September 17, 2008
"Too Big to Fail"?
Posted by Lisa Fairfax

A dominant theme in the recent discussions of the bailouts is that certain entities are “too big to fail.”  This got me thinking about the notion of “too big to fail” and its ramifications.  In particular, I wonder whether and to what extent we need to pay closer attention to companies that are “too big to fail” going forward.   A few questions come to mind.  When people say that a company is too big to fail, does that really mean that a company is simply "too big"?  If so, does that mean that we need to do more to encourage smaller companies, or at the very least do more to discourage large companies or companies that are intertwined with too many industries?   Does it mean that these larger companies simply need to be broken apart, much in the way that we demanded AT&T break off into the baby bells.  Alternatively, is there some value with ensuring that companies do not get “too big” in the sense that companies should be discouraged from having their tentacles in so many critical and multi-faceted operations that they play a pivotal role in the healthy operation of our markets, even if it does not have anti-trust implications? In other words, if a company is too big to fail, should we have taken steps to prevent these companies from getting so big, and presumably so important, to our economic health?  And if so, should this be a focus for the future? 

On the other hand, let’s assume that we are not prepared to discourage the growth of “too big” corporations.  Perhaps then we need to take seriously increased regulation for such companies.  Indeed, perhaps our current governance system is not equipped to monitor these companies.  Moreover, if certain companies are so crucial to our economic health that we cannot permit them to fail, then it seems that we have an important interest in knowing as much as we can about those companies—and potentially more than we know about other companies.  Enhanced disclosure and transparency not only would help us in times of crisis, but it would allow us to take preventative steps to combat problems before they arise.  To be sure, some may contend that these companies are already heavily watched, while others may resist increased oversight of particular entities within the corporate world.  But perhaps enhanced oversight is the price these “too big” companies must pay once we acknowledge that their continued existence is critical to our markets.   

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