Why Too Big To Fail?

FOREWORD Quis custodiet ipsos custodes? This question was first coined almost 400 years before the birth of Christ by the exalted Greek philosopher Plato in perhaps his most famous text - Republic. Translated from Latin, it means, “But who will guard the guardians?” How profoundly lasting was such a perspective dating back well over twenty centuries - with particular resound when we examine the current debacle within the global financial markets: a viciously engulfing phenomenon that germinated within the so-termed developed countries (led by the United States of America) and rapidly cascading to that of the less developed! What did Plato observe within his own environment that led him to reflect upon a question of such apprehension and mistrust? Surely, wouldn’t it be logical that for any person or group that has been granted such crucial and noble responsibilities, to be labeled “guardians” within a society, that they must have been so appointed by virtue of proven and widely acclaimed credibility? Furthermore, should not the expectation be that these guards would execute their duties in a just and ethical manner for the benefit of the society which they serve? Alas, Plato had doubts then, and as we will see in this book - Kaye Bonnick’s excellent and enlightening indictment on the modern guardians of the Financial Markets - we ought to have the same doubts today. Sadly, it appears that rhetoric and reality failed to converge and we are only left to ask “Where were our guards, the government, and why were they not vigilant in protecting the public from potential harm by actions of self-serving corporations? Introduction I first explored this issue in 2001, while pursuing my MBA at Baruch College in New York. It made an interesting study at the time. I had strong opinions then and I still do now. So much has happened in the past ten years that has significantly affected our financial landscape and there is still more to come in the aftermath of this collapse. This book has been borne from a desire to share my perspective on the financial issues related to the crisis we are facing as a result of the 2008 Wall Street meltdown. Financial issues are sometimes so complicated that the public simply ignores them and hopes for the best. While this crisis is invasive and too widespread to ignore, the issues are still too complicated for many people to understand. Even the “wise” among us are in awe of the developments in the past nine years, since the turn of the twenty first century. My objective is to explain some of the key components of the financial meltdown and why our government has treated some corporations as “too big to fail”. We’ve heard lots of stories about “who said what”, and “who did what” on Wall Street and in Washington. That is what I refer to as the “soap opera” side show that is interesting, and sometimes entertaining, but does not answer the question of how these events were even possible. How does a private corporation become too big and too important that it cannot be allowed to fail? There is outrage across our nation because so many individuals are losing their jobs and their homes, yet the government is willing to offer financial assistance to the large corporations at the center of this catastrophe. WHY? Why did the government commit to a “bail-out” package of approximately $700 billion dollars? The answer lies in financial legislation that was put in place in 1999, which resulted in the creation of financial institutions that were complex, difficult to regulate, but crucial to the health of our financial system. In order to understand the nature of our financial framework, I will broadly review the major events of the Great Depression and the financial legislations enacted then to stabilize the industry; discuss the structure of the banking system and how that has evolved over the years through various legislations; I will look at the critical events during the 1980s with the Savings and Loan crisis; and how we transitioned to “financial modernization”. This historical perspective will lay the premise for our discussion on the crisis of 2008/2009 and what proposals are being offered to prevent a recurrence. The critical question for our country is do we need to turn back the hand of time or can we move forward with a modernized framework that guards the guardians and the American people? The Current Crisis 2008/2009 We’ve been bombarded by reports in the media about the scary state of our economy and most pointed of all; we’ve been feeling and seeing the true state of our economy. We see companies laying off friends and family; manufacturing companies closing their doors because they can’t compete with cheaper imports, or they can’t get the short term credit/loans they need to continue operations; the price of gas inching up, once again; we hold our breaths while hoping that today will not be the day that we are the ones to get the pink slip. This crisis, which started in 2007, has been described as the worst economic downturn since the Great Depression. In that, really, is the answer to why these companies are too big to fail. Having another depression is not an option. These corporations, by design, are so huge and complex, that they are literally holding the country for ransom, and we have no choice but to meet their demands. The start of this crisis has been blamed on the mortgage mess that started to rear its ugly head with the rising rate of foreclosures and the fall in property values. While I do agree that this was the pin that burst the bubble, I dare argue that the crisis started when we allowed these financial super powers to develop. Even worst was our inability to ensure that they were properly regulated once we allowed them to form.