consequences were expected to be cross-border given the degree of interconnection of these companies across the world –explained in detailed in Subsection III.A below– (e.g. AIG’s impossibility to comply with its insurance and financial agreements would cause the failure of many other companies in different countries).
Thus, the Government decided to avoid the greater harm and consequently provided billions of dollars to the distressed companies (bailouts), who became known as “Too Big To Fail Companies”. This action prevented major bankruptcies and their consequences from happening –while also created additional consequences that will be considered below–.
As will be seen in the following Sections, issues arise in regard to the accuracy of the reasoning that justified the bailouts and there are also many doubts about their costs, both in money and in new incentives for the market players.
A. A Closer Look At The Idea of Too Big To Fail Companies
The Los Angeles Times explained that, according to experts “AIG is 'too interconnected to fail'… Its interconnectedness with other companies, markets and economies is so huge that consequences of its collapse are unforeseeable”.
According to Bloomberg, “American International Group, Inc. (AIG) is a holding company which, through its subsidiaries, is engaged in… General Insurance, Life Insurance & Retirement Services, Financial Services and Asset Management. …AIG provides insurance, financial and investment products and services to both businesses and individuals in more than 130 countries and jurisdictions.”
Time Magazine stated that “AIG had become one of the world's biggest public companies, with sales of $113 billion in 2006 and 116,000 employees in 130 countries, from France to China.”
Many analysts and public officers said that the cost of AIG’s failure could be impossible to calculate and extremely high for the economy.
Time Magazine gave more detail on how interconnected AIG was and how AIG’s health was important to many companies in the world:
“AIG has become the banking industry's ATM, essentially passing along $52 billion… to an array of U.S. and foreign financial institutions — from Goldman Sachs to Switzerland's UBS. Those firms were counterparties to the credit-default swaps (CDSs) that AIG FP sold at least through 2005, and the companies were collecting on the insurance-like derivatives. AIG paid out an additional $43.7 billion to many of the same banks, which were also customers of the securities-lending operation run out of AIG's insurance division…”
“The reason AIG has cost taxpayers $170 billion — and the reason the Obama Administration seemed willing, at least at first, to hold its nose and accede to bonuses for the company's managers — is that it's too big to fail. It's an often heard phrase, but what does it really mean?… The idea is that in a global economy so tightly linked that problems in the U.S. real estate market can help bring down Icelandic banks and Asian manufacturers, AIG sits at some of the critical switch points. Its failure, so the fear goes, would set off chains of others, rattling around the globe in short order. Although some critics say the fear is overblown and the world economy could absorb the blow, no one seems particularly keen on testing that approach…”
“AIG says it has written more than 81 million life-insurance policies, with a face value of $1.9 trillion. It covers roughly 180,000 small businesses and other corporate entities, which employ approximately 106 million people. That makes AIG America's largest life and health insurer; second largest in property and casualty. Through its aircraft-leasing subsidiary, AIG owns more than 950 airline jets. Just for good measure, AIG is a huge provider of insurance to U.S. municipalities, pension funds and other public and private bodies through guaranteed investment contracts and other products that protect participants in 401(k) plans. "We have no choice but to stabilize [it] or else risk enormous impact, not just in the financial system but on the whole U.S. economy," said Fed Chairman Ben Bernanke…”
“As AIG has pointed out in its own analysis, "The extent and interconnectedness of AIG's business is far-reaching and encompasses customers across the globe ranging from governmental agencies, corporations and consumers to counterparties. A failure of AIG could create a chain reaction of enormous proportion." Among other effects, it could lead to mass redemptions of insurance policies, which would theoretically destabilize the industry; the withdrawal of $12 billion to $15 billion in U.S. consumer lending in a credit-short universe; and even damage airframe maker Boeing and jet-engine maker GE, since AIG's aircraft-leasing unit buys more jets than anyone else.”
AIG was saved by the U.S. Government since it was considered to be Too Big To Fail. On the contrary, Lehman Brothers’ was not. Many other companies shared the fate of AIG and Lehman respectively.
IV. Analysis of the Facts
The following analysis of certain important facts and effects of the 2008/9 crisis allow a better understanding of the main issues involved. Pointing out those issues is most relevant to later devise proper strategies for regulation.
A. Size of Companies: Market Forces and Regulation
As seen above, the concept of Too Big To Fail Companies is absolutely related to size. Size may be measured by many characteristics of a company such as capitalization or how interconnected it is –as seen in Subsection III.A–, among others.
The idea of economies of scale reveals that as long as a company increases the quantity it produces, it will be able to distribute fixed costs among more units of product and it will also be able to get better deals in variable costs such as purchasing raw materials, thus reducing its average cost per unit. However, businessmen know that this increase in the quantity produced (in the size of the company) cannot be limitless since, at some point, the company will go into diseconomies of scale where an increase in the quantity produced implies an increase in the average cost per unit. Therefore, every business will try to maximize its economies of scale by growing until the point in which further growing gets the company into diseconomies of scale.
However, what would a company do if it knew that growing constantly would lead, at a certain point, to both reaching diseconomies of scale and a virtual shield against failure by being big enough to be considered for government bailouts? Clearly the company would have the incentives to grow bigger each minute irrespective of the risk involved in that process since that risk will be beard by the government –not by the company–as soon as the company becomes big enough.
Besides incentives, regulation also plays a most relevant role in the size of financial entities.
Recent history shows that the Glass-Steagall Act was enacted in the U.S. in 1933 to separate the activity of commercial banks from that of the investment banks, “as an emergency response to the failure of nearly 5,000 banks during the Great Depression” of the 1930s.
