You'll only see that terminology used by the press.

There's no such thing as "too big to fail."

AIG certainly wasn't "too big to fail." It could still fail.

All that has happened so far is that it's borrowed $85 billion from a private bank, promising to pay it back in 2 years at 11% interest.

It might not pay it back. In which case, it will become the property of the bank (the bank will exercise the warrants to purchase the stock that the company put up as collateral.)

The same exact process would happen if you didn't pay for your home loan. The bank would foreclose your house.

If AIG doesn't pay back the loan to the Fed, the Fed will foreclose on it and take over ownership, and then sell AIG's parts off to get its money back.

In that sense, AIG will have failed. So, if that happens (and there's no indication that it will, but if it did) then AIG would not have been "too big to fail."

The Fed is the bank of last resort, but it's a bank just like your bank down the street.

Re Comment 1

"Just like your bank down the street" is a bit strong. The Fed is a statutory creation with specific legal obligations of supervision and, by law and practice, bears responsibility for promoting stable prices and employment and overall systemic financial stability.

Nor is it a for-profit venture like the bank down the street. Any annual profits it generates, mainly through its Treasury security trading operations, after paying dividends to its member banks intended to compensate for interest-free reserves they hold with the central bank, are allocated to the United States budget.

Losses the Fed suffers are not absorbed solely by it or the member banks who own its capital stock. There is a public cost of this method of central banking.

So the decision to lend to AIG is not just like a decision of the bank down the street to do so. It may not exactly be a government bail out. But it is not exclusively a private arrangement.

Along the same lines, I'd be interested to hear the Conglomerate perspective on this whole notion of "moral hazard". Does the safety net of government bailouts really eliminate moral hazard? Would moral hazard really exert much pressure anyhow? I don't get the sense that the leaders of Enron, LTCM, Lehman, Merrill, AIG, et al would behave much differently either way.

I think the 'too big too fail' line refers more to AIG (and similar entities) being 'too big to be allowed to fail' as the consequences of failure (and the resulting 'fire sale' of assets) being so great.

If the Fed was forced to foreclose on AIG then I agree, AIG would have failed, but hopefully the assets could be sold off in a more controlled fashion rather than in the 'fire sale' fashion that could have been expected otherwise.

The Fed's governors ought to consult the extensive literature about "policy lending" by the state-owned banks in China. Bad idea there, and likewise here.

I'm a little confused here. I'd always thought the expression "too big to fail" meant just that - so big that it would be impossible to fail. In this context though, wouldn't the correct phraseology be "too big to be allowed to fail"?

Good insight, I've been thinking much the same myself. The outright socialistic federal government seizure of a company in order to save it seems to be about the worst possible and most interventionist outcome. Better to take a sort-of antitrust approach of ruthlessly enforcing a market of many smaller competing players in any niche where failure can bring the economy to its knees.

Another way of expressing it is "too big to have to compete." It has struck me before how many CEOS leave huge companies and then run as Democrats, which suggests that the view that Republicans are for big business and Democrats for the working man no longer holds water. Rather, big government has become a means for big business to gain competitive advantages through lobbying politicians and bureaucrats that are not available to smaller enterprises.

Too big to fail is also too big to be trusted with that kind of power.

The ultimate irony of 'too big' is that our country has been practically built from the ground up by monopolies.

Does anyone remember Standard Oil? They dominated. How about AT&T? They were the one to call on for nearly 80 years. The list of monopolies as players in emerging industries is long and studded with America's finest robber barons and sometimes the odd philanthropist.

The question is this: Are you comfortable with the regular cycle of business & emerging industries? In many respects I completely appreciate the innovation and guile needed to create large market share, but the peasant in me has doubts about the long term viability of just about any major player in any industry. As times change and competition opens to follow the money trail that many brand names are built upon, sometimes a company will outstrip it's corporate charter to serve the interests of both the marketplace (think: giving good products/services at a high level of satisfaction, justifying the company's existence) and the stakeholders (the people who hold interest in a company's well being and profit motives.)

It's quite obvious given the history of capitalism that companies will rise and fall. Karl Marx got one thing right about capitalism, however: History repeats itself, first as tragedy, second as farce.

The question should be at what point do we say enough is enough? We don't have unlimited resources to bail out every institution or industry that hits the rocks. How many times have we bailed out the air industry over the decades since deregulation? How many auto manufacturers do we really need? At one time we had dozens all creating unique cars, but at some point the monopolies took over. But because the companies each had fairly equal shares the government never stepped into assure competition. Later, when the rest of the world got into the act our car companies have become social welfare recipients, sucking billions upon billions since the 70s.

Meanwhile international mega-oil-conglomerates have gotten so huge that they fund well staffed 'think-tanks' and lobbyists by the dozen who fight CAFE standards (that would have made the car manufacturers competitive in today's high priced gasoline market) and fight for more access to pristine wilderness to continue the hegemony.

The irony is at a certain point in the not too distant future all the profits in oil will dry up after we switch to true alternative energy. I don't think mega corps are nimble enough to handle it, and they will pay the price again in the future.

The question is: Are you willing to pay for it again with your tax money? I'm not. Let these companies fail. It's what the free-market wants. If our economy tanks so be it. We need to get back to the gold standard and find real valuation for flailing markets.

The attempts by the current administration to bail out their rich crony investment banker friends at tax payer expense just says it all about our current predicament.

Privatized Profits with Socialized Risk. It needs to stop.

If a large company can act responsibly and stay in business with above the board accounting, that's great. If not, let them eat cake.

AST wrote: "It has struck me before how many CEOS leave huge companies and then run as Democrats, which suggests that the view that Republicans are for big business and Democrats for the working man no longer holds water. Rather, big government has become a means for big business to gain competitive advantages through lobbying politicians and bureaucrats that are not available to smaller enterprises."
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Did you know that K-Street (as the lobbyists in Washington DC are known) is dominated by Republicans? In fact, you need be a registered Republican to get anywhere with your lobbying career if you wanna play in the capital.

So...get your facts straight. Republicans (who put a premium on deregulation, which is what got us into this mess in the first place), were in control of congress since 1994 until 2006. They played it their way almost the entire time. Guess what?? They failed, particularly when they had a president who was willing to sign off on virtually anything they wanted.

Democrats are just trying to clean up the mess left behind by the most recent failure of conservative economics. If you want historical examples look up the McKinley years or perhaps the administration of Herbert Hoover. You'll see striking similarities. Republicans haven't changed one bit over the decades. They are nothing but lap dogs to big bucks.

God help this country.