Too Big to Fail Essay

5762 Words Mar 6th, 2013 24 Pages
Research Paper
Matthew Emery memery@capella.edu BUS3004 Developing a Business Perspective
Lynn MacBeth
08/12/2012
Too Big to Stay

Introduction

A financial institution so interwoven in the fabric of the national economy that its failure could cause a massive ripple effect is deemed “too big to fail”. Unfortunately for the taxpayers, their hard earned dollars are the only thing between salvation and failure for these companies. Poor management or industry instability can ruin any business, but the larger an institution gets, the larger the collateral damaged induced by their failure will be. It is the duty of a responsible government to never leave their citizens vulnerable to such a catastrophe. The goal of this paper is
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The “four C’s” are: contagion, correlation, concentration, and context (Grant 2010). A company covered by Title II of the Dodd – Frank Bill (written to protect against too big to fail policy in the future) must derive eighty five percent of its revenue from financial activities. This means that going forward, the only companies the government will consider systemically important are financial institutions, which is a change from the bailouts of Chrysler and General Motors. The bill is unclear however on how big equals too big. According to the Dodd – Frank Bill, any covered institution with ten billion dollars in assets must have a risk committee. A covered company with over fifty billion dollars in assets must have a submitted plan on how to wind down in case of failure and cannot have more than twenty five percent of its assets be in the form of credit. Finally, a mega-bank is one having over five hundred billion dollars in assets and no more than ten percent can be credit (Fitzpatrick IV 2011). Although the bill does make distinctions about how much money in assets a company must have to incur certain regulations, it leaves designation of systemic importance up to regulators to decide as that company is failing. None of these are objective criteria, and none would account for the fact that while Lehman Brothers was allowed to fail, Bear Sterns received a government bailout. In 2008, Bear Sterns was the

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