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.

This too-big-to-fail concept strikes me similarly. I believe in free markets, which do not even remotely exist if companies can be too big to fail. I wrote recently wrote an Op Ed on this very topic where I argued,

If the U.S. government is going to operate as an insurer, bailouts should be run like other government insurance programs.

Take, as an example, the National Flood Insurance Program. The U.S. government makes flood insurance available in communities willing to adopt and enforce a floodplain management ordinance. The stated purpose of this program is "to provide an insurance alternative to disaster assistance to reduce the escalating costs of repairing damage to buildings and their contents caused by floods."

In this instance, the government recognizes the reality that it will step in following a natural disaster, and thus has taken steps to mitigate the impact (i.e., costs) of such a disaster.

If the federal government is going to be in the business of bailing out extremely large companies, then similar steps should be taken to mitigate the costs of such bailouts. As a prerequisite to approving a major merger, the Department of Justice and the Federal Trade Commission could require the resulting entity to make divestitures or require the company to pay for government-supported insolvency insurance. For existing companies that are already "too big," the SEC could similarly require that a "dangerously large" company pay for insolvency insurance.

Some of these comments are mystifying to me.

It's as if people some believe that:

a) the government has bailed out AIG or

b) AIG is scot-free

AIG hasn't been "saved" from anything really. It's owners are, at this moment, paying billions of dollars of claims on the insurance gamble that AIG failed to properly underwrite.

In order to pay those claims, AIG will have to divest itself of its assets. The loan by the Fed (which is not the government, but a private banking system) will allow this orderly divestiture.

Thus, it is hardly the case that AIG was or is "too big to fail."

It has failed, in a very real sense, since it must now divest.

It's failure will now be orderly, and over a two-year period, nevertheless, well, here we are.

People believe, eroneouosly, that our monetary system is run by the government. It is not and this site should disabuse people of that notion.

While our government certainly can effect Fed decisions (by appointing members), it cannot make the Fed do anything the Fed does not decide to do. The Fed makes decisions independently. It may consult members of the government, but the government does not order the Fed to make, or not make, loans to businesses.

In this way, the Fed, as a private entity (yes, enabled by Congress just as all other corporations are enabled by our laws, but still a private entity) manages the monetary system.

People should remember that before making claims that the government is privatizing AIG or that socialism is now the law of the land.

"People should remember that before making claims that the government is privatizing AIG or that socialism is now the law of the land."

Unfortunately, since the Fed has decided that the taxpayer is going to be the ultimate backer of private companies (all profits of the Fed go back to government's coffers, where do the loses go when 'loans' aren't paid back and the 'assets' are worthless?)

Stop trying to make this sound like it's a private industry deal when The Fed walks in with 1.5 trillion in loan guarantees. Printing more money isn't going to cover the losses that will continue to pile up. The assets needed to fix the failures of greed have to come from somewhere, and that place will be your tax dollars.

Why should the Fed have to step in to cover the losses of a private company? Let them fail. The free market is demanding it, and why should the government interfere?

I often wonder at calls for the government, the largest most inefficient bureaucracy imaginable, to increase regulation of big businesses to improve competitiveness of small businesses. What small businesses need to thrive is a less hostile regulatory environment; and a drastic reduction in the out of control administrative regulation of every aspect of these businesss. In short: LESS REGULATION! "We" do not need to monitor companies; "We" have no business mandating the minutiae of a tradesmen's day to day life. The regulatory morass of today acts as a barrier to entry to smaller firms; reduces incentives for innovation; and ensures that the large companies that dominate a field continue to dominate that field far into the future. If one surveys the vital brands that define American industrial strength, they all pre-date the massive regulatory apparatus that has metastasized during the 20th century.

Markets fail whenever a field reduces the number of serious players down to the single digits.

So if you're too big to be allowed to fail, then you're too darn big. Go ahead with the bailing, but do it in a particular way. Can essentially the entire set of upper management. After you've had each of them testify under oath. Extensively. Reformulate the company based on either the existing internal subdivisions, geography, or some other feasible organization. Combine the bailout loan with a short grace period and shove them back out into the market. Bell and Standard Oil are examples. Some divisions flounder and are gobbled up, others mutate, some eventually remerge, etc.

By putting the executives on the spot - including the testimony - you've put personal risk back in the forecast for _other_ companies' executives. Half of the rationale for "cooking the books" is for the executives to avoid telling their investors how poorly they did this quarter. By attaching real personal risk to excessive corporate risk-taking, you've added a counterbalance to the book cooking.

But 'too big to be allowed to fail' is a serious problem. For example: historically, Boeing was an outrageously high percentage of the jobs in the greater Seattle area. Having Boeing fail would have had a tsunami-like effect on Seattle. The city has grown out of the total dependence somewhat, but I really understand the concept. And today, Boeing wouldn't be allowed to fail as the only domestic commercial aircraft manufacturer. This solution wouldn't necessarily work for Boeing - even though they have clear demarcations of where they should be split. (Military, Space, Commercial)