Should companies that are too big to fail..be broken up?

[Thunder]

We broke up Ma'Bell. Maybe its time to also break apart Chase, AIG, Citicorp, Bank of America, Ford, GM, etc?

Honestly, if the failure of a company or business would have dire consequences to the American economy, than maybe it is not only too big to fail...but too big to exist.

No one company should be able to send such shockwaves through the Dow Jones and the economy, that a national or even world-wide Depression could result from it.

I say, split em' up into 5 regional companies, if they are that big and that important.

[Upchurch]

I have no problem with that basic concept, but I'd reserve judgement until I see how it is implemented.

[MikeMangum]

How about just let them break up on their own if they are going to, you know...fail. Bell was a monopoly. AIG is not, nor is Ford.

[The True Scotsman]

I second MikeMangum. Let them fail. The resulting loss of jobs is a necessary evil in my opinion, but will eventually be resolved and the resulting drop in stock is only so devastating due to the fact that employers forced their employees to hold a 401k plans instead of giving them a comparable sum of money flat out (which they may choose to invest or save).

[gnome]

I would speak to guidelines that PREVENT companies from getting too big to fail, but breaking up an existing company seems legally problematic.

[ARubberChickenWithAPulley]

In fairness, I don't think Ford should be mentioned in the same sentence as GM, AIG, or Citigroup. They didn't accept or need government funding, and they actually seem to be recovering pretty well. They had their issues, but of all the companies out there, they seem to have been one of the most responsible.

And yeah, I'm skeptical of the entire "too big to fail" concept. GM was supposedly too big to fail. Yet it went bankrupt and... the economy didn't implode and the world didn't end.

[thaiboxerken]

In fairness, I don't think Ford should be mentioned in the same sentence as GM, AIG, or Citigroup. They didn't accept or need government funding, and they actually seem to be recovering pretty well. They had their issues, but of all the companies out there, they seem to have been one of the most responsible.

And yeah, I'm skeptical of the entire "too big to fail" concept. GM was supposedly too big to fail. Yet it went bankrupt and... the economy didn't implode and the world didn't end.

When a company goes bankrupt, where does all the debt go?

[INRM]

Yes, if they're too big to fail they should be broken up

[ARubberChickenWithAPulley]

When a company goes bankrupt, where does all the debt go?

Depends on the type of bankruptcy. In a liquidation, ideally, secured creditors would be repaid in full, and unsecured creditors would get what's left. Chapter 11's usually involve forgiving some of the debt in hopes of recovering a substantial portion later.

If you're an unsecured creditor, you're probably going to take it in the shorts. Sucks, but it's a risk of doing business.

The debt itself, in effect, "disappears" in the sense that the creditor has either forgiven it, or officially has no hope of recovering it. Thus the creditor loses any income from that debt repayment.

[thaiboxerken]

So no tax money is involved in bankruptcy?

[Thunder]

Yes, if they're too big to fail they should be broken up

i agree with you. but you do understand that such an attempt goes against some of the most basic principles of the free market, right?

[Random]

i agree with you. but you do understand that such an attempt goes against some of the most basic principles of the free market, right?

But companies that are "too big to fail" are also against the basic principles of the free market. If a company grows to the point where the government would have to step in and rescue it should it fail, then it creates a situation where risks are public, but rewards are private. The government becomes a de facto stakeholder in the company whether it wants to or not, and doesn't get a dime out of it.

[ARubberChickenWithAPulley]

So no tax money is involved in bankruptcy?

Beyond the administrative costs of the bankruptcy court, no, it shouldn't be.

[ponderingturtle]

I second MikeMangum. Let them fail. The resulting loss of jobs is a necessary evil in my opinion, but will eventually be resolved and the resulting drop in stock is only so devastating due to the fact that employers forced their employees to hold a 401k plans instead of giving them a comparable sum of money flat out (which they may choose to invest or save).

True it will all sort itself out in a few decades so why bother trying to prevent an economic collapse. But is nice to see someone in favor of bank nationalization instead of bailouts.

