"Too big to fail!" Are these new words or have I been unaware? In any case, these words were new to my ears. We've heard conservatives talk about the many dangers of big "ga'ment" and we've heard liberals complain about big "bid'ness." But it wasn't failure either was talking about; it was about the growing size and negative impact and influence due to size.
So is "too big to fail" a new concept? In the past, we've thought of "too big" as becoming inefficient: too many people performing bureaucratic maneuvers necessary because of their size rather than just to get things done that needed doing. So "too big to fail" bamboozled me upon first hearing it.
My compatriots couldn't get their thoughts around it, either -- or, at least they found it too difficult to discuss meaningfully. Experts in the field seemed the same way. Joseph Cassano, AIG financial head, said in August 2007: "It is hard for us, without becoming flippant, to even see a scenario within any realm of reason that would see us losing one dollar in any of these [credit default swap] transactions." It became obvious that Wall Street had disastrously overestimated its intelligence when it comes to the obscurity of derivatives. George Soros, one of the financiers who should know, said: "We don't understand how derivatives work?" So how were we financial novices, big or small, to know?
How can an organization become too big to fail? While we were still wondering about that conundrum, the powers that be were proceeding to arrange payment of large sums of taxpayer money to organizations that had become too big to fail. That puzzled us even more. To prevent failure, we needed to help them buy their way out in spite of size.
To further complicate the issue, some resultant changes occurred. Banks were buying other banks: JP Morgan bought Bear Stearns, Wells Fargo bought Wachovia and Bank of America bought Merrill Lynch.
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My opinion, based on limited intelligence and third- and fourth-hand information, is that maybe banks and investment firms weren't too big to fail but rather too willing to gamble.
Bernie Hughes of Superior is professor emeritus of educational administration at the University of Wisconsin-Superior.