However, in 1999 President Clinton repealed that Act by enacting of the “Financial Services Modernization Act”. Thus, banks could merge with brokers. This new regulation was aimed helping U.S. banks to “grow larger and better compete on the world stage.”
That was how modern regulation opened the gate to major growth of financial entities in the U.S. For sure that piece of regulation was effective and the goal was achieved.
B. The Decision Making Process: Rush and Lack of Accuracy
The 2009 economic situation is supposed to be the best possible outcome of the 2008 crisis, at least according to the rationale that if the U.S. Government (later on followed by governments around the world), did not bailout major companies that were Too Big To "let them" Fail, the 2009 economy would be much worse. However, it is still far from being what anyone would consider a “good” economic situation. Exceptionally high unemployment rates are the simplest evidence of that fact.
Taxpayers’ money was used to help Big Companies avoid their bankruptcy under the idea of avoiding a greater harm. But some other companies received no aid.
Major financial companies such as AIG and Bank of America received governmental aid, as well as important non-financial companies such as General Motors and Chrysler –it is interesting to see that both automotive companies filed for bankruptcy some months after being bailed out–.
And some other companies, like Ford, had the chance of asking for help but they said they did not need it.
Later on, important claims arose that AIG was not Too Big To Fail. Further, the authorities recognized that when approving the bailout they did not know that AIG’s executives were to be paid several millions in performance bonuses irrespective of the fact that the company was almost bankrupt.
Hundreds of billions of taxpayers’ dollars were used to bailout these Companies and still there is lack of information about the details.
The decision-making process was as chaotic as the crisis. Decisions were taken on a case-by-case basis, with no precise information and no pre-established parameters to follow, thus lacking of major coordination and accuracy.
C. Main Effects of The 2008/9 Crisis
The recession process that the economy is going through during 2009 is the major result of the financial crises. Outstanding economic meltdown includes people losing their homes since they are not able to repay their mortgages and unemployment rising dramatically.
D. Main Effects of the Bailouts
As mentioned in Section III above, the immediate effect of the bailouts was to calm down the markets and avoid the greater harm that would have been caused by the bankruptcy of the Too Big To Fail Companies.
However, when looking at the mid-term and long-term effects some concerns arise about the accuracy of the idea that a greater harm was avoided for the society as a whole. Some of those concerns are analyzed in the following Subsections.
i. Market Economy Incentives Seriously Affected
The bailouts were a strong hit against the basic principle of market economy: good businesses are to be rewarded with money from profit-seeking investors while bad businesses are to be punished with failure.
The bailouts came to show that management can make bad decisions, assuming excessive risk and leverage to collect big profits for a while, and when that scheme fails (as it happened with the subprime mortgages), they will still avoid bankruptcy by the grace of billions of dollars provided by the government in order to avoid a major harm.
Then, new incentives take over the market. They strictly say: become big enough as to make the State worry about your failure because of how interconnected your company is with other companies, and then you will avoid bankruptcy forever, making your company immortal.
That situation, which is one of the side effects of the bailouts, should sound crazy and unacceptable. However, the bailouts were destined to give us a healthier economy and markets, and we are supposed to be happy about them.
The U.S. President at the time, George W. Bush, said that he abandoned the principles of market economy "to save" market economy, when referring to the U.S. Government’s intervention in the market through the bailouts.
About this issue, Alan Greenspan said:
“One highly disturbing consequence of the ["too-big-to-fail"]-bailout problem is that I can see no way to convince markets henceforth that every large financial institution, should the occasion arise, would be subject to being bailed out with taxpayer funds. The implicit subsidy that such notions spawn insidiously impairs the efficiency of finance and the allocation of capital…”.
ii. The Monetary Costs of the Bailouts
The U.S. Government used significant funds to bailout companies (hundreds of billions of dollars). Thus the Treasury is not as wealthy as it was before.
In that sense, it is to be noted that “fearful investors have started to worry about how safe sovereign debt is”, in particular Greece and Ireland’s sovereign debt, and if governments cease to be reliable they will face a severe risk of losing the capability to calm down the markets with bailouts.
In addition, the printing of money to run bailouts could lead to inflation, which would be very difficult to supersede during a period of recession.
iii. Uncertainty on When and How Bailouts Are To Be Run
No rules existed nor exist to provide parameters on basic issues such as:
– when a company is big enough as to deserve a bailout,
– how much money is the government authorized to use for a bailout
– when is the correct time to run a bailout,
– what should the government request in exchange from the rescued companies,
– when two companies in similar situations can receive different treatment in regard to a bailout.
This list is just an example of many important points on which there are no parameters or rules to follow when it comes to a critical decision such as running a bailout of major companies in the economy.
V. The Future
The following Sections consider certain opinions and strategies to deal with issues spotted in Section IV above.
A. Will Regulation Be Enacted to Prevent This Kind of Situations From Happening Again? If That Occurs, How Should That Regulation Be Structured?
History tells that new regulation comes out of major crises. That was the case with the 1930’s crisis and the Glass-Steagall Act, Enron and the Sarbanes-Oxley Act, among others. Given the severity of the 2008/9 crisis, the same outcome should be expected.
The U.S. Treasury Secretary, Timothy Geithner, recently said that "No financial system can operate efficiently if financial institutions and investors assume that government will protect them from the consequences of failure." The term "too big to fail" must be excised from our vocabulary.”
Mervyn King, the Governor of the Bank of England, said that “Privately owned and managed institutions that are too big to fail sit oddly with a market economy.”
