Is Citigroup "too big to fail"?

[superfreddy]

I've read this argument in many online discussions. Nobody has been able to provide a good argument regarding why. The follow up question is "how big is too big"

 

[godless dave]

It's a term made up by greedy executives who don't want to be regulated. There's no such thing as a company that's too big to fail.

 

[superfreddy]

It's a term made up by greedy executives who don't want to be regulated. There's no such thing as a company that's too big to fail.

I thought it was the government who originally used the term "too big to fail"

 

[godless dave]

I thought it was the government who originally used the term "too big to fail"

The government works for the executives.

 

[drkitten]

The government works for the executives.

No. But the executives do offer services to the government. Any company that the government relies on to the point where it would be significantly inconvenient to replace its services is "too big to fail."

As a simple example -- where does the Air Force buy its planes? Mostly, from Lockheed Martin. If Lockheed Martin were suddenly to collapse, there would be a HUGE hole in the fighter plane acquisitions pipeline, one that would take years to fill. While there are other companies out there, they couldn't build the planes Lockheed does without an extensive multi-year development plan.

Therefore, the government needs Lockheed Martin to keep making planes.

 

[godless dave]

Yes, many companies sell services to the government. But I'm talking about companies paying lobbyists to write legislation for the congresspeople they have on their payroll, and writing press releases that contain terms like "too big to fail".

 

[drkitten]

Yes, many companies sell services to the government. But I'm talking about companies paying lobbyists to write legislation for the congresspeople they have on their payroll, and writing press releases that contain terms like "too big to fail".

Well, good. If you're going to talk about unrealistic fantasy worlds, I prefer C.S. Lewis.

 

[godless dave]

Well, good. If you're going to talk about unrealistic fantasy worlds, I prefer C.S. Lewis.

Are you serious? How do you think we ended up with banking deregulation? Corporations pay lobbyists to influence legislators, and legislators comply either through corruption or astounding naivete.

That's also how we ended up with the unregulated nutritional supplement market and the DMCA.

It's also why emissions standards for motor vehicles were unchanged for so long.

It's also why phone companies that participated in the warrantless wiretapping program are exempt from civil litigation.

 

[geni]

I've read this argument in many online discussions. Nobody has been able to provide a good argument regarding why.

To big to fail broadly translates as "Due to it's size would case unacceptable collateral damage if it went down".

Banks like Citigroup are fundimental to the US economic system and the damage they would do (both through dirrect loses to depositors and loss of confidence in other institutions) would likely result in the near total destruction of the US finacial sector (I supose a few very specialised or localised institutions would survive) followed but much of the rest of the US and world ecomomly shortly afterwards.

The follow up question is "how big is too big"

Depends on the sector the company is in.

 

[godless dave]

To big to fail broadly translates as "Due to it's size would case unacceptable collateral damage if it went down".

Banks like Citigroup are fundimental to the US economic system and the damage they would do (both through dirrect loses to depositors and loss of confidence in other institutions) would likely result in the near total destruction of the US finacial sector (I supose a few very specialised or localised institutions would survive) followed but much of the rest of the US and world ecomomly shortly afterwards.

Or so Citigroup would have you believe.

 

[superfreddy]

To big to fail broadly translates as "Due to it's size would case unacceptable collateral damage if it went down".

Banks like Citigroup are fundimental to the US economic system and the damage they would do (both through dirrect loses to depositors and loss of confidence in other institutions) would likely result in the near total destruction of the US finacial sector (I supose a few very specialised or localised institutions would survive) followed but much of the rest of the US and world ecomomly shortly afterwards.



Depends on the sector the company is in.

Wouldn't the market adjust to the fail in the long run? I've seen your explanation before but it still seems like especulation. Again, how big is "too big" in the financial sector?

 

[drkitten]

Are you serious?

Yes.

How do you think we ended up with banking deregulation? Corporations pay lobbyists to influence legislators, and legislators comply either through corruption or astounding naivete.

Which has nothing to do with companies being "too big to fail."

