Free Essay

Too Big to Fail

In: Business and Management

Submitted By mattemery
Words 5770
Pages 24
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 to prove that too big to fail policy is what turned a period of stagnant growth into the worst financial crisis since the Great Depression. It is a well known fact that the housing market and therefore the United States economy started slipping in late 2007. As the economy was faltering, it still managed to not slip into recession status until September 2008. It is lees than coincidental that America's fifth largest financial institution, Lehman Brothers, filed for bankruptcy on September 15, 2008, the very same time the economy plummeted. The instability of the market led to runs on banking institutions, which in turn led to more bank failures, which led to massive bailouts. These bailouts, while helpful at the time, lead to unprecedented national debt. Allowing banks, securities companies, holdings companies, insurance companies, and combinations of the aforementioned businesses to privatize profits and publicize losses due to foolish risk will eventually ruin capitalism as we know it.
Too big to fail is defined by Henry Paulson as “An institution whose failure would seriously hurt the economy or financial stability.” (Macey 2011). The Federal Reserve Bank of Cleveland stated that a financial institution was considered systemically important if it met the “four C’s principle”. 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 fifth largest financial institution in the United States and therefore considered systemically important but Lehman Brothers was the fourth largest (Macey 2011).
This paper will not end too big to fail policy, as others written about this same subject have not been able to either. The purpose of this particular paper is to present facts about the way the American people in form of their government treat its largest institutions, and the way those companies show their appreciation. While there are advantages to large banks, the risks greatly outweigh the benefits. Therefore, I will attempt to show that there are feasible ways to control a financial institution's grip on the heart of America's economy. The only thing stopping the process so far is that our elected policymakers do not possess the courage to stand up for their constituents in the face of political hazard.