“No one is more sick of bailouts than I am” said Ben Bernanke, chairman of the U.S. Federal Reserve. He also stated that “As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause”.
Former Federal Reserve Chairman Alan Greenspan said “U.S. regulators should consider breaking up large financial institutions considered too big to fail”.
U.S. Senator Christopher Dodd, chairman of the Senate Banking Committee also said that Too Big To Fail must end.
IMF leader Dominique Strauss-Kahn said public will not tolerate another bailout.
The G20 also focused in the importance of enacting new regulation, as will be seen in Subsection V.B.i below.
And most importantly, taxpayers seem to accept that the bailouts were the best available solution for a major crisis but they look convinced that the money they pay to the government is not to be used for saving private companies from failure.
B. Current Proposals
During the last months some technical proposals for new regulation were made, many of them in an early stage of development while. In addition, Bills have been introduced in the U.S. Congress and some measures were adopted by the U.S. Executive Branch. The main ones are considered in the following Subsections.
i. General Analysis
Among many proposals, a most relevant one is the G20’s “Global Plan for Recovery and Reform”, which states that the Member Countries agreed to:
– strengthen financial regulation to rebuild trust;
– fund and reform their international financial institutions to overcome this crisis and prevent future ones;
– strengthening financial supervision and regulation;
– establish the much greater consistency and systematic cooperation between countries, and the framework of internationally agreed high standards, that a global financial system requires;
– promote propriety, integrity and transparency;
– guard against risk across the financial system;
– establish a new Financial Stability Board (FSB) with a strengthened mandate, as a successor to the Financial Stability Forum (FSF), including all G20 countries, FSF members, Spain, and the European Commission;
– extend regulation and oversight to all systemically important financial institutions, instruments and markets, including for the first time, systemically important hedge funds;
– take action against non-cooperative jurisdictions, including tax havens;
– regulation must prevent excessive leverage and require buffers of resources to be built up in good times;
– improve the quality, quantity, and international consistency of capital in the banking system;
– call on the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards;
– extend regulatory oversight and registration to Credit Rating Agencies to ensure they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest.
In addition other interesting proposal was published in the Financial Times, stating the following ideas:
– restore narrow banking or public utility banking;
– tax bank size;
– create effective special resolution mechanisms for all systemically important financial institutions.
ii. Bills and Executive Decisions
Some concrete actions have taken place already.
For instance, President Obama signed an executive order creating the “Financial Fraud Enforcement Task Force” to investigate and prosecute corporate fraud and deter wrongdoing. Its mission “…is not just to hold accountable those who helped bring about the last financial meltdown, but to prevent another meltdown from happening" said Eric Holder, U.S. Attorney General.
Senator Bill Sanders introduced the “Too Big To Fail, Too Big to Exist” Bill. Such proposal gives the Secretary of the Treasury 90 days since the date of enactment of the Act, to submit to Congress a list of all commercial banks, investment banks, hedge funds, and insurance companies that the Secretary believes are Too Big To Fail, and “beginning 1 year after the date of enactment of this Act, the Secretary of the Treasury shall break up entities included on the Too Big To Fail List, so that their failure would no longer cause a catastrophic effect on the United States or global economy without a taxpayer bailout”.
Such a Bill also defines Too Big To Fail Companies as any entity that has grown so large that its failure would have a catastrophic effect on the stability of either the financial system or the United States economy without substantial governmental assistance.
The Bill seems contradictory on the idea of addressing only Too Big To Fail financial entities or Too Big To Fail Companies of any industry.
Sen. Christopher Dodd, Chairman of the Senate Banking Committee, introduced a 300-page Bill, which the Wall Street Journal described by saying that “Sen. Christopher Dodd's bill on financial regulation crystallizes the government's ability to lend to private enterprises using central bank resources.”
That Bill proposes the creation of three new agencies to look after the market’s and bank’s health, among other measures.
C. Legislative Strategy: Issues to Consider
Enacting new legislation implies giving new incentives to the market. Along that path many factors should be considered. Some of them are analyzed in the following Subsections.
i. Incentives and The Aggregate Effect of New Regulation
Systemic risk, the 2008/9 systemic crisis, and the bailouts are three different situations, with different causes and effects. That distinction must be first and foremost considered when enacting new regulation to deal with the three of them since some new rules might be effective to address one or two of them but useless in regard to the other/s. For instance, attempting to reduce the size of companies might be useful in regard to the outcomes of bailouts but might not be a solution for systemic risk.
However, since what matters is the aggregate effect of the new package of rules, no new regulation should be discarded by the mere fact that is not a global solution for the whole set of problems.
Obviously, we do not want new regulation to solve some of the current problems while causing new ones.
Moreover, since the market reacts to incentives, the new regulation should be mainly addressed towards terminating the undesired incentives that contributed to the 2008/9 crisis as well as the undesired incentives arising in the markets as a result of the bailouts.
ii. How to Address Systemic Crises (Systemic Risk)
Traditional financial regulation deals with the issue of systemic risk and, thus, systemic crises.
That involves regulation on capital, liquidity, leverage, executives’ compensation and issuance of securities, as well as requirements to file reports on the companies’ activities, among other rules. Some examples are the Basel rules, the Sarbanes-Oxley Act, the Financial Services Modernization Act of 1999, and public insurance for certain kind of deposits.
Fine tuning over the existing principles will help re-address the issue of systemic risk in accordance with the new situation in the market. However, excessive increase in governmental controls of the markets and the companies to prevent failures will only bring us closer to the government being co-responsible for new systemic crises. On the contrary, drafting regulation to terminate undesired incentives and regenerate desired ones, will make the markets flow smoothly and will allow the government to remain in an objective position.