Organization become "too big to fail" when the government -- or society -- become too dependent on a single source of (whatever) to be able to tolerate the loss of that single source. There are lots of historical examples, typically from wartime, where loss of a resource ended up threatening the survival of the controlling nation-state. A good example of that from the Napoleanic era is the potential loss of Swedish timber, which was the only source of suitable trees for masts for the Royal Navy -- which ended up directing much of H.M.G's foreign policy in the Baltic from the early 19th century to the rise of steamships.

There are a number of defense contractors that are "too big to fail" because they're the only ones (today) that know how to make key components for warheads. I already mentioned Lockheed-Martin. For a while in the 1980s, EDS was handling almost all data-processing operations for the United States government. More recently, AIG ended up underwriting and insuring almost all of the government's financial operations. While that might be a bad idea, it has nothing to do with bad regulations. The problem is that you shouldn't single-source anything crucial, as any MBA knows.

So, yes, I'm quite serious. And you're quite, QUITE wrong.

 

[godless dave]

Yes.



Which has nothing to do with companies being "too big to fail."

Organization become "too big to fail" when the government -- or society -- become too dependent on a single source of (whatever) to be able to tolerate the loss of that single source. There are lots of historical examples, typically from wartime, where loss of a resource ended up threatening the survival of the controlling nation-state. A good example of that from the Napoleanic era is the potential loss of Swedish timber, which was the only source of suitable trees for masts for the Royal Navy -- which ended up directing much of H.M.G's foreign policy in the Baltic from the early 19th century to the rise of steamships.

There are a number of defense contractors that are "too big to fail" because they're the only ones (today) that know how to make key components for warheads. I already mentioned Lockheed-Martin. For a while in the 1980s, EDS was handling almost all data-processing operations for the United States government. More recently, AIG ended up underwriting and insuring almost all of the government's financial operations. While that might be a bad idea, it has nothing to do with bad regulations. The problem is that you shouldn't single-source anything crucial, as any MBA knows.

So, yes, I'm quite serious. And you're quite, QUITE wrong.

And the decision to single-source was made by legislators, at the behest of lobbyists.

And the decision to describe a company as "too big to fail" is made by legislators, at the behest of lobbyists.

 

[drkitten]

Wouldn't the market adjust to the fail in the long run?

In the long run, yes. But the long run can be quite long, and the road can be quite bumpy. Lockheed Martin (to re-use a good example) has been working on the F-22 fighter plane for more than 20 years; if Lockheed were to fail today, whatever contractor took over would probably not be able to deliver any planes until at least 2025.

So that would leave a hole in the US defense system (no fifth-generation frontline fighter) for at least fifteen years. Sure, "in the long run" we could patch the hole, but that probably wouldn't make the pilots killed in action in 2021 any happier.

Again, how big is "too big" in the financial sector?

It's not measured in dollars; it's measured in services delivered. A single contractor can be "too big to fail" if they have key skills or capacities that no one else can provide.

 

[drkitten]

And the decision to single-source was made by legislators, at the behest of lobbyists.

No, usually the decision to single-source was made by executive branch bureaucrats who are trying to get the best and most reliable services for the money, which in turn means they go for large companies who have established economy of scale and have a well-oiled pipeline for service delivery.

And the decision to describe a company as "too big to fail" is made by legislators, at the behest of lobbyists.

Yes, all those "legislators" in the executive branch.

 

[DavidS]

Wouldn't the market adjust to the fail in the long run?

[adams]
The statistical likelihood is that other civilizations will arise. There will one day be lemon-soaked paper napkins. Till then there will be a short delay. Please return to your seat.
[/adams]

 

[Tippit]

To big to fail broadly translates as "Due to it's size would case unacceptable collateral damage if it went down".

Banks like Citigroup are fundimental to the US economic system and the damage they would do (both through dirrect loses to depositors and loss of confidence in other institutions) would likely result in the near total destruction of the US finacial sector (I supose a few very specialised or localised institutions would survive) followed but much of the rest of the US and world ecomomly shortly afterwards.



