Transcript Revolt Against Big

Too Big to Fail – Before Crisis
Too big to fail financial institutions brought
down the US economy and almost the whole
world in late 2008.
 These concentrated and systematically
important institutions, for example AIG,
Lehman Brothers, Bear Stearns, and the
ones that were bailed out.
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Too Big to Fail – After Crisis
There are fewer institutions now and they
are even bigger than before.
 Similar situation with European banks,
and because of cross-border financial
flows, they are de-stabilizing economies
and stock markets.
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Anger Against Big Brother
Events in Middle East are a revolt against the Big Man (dictators and
autocrats).
 The anger in US against bailouts of not only banks but Big Motors
(General Motors, Ford, and Chrysler) even if it meant protection of million
of auto jobs is palpable – it is no longer, what is good for General Motors
is good for America.
 Similarly, there is growing frustration with Big Governments which is
blamed for inadequate delivery of essential services. Hence we have tax
revolts, tax evasion, and rising informal sector (30-50%) in both
developed and developing countries.
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Big Oil still rules
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Most of the petroleum and natural gas in the world is
controlled by a few State-owned companies.
Apart from OPEC countries, there is SINOPEC and
SINOCHEM in China, NAMCOR (Namibia), Hindustan
Oil, PINIG (Turkey), and so on.
These oil-giants behave like a second central bank and
usually have more assets than the central banks (in
terms of foreign exchange, royalties and other revenues)
In China, State-owned enterprises account for over 30%
of GDP
Conglomerates everywhere
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It is not only financial conglomeration but in most countries
these large institutions own media empires, financial
institutions, industries, hotels etc.
There are production sharing and trading firms that are large in
East Asia – hence trade collapsed during 2008 crisis.
Advantage is lower cost of capital for these big institutions.
There are resources flowing in and out of various institutions
and this enables them to avoid transparency, taxes, and public
scrutiny. Some might even be public companies, using public
money.
There is growing pressure from people via social media to deal
with these ‘monsters.’
Systemic risks this poses
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These and other large institutions may become
irretrievably insolvent (e.g. Satyam Computers in India in
2008) and must be taken over by the authorities.
And, if so, the governments will have to deal with that
problem even though the cost to taxpayers will be high.
But pre-emptive nationalization of the large banks or auto
industry or media etc is a terrible idea on policy grounds
as governments will not be able to manage these.
Policy Options
Should regulations be instituted to prevent such institutions
to become too big.
 Should they be broken up (e.g. AT&T was broken up before
and newer telephone companies such as Sprint, Verizon etc
came up).
 They have to be specially regulated, especially by a singleregulation that assesses all the risks of all the entities.
 Some degree of additional regulatory costs (in the form of
higher capital requirements, for example) can be imposed
on large institutions without rendering them uncompetitive.
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Policy Options continued…
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Improved Resolution Procedures for Systemically
Important firms. Issue a long-term debt instrument
that converts to equity under specific conditions.
Institutions would issue these bonds before a crisis
and, if triggered, the automatic conversion of debt
into equity would transform an undercapitalized or
insolvent institution, at least in principle, into a well
capitalized one at no cost to taxpayers
Process for orderly resolving the institution by
placing it in receivership.
Policy Options Conclusions
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At the same time, there were thousands of regulators
who were supposed to be watching the store, literally
rooms full of regulators policing the large institutions.
Warnings were given to regulators of impending crisis
but they chose to ignore them, believing instead that
the market could regulate itself.
In the future we must seek a system that takes
advantage of market incentives and makes use of
well-paid highly-qualified regulators. Creating such a
system will take time and commitment, but it is clearly
necessary.