Further, it should be noted that systemic risk is essential to the markets and each time new regulation is enacted or the economy shows changes, new incentives and opportunities appear for investors and then for systemic risk to occur.
Miscalculations of risk are a key factor for crisis to happen and miscalculations of risk will always exist because of limited information, erroneous assumptions, etc., and mainly just because it is not possible to tell the future.
Although crises will continue to occur, it is important to avoid falling twice in the same mistakes.
iii. How to Address Bailouts
According to the Government, bailouts were a consequence of having Too Big To Fail Companies facing failure. However, as seen in Subsection IV.D above, bailouts calmed down the markets while also causing undesired incentives for the future.
Traditional regulation might not be enough to tackle this new issue. Instead, new alternatives have to be explored.
Bailouts like the ones seen during 2008/9 are the application of an old idea: exceptional situations require exceptional remedies. It is difficult to avoid the fact that such an idea will remain powerful irrespective of any future regulation.
It also seems strange to think that whenever the cost/benefit analysis of running a massive bailout or suffering the effects of massive major bankruptcies turns on the side of executing the rescuing plan, that analysis will be ignored –and the salvage will not be performed–.
However, some of the undesired effects that bailouts provoke can be diminished by limiting the size of companies.
The markets already know about size limits for companies in regard to antitrust matters.
The Sherman Antitrust Act, enacted in 1890, sets up the foundation and the basis for most federal antitrust regulation in the US. However, this type of regulation is spread all around the world.
The complexity of the AT&T break-up is one the arguments offered to tackle the idea that financial entities are too complex to be fragmented. However, the international ramifications of the financial entities and other major companies that might be considered Too Big To Fail, seem to draw a scenario more complex than that of AT&T, which was mainly related to the U.S. market.
Nevertheless, the idea that business operating through subsidiaries in many countries of the world cannot be broke up seems exaggerated when the same know–how used to aggregate business units around the globe should be able to be used in order to disaggregate them, especially when there is not a specific deadline for such work.
In regard to timing it is clear that new measures to avoid the already known undesired incentives are to be taken as soon as possible, but a transition period could be worth the cost.
Further, a pay-back-period approach can be useful to deal with the idea that breaking up Too Big To Fail Companies implies a cost “too high to be afforded”. Indeed, the costs of the undesired incentives existing in the market as a consequence of the bailouts –seen above in Subsection IV.D– should be paid continuously each day since the markets operate following those undesired incentives. On the other hand, the costs of breaking up Too Big To Fail companies could be distributed along a certain period of time.
Neither market theory nor Bankruptcy Law consider being “Too Big” as a characteristic that allows avoiding failure.
Additional perpetual wealth concentration could be a side-effect of a continuous bailout policy for Too Big To Fail Companies.
A size-limit on companies would increase the number of companies in the market. That leads to conclude a priori that it will be more difficult that all of them fail at the same time.
Anyway, it seems unreasonable to believe that such a measure could avoid systemic risk and, thereafter, systemic crises from happening, since systemic risk is intrinsic to the existence of markets. However, size regulation might help avoiding systemic risk related with Too Big To Fail Companies. In addition, in the eventual need of a bailout, the unfair situation of some few –not many– companies receiving aid from the government as well as the consequence of wealth concentration, could be both diluted if the bailout involve many companies and not only a few ones.
When the question of which companies should be reached by this size-limit regulation –or by any regulation addressing the Too Big To Fail Companies issue– arise, there seems to be no reason to distinguish among financial, insurance, automotive or any company from any other industry as long as they share the distinctive characteristic of being so big that allowing them to fail would cause a catastrophic effect on the stability of either the financial system or the economy. Nonetheless, certain industries can be considered within exceptions to the rule because of matters related to other policies (e.g. national security, health, etc.).
To that extent of deciding when a company is “Too Big”, it should be noted that a company is dangerously big when it is large enough to transfer its risk (cost of failure) to the government. Then, the ratio “size of the company/size of the community where it operates” should be considered for testing size.
The major drawback of breaking up companies would be related to the idea that operating in such a big scale is the only way to allow the existence of certain products and certain costs. Thus, consumers will suffer from an increase in the price of certain products and from the disappearance of other products. However, consumers might face a higher cost when the undesired incentives of bailouts exist in the markets, since those incentives corrupt the whole market system and not only the specific market of a product or service.
The previous comments in this Subsection refer to the idea of avoiding Too Big To Fail Companies in order to avoid bailouts and then the negative incentives they provide to the markets. Nonetheless, a different approach to the bailouts is possible: bailouts can be institutionalized. That would imply providing certainty about all the parameters mentioned in Section IV.D.iii. The consequences of that strategy would be totally different since they would create a different set of new incentives for the markets. However, that kind of approach will not be considered in this article.
As shown below, there is a lot to consider about the 2008/9 systemic crisis, the bailouts and the Too Big To Fail Companies. It is clear that there are still many problems to be solved.
The public opinion and the policy makers agree on the idea of enacting new regulation to avoid falling twice on the same mistakes –and failures–.
In the past, major crises caused new regulation to be enacted, and the 2008/9 systemic crisis will also generate new important regulation on the financial markets. Indeed, in special issues such as what to do with the Too Big To Fail Companies, such regulation could even go further than the financial markets and address other sectors as well.