Depends on the sector the company is in.

The phrase "too big to fail" is a red herring that is only meaningful in the context of the instability that the fiat money/fractional reserve banking system introduces to the system.

If Citibank collapses then it will devastate all of its counterparties and have a negative systemic effect, but only because of the nature of the system. If we had sound money, the rationale that Citi is "too big to fail" would no longer apply. It's for this reason that fiat money and fractional banking are incompatible with a free society, and totally compatible with a fascist society dependent upon monopolistic banks and corporations, and a massive government.

 

[The_Animus]

To big to fail is just another flavor of fear used to serve various interests.

If they were allowed to fail the economy would take a hit, not only in the US but worldwide. However, humanity is very creative, and adaptive, and I think you'd find that new credit companies would form, granted not to the size and scope of groups like citi, but would certainly help ease the economic turmoil until new companies grew to the point of being able to provide stabilization.

Would we have hard times? Would we have had to cut back on spending so much money we don't have? Yes, yes we would. But I still like that better than propping up companies that failed utterly because of poor decisions using taxpayer money.

 

[superfreddy]

In the long run, yes. But the long run can be quite long, and the road can be quite bumpy. Lockheed Martin (to re-use a good example) has been working on the F-22 fighter plane for more than 20 years; if Lockheed were to fail today, whatever contractor took over would probably not be able to deliver any planes until at least 2025.

So that would leave a hole in the US defense system (no fifth-generation frontline fighter) for at least fifteen years. Sure, "in the long run" we could patch the hole, but that probably wouldn't make the pilots killed in action in 2021 any happier.



It's not measured in dollars; it's measured in services delivered. A single contractor can be "too big to fail" if they have key skills or capacities that no one else can provide.

I can understand your example of a supplier to the government deemed "too big to fail". But, as far as I know, Citi is not a government supplier. I don't think is that relevant in the financial sector anymore. Measured in total market cap, is not even the largest financial institution. So, why Citi? I'm not ready to buy into conspiracy theories yet...

 

[drkitten]

If they were allowed to fail the economy would take a hit, not only in the US but worldwide. However, humanity is very creative, and adaptive, and I think you'd find that new credit companies would form, granted not to the size and scope of groups like citi, but would certainly help ease the economic turmoil until new companies grew to the point of being able to provide stabilization.

I don't think you understand that "the economy would take a hit" really entails.

The problem is that "credit" is not just used to spend money you don't have (although that's certainly one of the causes of the current crisis). It's also used to spend money that you DO have, but don't want to be inconvenienced by carrying around. As a simple example, I can't remember the last time I used a traveler's check. My ATM card, which is also a VISA card, works almost everywhere and in every currency; I can travel around the entire world and buy things for which I already have the money in my bank account.

If the VISA company suddenly collapsed, I wouldn't be able to do that. But I also wouldn't be able to use traveler's checks, because almost no one issues them any more, and almost no one accepts them any more. (The few places that do are generally banks, which would have collapsed along with the VISA company). Furthermore, I'd have a much more difficult time because the currency conversions aren't automatic -- if I had checks in dollars, I couldn't convert them to euros without going to a bank, and the bank relies on the existence of credit to do the currency exchange.

The systems that we had in place in the 1920s to handle this problem, for the most place, no longer exist. The system we have in place today to handle this problem assumes the availability of cheap and widely available credit. Eliminate the credit and there are no systems for large-scale monetary transactions -- or even medium-scale monetary transactions, or small-scale transactions across long-distances.

It makes no sense, for example, to eliminate the entire hospitality industry because we don't want to prop up the banking industry. But that would happen if the financial system collapsed, precisely because innkeepers would no longer be able to accept payment in any form other than cash -- and there's nowhere near enough cash in circulation to make the industry viable.

Yes, in the long run, "there will once again be lemon-soaked paper napkins." But the transition would be ugly, and go far beyond the "mere" billions of TARP funding.