[ponderingturtle]

So no tax money is involved in bankruptcy?

Depends on what you mean by bankruptcy, in large financial institutions such things get called nationalization, and the tax payer can be left holding a lot of bad investments.

[casebro]

I do believe we should stop allowing mergers if the resultant company would be too large. IIRC, buying more than 5% of a stock requires notification to the SEC, because market manipulation gets easier. Yet merging large companies into HUGE companies seems easy.

But don't mergers require SEC approval too? Is it all a matter of shifting the enforcement of existing regs? Lean a little towards smaller companies being "good for the country" than "huge is always better due to economy of scale" ?

I don't know what would be the ideal size, in order to prevent oligarchy from happening. Perhaps no merger that wold allow the resultant company from controlling more than 3% of the national market? Actual growth in the competitive market allowed to a some what greater percent, maybe 5-6%, before breaking the company to maintain more competition in the field.

But I don't know- how large is the market share of the companies mentioned above? AIG, Goldman-Sachs, GM. ?

[Upchurch]

I have no problem with that basic concept, but I'd reserve judgement until I see how it is implemented.

When I answered, I assumed it was implied that this was for businesses that have failed or are in the process of doing so. Reading the OP again, I see that it isn't.

[The True Scotsman]

True it will all sort itself out in a few decades so why bother trying to prevent an economic collapse.

Do I sense a bit of sarcasm? If you are being sarcastic, then allow me to respond. My previous answer was more heuristical, but perhaps now I will go more in depth. Non-banking institution should be allowed to fail (that is speaking to Ford, GM, AIG). Banking institutions should be bailed-out (and perhaps later nationalized), because letting them fail would only multiply economic problems (that is speaking to Chase, Bank of America, Citigroup, etc). Afterwards, serious measure need to be taken to make certain history doesn't repeat itself with the banking institution by placing regulation on banking institutions.

But is nice to see someone in favor of bank nationalization instead of bailouts.

How did you surmise that from my post?

[ponderingturtle]

Do I sense a bit of sarcasm? If you are being sarcastic, then allow me to respond. My previous answer was more heuristical, but perhaps now I will go more in depth. Non-banking institution should be allowed to fail (that is speaking to Ford, GM, AIG). Banking institutions should be bailed-out (and perhaps later nationalized), because letting them fail would only multiply economic problems (that is speaking to Chase, Bank of America, Citigroup, etc). Afterwards, serious measure need to be taken to make certain history doesn't repeat itself with the banking institution by placing regulation on banking institutions.

In this sense AIG might well count as a bank. Again why pick on Ford it never asked for any federal money.


How did you surmise that from my post?

Because when a large bank fails people call it nationalization. You need to know more about banks before you start throwing around words you don't understand. The process of bank failure is practiced most weekends, as we are having bank failures most weekends. But when you apply that process to a large bank people call it nationalization.

Letting the banks fail or nationalizing them is really the same process.

[The True Scotsman]

In this sense AIG might well count as a bank. Again why pick on Ford it never asked for any federal money.

Fair enough. Though please don't miss my larger point that some companies have nothing to do with financing and should be allowed to fail, as that point remains un-addressed.


Because when a large bank fails people call it nationalization. You need to know more about banks before you start throwing around words you don't understand. The process of bank failure is practiced most weekends, as we are having bank failures most weekends. But when you apply that process to a large bank people call it nationalization.

Letting the banks fail or nationalizing them is really the same process.

Let's not get too pissy now. We can debate this like civil human beings.

Now, I don't see how nationalizing is the same as letting a bank fail. If a bank fails, it no longer exists as a company. If a bank is nationalized, then it become public domain and continues to exist.

Though I am still left wondering when I ever used the word "nationalize". Looking through the thread, I see the word only being used by you. (Assuming that is the word I am "throwing around" and "don't understand).

[thaiboxerken]

i agree with you. but you do understand that such an attempt goes against some of the most basic principles of the free market, right?

It might. Is that wrong?

[thaiboxerken]

Beyond the administrative costs of the bankruptcy court, no, it shouldn't be.