When deciding what new regulation to enact, it is essential to understand that systemic risk, the 2008/9 systemic crisis, and the bailouts –used as a tool to solve large crises–, are three different situations, with different causes and effects. Improvements can be achieved separately with respect to the three of them and the aggregate effect of those improvements will put our society (and our markets) in a better position to face future systemic crises –since it is impossible to assure they will not occur–. Along that path it is most important to formulate regulation that solves current problems without creating new ones.
Systemic crises existed before but companies with secured immortality did not. The latter is the most challenging factor for the future regulation and leads to questioning if the bailouts used to “save” the economy actually performed as expected when they became a “free pass to immortality” for Too Big To Fail Companies. According to market reasoning, eternal companies should be the result of great and continuous business decisions through generations, and not a consequence of “great size” and government intervention.
Fine tuning over traditional financial regulation as well as exploring new ideas such as size-limits for Too Big To Fail Companies is required.
In doing so, the creation of proper incentives should be pursued as opposed to excessive government control over the markets.
There is no doubt that the opinions and strategies mentioned in this article should continue to be explored in depth, together with any other strategy available to enrich the discussion in order to achieve the best system possible.
The mystery of money – Both sides of the coin, The Economist, Nov 26, 2009, available at http://www.economist.com/research/articlesBySubject/displayStory.cfm?story_id=14959703&subjectID=348918&fsrc=nwl.
 What is the difference between systemic risk and systematic risk? at Investopedia, http://www.investopedia.com/ask/answers/09/systemic-systematic-risk.asp.
 Press Release, JPMorgan Chase & Co. (May 31, 2008), available at http://www.bearstearns.com/includes/pdfs/PressRelease_BSC_31May08.pdf.
 Michael Lewis and David Einhorn, The End of the Financial World as We Know It, N.Y. Times, January 3, 2009, availabe at http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html?pagewanted=1&_r=3.
 “The Dow Jones Industrial Average has persisted for a century precisely because it symbolizes not merely 30 blue-chip stocks, but the general health of the economy…” “Over the last hundred years, the average has moved from 40.94 on May 26, 1896 to a record of 5778 on May 22, 1996. The market's progress also tracks, even allowing for the vagaries of inflation, the well-being of society and people not only in the United States but throughout the world.” Editorial, Review & Outlook: Mr. Dow's Barometer, Wall Street Journal, May 28, 1996, available at http://www.djaverages.com/?view=industrial&page=editorial.
 Graeme Wearden, David Teather, and Jill Treanor, Banking crisis: Lehman Brothers files for bankruptcy protection, The Guardian, Sept. 15, 2009, available at http://www.guardian.co.uk/business/2008/sep/15/lehmanbrothers.creditcrunch. See also Lehman Brothers Files For Bankruptcy, Scrambles to Sell Key Business, CNBC, Sept. 15, 2008, available at http://www.cnbc.com/id/26708143.
 Google Finance, supra note 6.
 U.S. Bureau of Labor Statistics, Labor Force Statistics from the Current Population Survey, available at http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?request_action=wh&graph_name=LN_cpsbref3.
 Gerard Baker, Banking crisis: Spectre of 1930s haunts America as financial turmoil worsens, October 1, 2008, available at http://www.timesonline.co.uk/tol/news/world/us_and_americas/article4856477.ece. See also Alex Markels, Comparing Today's Housing Crisis With the 1930s, February 28, 2008, available at http://www.usnews.com/money/personal-finance/real-estate/articles/2008/02/28/comparing-todays-housing-crisis-with-the-1930s.html. See also John Waggoner, Is today's economic crisis another Great Depression?, April 4, 2008, available at http://www.usatoday.com/money/economy/2008-11-03-economy-depression-recession_N.htm.
 Press release, G20, The Global Plan for Recovery and Reform (April 2, 2009), available at http://www.g20.org/Documents/final-communique.pdf. See also Press release, G20, Declaration: Summit On Financial Markets and the World Economy (November 15, 2008), available at http://www.g20.org/Documents/g20_summit_declaration.pdf. See also Press release, U.S. Department of the Treasury, Treasury Outlines Framework For Regulatory Reform – Provides new Rules of the Road, focuses first on containing systemic risk (March 26, 2009), available at http://www.treas.gov/press/releases/tg72.htm.
 Federal Reserve Bank of St. Louis, The Financial Crisis – A Timeline of Events and Policy Actions, http://timeline.stlouisfed.org/index.cfm?p=timeline (last visited Nov. 29, 2009). See also Steve Eder and Claudia Parsons, TIMELINE: Action on pay comes after a year of bail outs, Reuters, Oct 22, 2009, available at http://www.reuters.com/article/ousivMolt/idUSTRE59L5UF20091022. See also Timeline: U.S. Government bail-outs, BBC News, March 23, 2009, available at http://news.bbc.co.uk/2/hi/business/7748874.stm. See also A bailout timeline, Times Online, September 18, 2008, available at http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4780330.ece.
 Lehman Brothers’ failure generated images of several of its employees crying in the street while leaving their offices unemployed as a consequence of the company’s failure. The idea of replication of this scenario in other institutions that were in jeopardy came across every mind. Many companies were in deep trouble at that time (at least the major ones that were later on saved by the Government) and no solution was expected since the figures were negative and showed no mercy. Massive sales of stock were made by investors desperately running to quality, i.e. moving their funds to U.S. Government backed assets, since those are believed to be the most secure investment possible. That made indexes fall as showed above in regard to the Dow Jones. Everything was panic about the economy and rumors in the financial markets expecting the falling of major companies. That idea was in every mind while TV screens showed important executives had last minute meetings with authorities trying to avoid bankruptcies as surgeons work in the emergency room to save lives.
