Too Big to Fail!

Over the past year or so you’ve probably heard the term “too big to fail”. The term implies exactly what it says; these companies are so large and interconnected to other services in our economy that the failure of any one of them would have significant implications on the entire financial systems. In fact some people believe that any one of these corporations could destroy our economic foundation as a whole. For this reason, the phrase became the backbone of government bailouts that took billions upon billions out of a heavily indebted treasury to support these businesses.

Though these bailouts were admittedly successful and will for the most part be repaid over the years, they placed immense stress on our fiscal system and often came very close to not working. And hence recent legislation, specifically the Dodd-Frank bill. Under the law, companies titled too big to fail would have to not only create a safety blanket of reserve capital but also create a sort of will that would detail their shut down process in case. Furthermore, all of this will be subject to extra scrutiny by regulators.

I personally completely agree with this proposition as it’s the first concrete and system-wide step in the right direction. Though many of us saw the negative consequences of the recession, little has been done in the way of preventing its recurrence on a large scale. For reorganization beyond the responsibility these times have instilled in us individually, I think legislation such as this is going to prove absolutely imperative.

So now the question for Dodd-Frank is who would fall under the category of too big to fail? At this point, any bank holding over $50 billion in assets immediately makes the cut. But other companies aren’t going to be nearly as easy to judge nor will deciding how many companies will be on the list going to be easy. Right now the primary contenders are insurers like AIG, hedge funds, asset managers and extremely large corporations. As the decision process continues however, lobbying persists as companies try to get themselves off the list. I find this absolutely terrible as I’m sure many of you do. For now we can simply hope that necessary reform takes place unaffected by money or power.