So the debt goes where? Back to the companies that are owed the money?

[MikeMangum]

So the debt goes where? Back to the companies that are owed the money?

I believe the technical word for the new locus of the debt is "poof".

Joe Blow loaned $100 to John Doe. John Doe is unable to repay, declares bankruptcy, and only has $35 dollars to his name. Joe Blow gets $35 back instead of $100 and the rest of the debt went "poof".

Joe Blow took it in the shorts. That's why there is a risk to loaning money, why the risk differs between secured and non-secured debt, and why it is in the lenders best interest to only lend money to entities that can likely repay OR to charge a much higher interest rate for riskier debt.

ETA: the whole point of bankruptcy is it offers a way for entities to have debts against them forgiven. It is a civil court action. The government isn't paying for anything, other than the cost of the court, the judge, and the court staff...just like any other civil action. Bankruptcy is essentially appealing to government to have debts owed to a third party declared void.

[ponderingturtle]

Let's not get too pissy now. We can debate this like civil human beings.

Now, I don't see how nationalizing is the same as letting a bank fail. If a bank fails, it no longer exists as a company. If a bank is nationalized, then it become public domain and continues to exist.

And is then sold off. When people were talking about nationalizing big banks that was really the same as letting them fail.

[The True Scotsman]

And is then sold off. When people were talking about nationalizing big banks that was really the same as letting them fail.

I am assuming in your response that by "sold off" you mean the selling of the company intact and not the liquidation of the company's assets. If this is the case, then I would say that a bank hasn't failed if it has been sold off. As I see it, as long as the company is intact, it hasn't failed. If it has been sold off to the government or the government has taken possession of the bank, then it has been nationalized. I do not see how a bank can be nationalized if it has failed. As I see it, failure of a company means the dissolution of the company.

[MikeMangum]

As I see it, failure of a company means the dissolution of the company.

Tell that to the previous owners of the bank who just took it in the shorts.

[The True Scotsman]

Tell that to the previous owners of the bank who just took it in the shorts.

Ok, where is he? :p

[ponderingturtle]

I am assuming in your response that by "sold off" you mean the selling of the company intact and not the liquidation of the company's assets. If this is the case, then I would say that a bank hasn't failed if it has been sold off. As I see it, as long as the company is intact, it hasn't failed. If it has been sold off to the government or the government has taken possession of the bank, then it has been nationalized. I do not see how a bank can be nationalized if it has failed. As I see it, failure of a company means the dissolution of the company.

Well not exactly intact, as a bank it failed and so many assets are likely bad assets. The federal government ends up with those, but the good assets, the branches and specifically the depositors all get transferred to some other bank.

The process is actually kind of odd for banks small enough to fail, because it all happens over the span of a weekend. We have had more than 50 bank failures in 2010 so far. There will be more this weekend.

Now think about trying to audit an entire bank in a weekend, determine which assets are good enough to sell and which ones end up not being sold?

The thing is that the word nationalize as people were applying it to banks is not the government running all banks for ever. But it really was letting the banks that are to big to fail fail.

[Thunder]

ok..fine. we don't have to break up corporations that are "too big to fail".

but then, I don't want one God damn dime going to any more Federal bail outs.

[ARubberChickenWithAPulley]

So the debt goes where? Back to the companies that are owed the money?

MikeMagnum covered it pretty well. Debt is simply an obligation to pay someone. If a company owes you money and that company disappears, the obligation (debt) disappears with it. It doesn't go anywhere, it ceases to exist.

[thaiboxerken]

Right, but someone is losing out on payment. If huge companies get so large, and end up owing lots and smaller companies, then go bankrupt.............what happens then?

[ARubberChickenWithAPulley]

Right, but someone is losing out on payment. If huge companies get so large, and end up owing lots and smaller companies, then go bankrupt.............what happens then?