 This situation occurred in the U.S. as well as in many other countries.
 It is important to note that the unfairness of this situation relies both in the idea that everyone in the society had to pay for bad profit-seeking decisions made by a small group of “sophisticated” people, and in the idea that such was a cross-border consequence.
 Among other decisions, the Treasury Announced the TARP (Troubled Asset Relief Program) Capital Purchase Program Description on October 14, 2008. Press release, U.S. Department of the Treasury, Treasury Announces TARP Capital Purchase Program Description (October 14, 2008), available at http://www.treas.gov/press/releases/hp1207.htm.
 A more accurate name would have been Too Big To “Let Them” Fail Companies. The name Too Big To Fail companies gives the idea that they will never fail and we already know that they would have failed if the Government decided not to aid them (as it happened with Lehman Brothers). On the other hand, the Too Big To “Let Them” Fail gives a more clear idea of what really occurred: the companies were about to fail, but a third party, the Government, was the one who could not “Let Them” fail because of the cost of such course of action.
 Nevertheless, companies like Chrysler and General Motors filed for bankruptcy even after receiving substantial aid from the government. See Chris Isidore, GM bankruptcy: End of an era, CNNMoney.com, June 2, 2009, available at http://money.cnn.com/2009/06/01/news/companies/gm_bankruptcy/index.htm. See also Asociated Press, Chrysler files for bankruptcy protection, MSNBC, April 30, 2009, available at http://www.msnbc.msn.com/id/30489906/.
 Jim Puzzanghera, Why the world's biggest insurance company is still getting taxpayer funds, Los Angeles Times, March 9, 2009, available at http://articles.latimes.com/2009/mar/09/business/fi-nofail9.
 American International Group, Inc. Information, http://www.reuters.com/finance/stocks/companyProfile?symbol=AIG.N (last visited Nov. 29, 2009).
 Bill Saporito, How AIG Became Too Big to Fail, Time Magazine, Mar. 19, 2009, available at http://www.time.com/time/business/article/0,8599,1886275,00.html.
 Mark Felsenthal and Theodore d'Afflisio, Fed's Kohn: AIG too big to fail, Reuters, Mar 5, 2009, available at http://www.reuters.com/article/businessNews/idUSTRE52446C20090305.
 Saporito, supra note 21.
 Video AIG Too Big to Fail?, Sept. 16, 2009, http://online.wsj.com/video/aig-too-big-to-fail/EB43660E-F0EC-4FD1-8A2E-86C5E3661C62.html (last visited Nov. 1, 2009).
 A detailed timeline of the crisis is provided by the Federal Reserve Bank of St. Louis. See supra note 12.
 Economies of scale, definition at Investopedia, http://www.investopedia.com/terms/e/economiesofscale.asp (last visited Nov. 29, 2009).
 Diseconomies of scale, definition at Investopedia, http://www.investopedia.com/terms/d/diseconomiesofscale.asp (last visited Nov. 29, 2009).
 Both effects may differ in time, but are the result of a growing strategy different from the traditional one, which would be growing to maximize economies of scale and stop growing when going into diseconomies of scale.
 "The too-big-to-fail problem has been central to the degeneration and corruption of the financial system in the north Atlantic region over the past two decades. The too-big-to-fail category is sometimes extended to become the too-interconnected-to-fail, too-complex-to-fail and too-international-to-fail problem, but the real issue is size.” Willem Buiter, Too big to fail, Financial Times, June 26 2009, available at http://www.ft.com/cms/s/0/bd93a1e6-61e9-11de-9e03-00144feabdc0.html?nclick_check=1. See also Eric Dash, If It’s Too Big to Fail, Is It Too Big to Exist?, N.Y. Times, June 20, 2009, available at http://www.nytimes.com/2009/06/21/weekinreview/21dash.html.
 Glass-Steagall Act (1933), N.Y. Times, November 29, 2009, available at http://topics.nytimes.com/topics/reference/timestopics/subjects/g/glass_steagall_act_1933/index.html.
 Glass-Steagall Act description at Investopedia, http://www.investopedia.com/terms/g/glass_steagall_act.asp (last visited Nov. 29, 2009).
 Cyrus Sanati, 10 Years Later Looking At Repeal Of Glass-Steagall, N.Y. Times, Nov. 12, 2009, available at http://dealbook.blogs.nytimes.com/2009/11/12/10-years-later-looking-at-repeal-of-glass-steagall/.
 Bail-out poker, The Economist, Nov 26th 2009, available at http://www.economist.com/businessfinance/displaystory.cfm?story_id=14973029.
 See supra note 9.
 AIG is the largest insurance company in the world. Jim Puzzanghera, Why the world's biggest insurance company is still getting taxpayer funds, Los Angeles Times, March 9, 2009, available at http://articles.latimes.com/2009/mar/09/business/fi-nofail9.
 Patrick Rucker and Jonathan Stempel, Bank of America gets big government bailout, Reuters, Jan 16, 2009, available at http://www.reuters.com/article/topNews/idUSTRE50F1Q720090116.
 See supra note 18.
 Robin Sidel, David Enrich and Dan Fitzpatrick, WaMu Is Seized, Sold Off to J.P. Morgan, In Largest Failure in U.S. Banking History, Wall Street Journal, September 26, 2009, available at http://online.wsj.com/article/SB122238415586576687.html.
 A detailed timeline of the crisis is provided by the Federal Reserve Bank of St. Louis, where it is possible to see the evolution of this complicated time. See supra note 12.