I don't think there is any blanket answer to that question. If you're a tiny company that makes widgets for GM, and GM is 90% of your business, and GM goes bankrupt, you're probably going to go bankrupt too -- and that's regardless of what GM might owe you at the time. They could be completely paid up with you, for all it matters. If they're the vast majority of your business and they disappear, you're probably done. But that's the risk of putting all your eggs in one basket, so to speak.

If you're a company that has a more diversified customer base, obviously you'll take a hit, but you can probably survive if you have other customers and income.

In the first scenario, that's why a Chapter 11 could be the best case for a small supplier. Maybe GM is 6 months behind on payments to you and you have to forgive that, but if GM stays in business, at least you have some customer going forward.

[Newtons Bit]

Right, but someone is losing out on payment. If huge companies get so large, and end up owing lots and smaller companies, then go bankrupt.............what happens then?

The smaller companies get broken out and sold in chunks. The proceeds go to paying the creditors of the parent corporation.

GM, AIG and Lehman brothers have both done this with parts of their business.

[INRM]

Thunder,

I suppose you make a point. I'm not opposed to the idea of people making money for their work or anything. But obviously there needs to be regulations for corporate conduct, and means of dealing with corporate misconduct; restrictions against monopolies and anti-competitive practices; and means to prevent companies that a nation is dependent on from being able to engage in reckless practices with impunity, and effectively be able to hold a nation hostage (knowing the nation has to bail them out in order to survive), something that would also give these corporations undue influence on a nation -- as a result, it is my opinion that if corporations become too big to fail, they should be broken up into smaller corporations to prevent them from being able to do this reasonably speaking.


INRM

[INRM]

Agree, Disagree?

[lomiller]

If you're a company that has a more diversified customer base, obviously you'll take a hit, but you can probably survive if you have other customers and income.

You seem to be mislead about what causes a company to flail. Companies don’t fail because of profitability they fail because of liquidity. Certainly being unprofitable for a long period of time will hurt your liquidity situation, but so can other things, chief among them access to credit.

In the case of the car companies this was the issue, the banks stopped lending, even to people who would be able to pay them back. It was this inability to get credit that threatened them, not the prospect of returning to profitability. Had they encountered the same problem in any other recession you would never have even heard about it because they would have had no problems raising money. This recession was different because the banks had to stop making any loans at all to protect their own liquidity positions.

[MikeMangum]

You seem to be mislead about what causes a company to flail. Companies don’t fail because of profitability they fail because of liquidity. Certainly being unprofitable for a long period of time will hurt your liquidity situation, but so can other things, chief among them access to credit.

In the case of the car companies this was the issue, the banks stopped lending, even to people who would be able to pay them back. It was this inability to get credit that threatened them, not the prospect of returning to profitability. Had they encountered the same problem in any other recession you would never have even heard about it because they would have had no problems raising money. This recession was different because the banks had to stop making any loans at all to protect their own liquidity positions.


2009: GM posts $4.3 billion loss, says 2010 profit possible (http://www.reuters.com/article/idUSTRE6363V820100407)
2008: GM: Almost out of cash: No. 1 automaker posts huge loss - says it has made case to Washington for rescue. (http://money.cnn.com/2008/11/07/news/companies/gm/index.htm?postversion=2008110711)
2007: GM's $39B loss a record (http://money.cnn.com/2007/11/07/news/companies/gm/index.htm)
2006: "He described the company, which reported losses of $10.4 billion in 2005 and $2 billion last year, as “operating at or close to break even.” (http://www.nytimes.com/2007/05/04/business/04auto-web.html) This was the spin during the year that GM lost $39B
2005: General Motors lost $8.6 billion in 2005 (http://www.wsws.org/articles/2006/jan2006/gm-j28.shtml) - (Revised to $10.4 billion - GM Raises 2005 Loss by $2 Billion (http://www.mindfully.org/Industry/2006/GM-$2B-Loss16mar06.htm))


Yeah, I can imagine GM found it hard to get credit...but I wouldn't really call it a liquidity problem (that's kindof like referring to death caused by gunshot wound as "lack of oxygen to the brain"). 5 straight years of multi-billion dollar losses will tend to make creditors a bit reluctant to loan you money. GM posted greater losses than its entire market capitalization, in one year.