 Reuters, Ford does not need bailout loans, CEO says, France24, January 25, 2009, available at http://www.france24.com/en/20090125-ford-says-it-does-not-need-bailout-loans-auto-industry-crisis. See also Ford Executive: Automaker Doesn't Need Bailout, npr, Nov. 29, 2009, available at http://www.npr.org/templates/story/story.php?storyId=102665356. See also Ford: We Don't Need a Bailout, But…, U.S. News, Dec. 3, 2008, available at http://usnews.rankingsandreviews.com/cars-trucks/daily-news/081203-Ford-We-Don-t-Need-a-Bailout-But-/.
 “Since last September, the government's case for bailing out AIG has rested on the notion that the company was too big to fail. If AIG hadn't been rescued, the argument goes, its credit default swap (CDS) obligations would have caused huge losses to its counterparties—and thus provoked a financial collapse. Last week's news that this was not in fact the motive for AIG's rescue has implications that go well beyond the Obama administration's efforts to regulate CDSs and other derivatives. It's one more example that the administration may be using the financial crisis as a pretext to extend Washington's control of the financial sector. The truth about the credit default swaps came out last week in a report by TARP Special Inspector General Neil Barofsky. It says that Treasury Secretary Tim Geithner, then president of the New York Federal Reserve Bank, did not believe that the financial condition of AIG's credit default swap counterparties was "a relevant factor" in the decision to bail out the company. This contradicts the conventional assumption, never denied by the Federal Reserve or the Treasury, that AIG's failure would have had a devastating effect. So why did the government rescue AIG? This has never been clear.” Peter J. Wallison, Lack of Candor and the AIG Bailout, Wall Street Journal, Nov. 27, 2009, available at http://online.wsj.com/article/SB10001424052748704779704574551861399508826.html?mod=googlenews_wsj.
 Saporito, supra note 21.
 Brady Dennis, Lawmakers Rebuke Treasury Department Over TARP Spending, Washington Post, July 21, 2009, available at http://www.washingtonpost.com/wp-dyn/content/article/2009/07/21/AR2009072103561.html. See also Fred Lucas, $700-Billion Bailout Lacks Transparency, Accountability, Congressional Panel Says, CNSNews, January 14, 2009, available at http://www.cnsnews.com/news/article/41922.
 "I've abandoned free-market principles to save the free-market system… to make sure the economy doesn't collapse." AFP, Bush says sacrificed free-market principles to save economy, Google Hosted News, http://www.google.com/hostednews/afp/article/ALeqM5jyyKrPjYt7VhpS8G8DrRkr18B0hA (last visited Nov. 29, 2009).
 Peter Baker, Bush Returns to Public Spotlight, N.Y. Times, Nov. 12, 2009, available at http://thecaucus.blogs.nytimes.com/2009/11/12/bush-returns-to-public-spotlight/?scp=2&sq=bush%20abandon%20market%20economy&st=Search.
 Alan Greenspan, Remarks on “Systemic Risk”, American Enterprise Institute, June 3, 2009, available at http://www.aei.org/docLib/Greenspan%20-%20Speech%20-final.pdf.
 David D. Kirkpatrick and Charlie Savage, Firms That Got Bailout Money Keep Lobbying, N.Y. Times, January 23, 2009, available at http://www.nytimes.com/2009/01/24/business/24lobby.html.
 Editorial, Dubai reveals the fragility of finance, Financial Times, Nov. 27, 2009, available at http://www.ft.com/cms/s/0/308e52b0-db8c-11de-9424-00144feabdc0.html.
 “Not only does the “too big to fail” paradigm provide unequal advantage to big business, but when bailouts become “necessary,” it can be employed unevenly among the big fish as well; allowing some to survive while others are left to fail. An example of this was demonstrated when former Treasury Secretary Hank Paulson approved Troubled Asset Relief Program (TARP) funds for AIG; Goldman Sachs biggest debtor; but not Lehman Brothers or Bear Stearns; Goldman’s two major competitors.” Stan Transue, Too big to fail: a cover for corporate welfare, Examiner, Nov. 27, 2009, available at http://www.examiner.com/x-29000-Habersham-County-Conservative-Examiner~y2009m11d27-Too-big-to-fail-a-cover-for-corporate-welfare. Under this line of reasoning at least there is room to ask if the bailouts do not violate the guarantee of equal treatment under the law as established by the Fourteenth Ammendment.
 Even the Ponzi Scheme run by B. Madoff caused new regulation to be enacted. See “The Securities and Exchange Commission Post-Madoff Reforms” available at http://www.sec.gov/spotlight/secpostmadoffreforms.htm.
 The Chairman and chief executive of J.P. Morgan Chase wrote for the Washington Post that “Our company, J.P. Morgan Chase, employs more than 220,000 people, serves well over 100 million customers, lends hundreds of millions of dollars each day and has operations in nearly 100 countries. And if some unforeseen circumstance should put this firm at risk of collapse, I believe we should be allowed to fail.” Jamie Dimon, No more 'too big to fail', Washington Post, Nov. 13, 2009, available at http://www.washingtonpost.com/wp-dyn/content/article/2009/11/12/AR2009111209924.html.
 Christian Leuz, We Need Smarter Regulation, Not More, Forbes, Sept. 2, 2009, available at http://www.forbes.com/2009/02/09/dynamic-financial-regulation-opinions-contributors_0209_christian_leuz.html.
 Dimon, supra note 52.
 Edmund. L. Andrews, Bernanke, in Nod to Critics, Suggests Board of Regulators, N.Y. Times, Oct. 1, 2009, available at http://www.nytimes.com/2009/10/02/business/economy/02regulate.html.
 Ben Bernanke, The right reform for the Fed, Washington Post, Nov. 29, 2009, available at http://www.washingtonpost.com/wp-dyn/content/article/2009/11/27/AR2009112702322.html.
 Michael McKee and Scott Lanman, Greenspan Says U.S. Should Consider Breaking Up Large Banks, Bloomberg, Oct. 15, 2009, available at http://www.bloomberg.com/apps/news?pid=20601087&sid=aJ8HPmNUfchg.
 IMF leader Dominique Strauss-Kahn says public will not tolerate another bailout, The Times, November 24, 2009, availlable at http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6928870.ece.
 Paul Davidson, 78% of Americans want a bailout but most want significant changes, USA Today, Sept. 28, 2008, available at http://www.usatoday.com/money/economy/2008-09-25-poll-results_N.htm. See also Poll: No more bailout for GM, Chrysler, United Press International Inc, Feb. 26, 2009, available at http://www.upi.com/Top_News/2009/02/26/Poll-No-more-bailout-for-GM-Chrysler/UPI-46041235701427/.
 G20, supra note 11.
 “Washington, D.C., Sept. 17, 2009 — The Securities and Exchange Commission today voted unanimously to take several rulemaking actions to bolster oversight of credit ratings agencies by enhancing disclosure and improving the quality of credit ratings”. Press release, Securities and Exchange Comission, SEC Votes on Measures to Further Strengthen Oversight of Credit Rating Agencies (Sept. 17, 2009), available at http://www.sec.gov/news/press/2009/2009-200.htm.
 Willem Buiter, Too big to fail is too big, Financial Times, June 24, 2009, available at http://blogs.ft.com/maverecon/2009/06/too-big-to-fail-is-too-big/.
 Eric K. Clemons, How to Make U.S. Financial Regulation Work Again, Business Week, April 6, 2009, available at http://www.businessweek.com/investor/content/apr2009/pi2009043_273663.htm.
 Lee Jones, Turner calls for new Glass-Steagall approach, Money Marketing, Nov. 2, 2009, available at http://www.moneymarketing.co.uk/regulation/news/turner-calls-for-new-glass-steagall-approach/1001475.article.
 Robert Pozen, Stop Pining for Glass-Steagall, Forbes, Sept. 16, 2009, available at http://www.forbes.com/forbes/2009/1005/opinions-glass-steagall-on-my-mind.html. See also Craig Torres and Michael McKee, Fed’s Tarullo Says Dividing Banks May Not Curb Too Big to Fail, Bloomberg, Nov. 10, 2009, available at http://www.bloomberg.com/apps/news?pid=20601103&sid=asfrJ4dAXcgM.
 Joanna Chung in New York, New task force to step up fight against fraud, Nov. 18, 2009, available at http://www.ft.com/cms/s/0/c8226370-d3e2-11de-8caf-00144feabdc0.html.
 Too Big To Fail To Big To Exist Bill, available at http://sanders.senate.gov/files/AYO09C99.pdf. See also Senator Sanders Video available at http://sanders.senate.gov/newsroom/media/view/?id=ae60bcf0-125c-4306-b07c-d875fe48b1f5 (last visited Nov. 29, 2009).
 Joseph R. Mason, Bailout Nation, Wall Street Journal, Nov. 24, 2009, available at http://online.wsj.com/article/SB10001424052748704611404574556331427394554.html?mod=googlenews_wsj.
 Binyamin Appelbaum and Brady Dennis, Dodd's overhaul goes well beyond other plans, Washington Post, Nov. 11, 2009, available at http://www.washingtonpost.com/wp-dyn/content/article/2009/11/09/AR2009110901935.html.
 As it may have been the case of the bailouts.
 How the Dubai crisis unfolded, Financial Times, Nov. 27, 2009, available at http://www.ft.com/cms/s/0/d9c5ef76-db84-11de-9424-00144feabdc0.html. See also Dubai reveals the fragility of finance, Financial Times, Nov. 27, 2009, available at http://www.ft.com/cms/s/0/308e52b0-db8c-11de-9424-00144feabdc0.html.
 See Section III of this Article.
 Nouriel Roubini, 'Too Big To Fail' Revisited, Forbes, May 11, 2009, available at http://www.forbes.com/2009/11/04/too-big-to-fail-volcker-greenspan-mervyn-king-opinions-columnists-nouriel-roubini.html.
 Patrick Thibodeau, History shows Microsoft dilemma is nothing new, CNN, May 18, 1998, available at http://www.cnn.com/TECH/computing/9805/18/monopoly/index.html.
 Andrew Beattie, Why is the 1982 AT&T breakup considered one of the most successful spinoffs in history?, Investopedia, available at http://www.investopedia.com/ask/answers/09/att-breakup-spinoff.asp?viewed=1.
 Discussions exist about the effectiveness of the break ups on antitrust matter, even though the AT&T case seems to be pointed out as a great success. Rachel Konrad, Is a breakup an effective solution?, CNET News, April 28, 2000, available at http://news.cnet.com/Is-a-breakup-an-effective-solution/2100-1001_3-239872.html.
 However, certain analysis of systemic risk can be sustained to say that when the “black swan” phenomenon (the unexpected and underestimated event) occurs, when the systemic risk materializes, is exactly because everyone underestimated it, and the increase in the number of companies would not be an insurance against that situation since the new companies in the market would fail to properly measure the risk as the previously existing ones did.
 See Section V.A of this article.