[ARubberChickenWithAPulley]

You seem to be mislead about what causes a company to flail. Companies don’t fail because of profitability they fail because of liquidity. Certainly being unprofitable for a long period of time will hurt your liquidity situation, but so can other things, chief among them access to credit.

In the case of the car companies this was the issue, the banks stopped lending, even to people who would be able to pay them back. It was this inability to get credit that threatened them, not the prospect of returning to profitability. Had they encountered the same problem in any other recession you would never have even heard about it because they would have had no problems raising money. This recession was different because the banks had to stop making any loans at all to protect their own liquidity positions.

It would be better if you quoted me in context. I wasn't talking about the car companies themselves, I was talking about their suppliers, in answer to a question about GM going bankrupt. I didn't say anything about profitability.

I said that if you're a small supplier, and GM is 90% of your revenue, and GM goes bankrupt, you are probably going to go bankrupt too. Yes, you might be able to obtain credit and sell off assets to continue essential operations while looking for a new client, but by and large, if a single customer is the vast majority of your business, you are largely tied to the success/failure of that client. If you have more diversity in your revenue streams, you can weather a hit to one of them much more easily.

[lomiller]

You are no more correct now then you were the first time you said that. The bankruptcy of any large client can endanger a company, and this isn’t limited to cases where one client makes 90% of your business.

Lets say you have a client that makes up 30% of your business go bankrupt, but the other 70% are still profitable. You immediately face three issues. First, your costs do not instantly drop by 30%, indeed it’s unlikely you could achieve anywhere near a 30% reduction in costs no matter how much time you have. Secondly you have already spent money, or more likely incurred debt, on the sales you made to that company. Third you can no longer expect to get paid for those sales.

IOW you still have your own bills to pay but the money you were going to flow towards those bills isn’t coming. The only way you can deal with this situation is to borrow, but in a bank crisis you can’t do that either. It therefore doesn’t matter if the rest of your business is profitable or not, you can’t pay your bills and will be forced to declare bankruptcy yourself.

[ARubberChickenWithAPulley]

You are no more correct now then you were the first time you said that. The bankruptcy of any large client can endanger a company, and this isn’t limited to cases where one client makes 90% of your business.

And you are no more understanding my post than you did the first time you replied. And now you're contradicting yourself and arguing against your first point that companies go bankrupt because of liquidity, not profitability (which itself is funny because I didn't say anything about profitability to begin with). And you're being ultra-literal with the "90%" figure, which was pretty clearly an example, not a statement of a hard and fast rule. I never said a client had to lose 90% of its business to go bankrupt, or that losing a smaller client couldn't endanger a company. In fact, the first statement in the post you replied to was: I don't think there is any blanket answer to that question (the question being: what happens to a company when a big client goes bankrupt). :rolleyes:


Lets say you have a client that makes up 30% of your business go bankrupt, but the other 70% are still profitable. You immediately face three issues. First, your costs do not instantly drop by 30%, indeed it’s unlikely you could achieve anywhere near a 30% reduction in costs no matter how much time you have. Secondly you have already spent money, or more likely incurred debt, on the sales you made to that company. Third you can no longer expect to get paid for those sales.

IOW you still have your own bills to pay but the money you were going to flow towards those bills isn’t coming. The only way you can deal with this situation is to borrow, but in a bank crisis you can’t do that either. It therefore doesn’t matter if the rest of your business is profitable or not, you can’t pay your bills and will be forced to declare bankruptcy yourself.

This is all well and good, but it doesn't contradict anything I've said. All of this, of course, depends on the condition of the individual company: how leveraged they are to begin with, what their margins are like, whether they have cash on hand, availability of credit, etc. etc. But losing 90% of revenue is going to typically put a company at much greater risk than losing 30%. All other things being equal, if you go from, say, having $1 billion in revenue to $700 million, you're going to have a lot better chance of getting the credit you need and cutting costs enough to continue to operate, than if you go from $1 billion to $100 million.