Why Too Big to Fail Policy is Dangerous

Before the passage of the Gramm-Leach-Bliley Act of 1999, Senator Jack Reed (D-RI) said: “We run the risk of the doctrine “too big to fail”, that the financial institutions will become so large we will have to save them even if they are unwise and foolish in their policies. We have seen this before. We have to be very careful about this” (Grant 2010). Not only have we seen it before, but we have seen it since the passage of Gramm-Leach-Bliley, in the form of the largest bailout in history. The Financial Services Modernization Act of 1999, more commonly known as the Gramm-Leach-Bliley Act, repealed the last remaining parts of the Glass-Steagall Act of 1933. This was done in order to provide more competition in the financial services industry (Grant 2010). The Glass-Steagal Act was passed after the Great Depression in order to prevent banks from combining with securities companies. The idea behind prohibiting those mergers was in reaction to the bank runs that spurred the Great Depression. The other key part of Gramm-Leach-Bliley was repealing half of the Bank Holding Company Act of 1956 which required the Federal Reserve Board of Directors approval for the forming of a bank holding company. It also prohibited the bank holding companies from participating in most non-banking activities (Grant 2010). Five years before allowing banks to combine with non-banking companies, Congress had passed a law repealing the first half of the Bank Holding Company Act, which had restricted bank holding companies from acquiring other companies across state lines, in the Reigle-Neal Act (Grant 2010). All of this deregulation lead to an alarming rate of bank mergers and expansion, in fact there have been 10,787 bank mergers between 1980 and 2009. So, now that mega-banks are being formed, we should start to see the extra competition in the market that Congress stated was the reason for repealing regulations.
In 2009, there were 8204 banks whose deposits were insured by the Federal Deposit Insurance Corporation (FDIC) (Macey 2011). Of the over eight thousand banks, 116 (1.4%) of them controlled 77% of the 133 trillion dollars of all American bank owned assets (Macey 2011). Citigroup, JP Morgan Chase, Bank of America, and Wells Fargo alone hold 39% of all FDIC insured deposits. In 1980, however, the five largest banks in the United States held 12% of all deposits (Macey 2011). It hardly appears that there is more or fiercer competition that has resulted in all of the bank mergers of the last thirty years. Perhaps a partial explanation for large banks continuing to get larger and taking up more market share is because they have an “ease of access” advantage over smaller banks to lending. In the past, when systemically important financial institutions have failed, or been on the brink of failure, there has been a government bailout of that institution. Until the Failure of Lehman Brothers, no institution that large has been allowed to fail, which sets a precedent that creditors use as evidence of large financial institutions being safe investments (Cohen 2012). If larger banks are considered safer investments than smaller banks are, they will have the equivalent of a higher credit rating (Macey 2011), which as consumers, we know means a lower interest rate on credit. The mega-banks that have access to high credit lines at a low interest rate along with billions of dollars they hold in assets. This makes it possible for them to make loans of the magnitude that large multinational companies require. Financial Institutions of this size also make very large campaign contributions (Grant 2010). The massive donations, along with the unexpressed guarantees from the government that they will will be saved by taxpayer money if they do fail, allow these companies unjustified government influence (Macey 2011). When campaign contributions and lobbyists are effective, banks are helping to shape legislation as they did with the Financial Services Modernization Act, which assures these banks are able to keep their dominance. These competitive advantages cause the stock market, customers, and creditors to favor large banks, accounting for less competition.
“If the crisis has taught us anything, it's that banks fail and massive banks fail massively.” (Boone 2010). Larger banks, even though credit flow would show otherwise, are not inherently less risky than their smaller alternatives. Although the 266 banks with assets totaling over 3.1 billion dollars account for 80% of all deposits in the United States, they only hold 72% of the FDIC insured deposits (Macey 2011). During the last bailout, the government secured all deposits in the banks that were rescued, meaning that they paid out money to an extra eight percent of depositors (Macey 2011). When financial institutions acquire or merge with other non-related financial institutions there is no guarantee that the resulting company will be any more efficient. The board members of an investment bank that acquires a commercial bank for example may have no idea how to run a commercial bank let alone an insurance company. Also as a financial institution grows excessively large, the many branches become unwieldy and hard to manage effectively (Grant 2010). An example of this inefficiency would be Citigroup. When the Gramm-Leach-Bliley Act passed so that Citibank could merge with Travelers Insurance to form Citigroup, the resulting company was not any more profitable than Citibank had been, in fact Travelers was spun back off as its own company in 2003 (Grant 2010). There is no financial institution that can grow so large as to make it intrinsically safe unless it the only one that exists. At this time, there is no major calling for a socialized banking, insurance, and investment system in the United States.
In the event of a financial crisis, the government will always attempt to stabilize the economy by bailing out the largest and most interconnected corporations. In the case of the Great Recession, the Toxic Asset Relief Program (TARP) was the way that policymakers attempted to stave of a depression. Although when TARP money started being infused into the economy, the financial crisis plateaued and even started to get slightly better, the program was flawed. When banks accepted taxpayer money in order to save them from their mistakes, there were no conditions attached. The people responsible for the crisis kept their jobs and as of March 2012, the Government Accountability Office said that about one half of the 341 banks that received TARP money had repaid their loans with money they had received from other government programs (Dayen 2012). The government had lent money to banks at a near zero interest rate hoping to spur the economy. When the government needed money to paid off some of the large debt that was incurred by the TARP program, those same banks lent the government that same money back at about a three percent interest rate (Dayen 2012). Also, TARP money was not used for foreclosures which had been discussed in the original drafting of the bill. Each foreclosure costs an average of 250 thousand dollars to the economy as a whole, and there could have been approximately two million foreclosures avoided by the housing portion of the TARP bill that was not included (Dayen 2012). That alone would have added 500 billion dollars to an already sluggish economy. As of April 2012, it was estimated that the United States Gross Domestic Product (GDP) was at 900 billion dollars below potential (Bernstein 2012). The economy may be able to be propped up somewhat by billions of dollars of government money. The losses felt by the taxpayers in the form of inflation, joblessness, and government obligations that will be paid for by their children and grandchildren however, are not worth the risk that is being levied upon them by a handful of millionaires.
The best that the government has been able to do thus far to prevent too big to fail policy from creating another round of unwanted bailouts is the Dodd-Frank bill. The Dodd-Frank bill does help establish regulations that would allow the government to unwind a systemically important institution without saving them, however no American policy can override the laws or decisions of a foreign government (Boone 2010). As of 2009, JP Morgan Chase drew in 62% of all their profits from international sources (Boone 2010). Large banks do not just dominate the American market, but also the international market. In 2009, 40% of all international industry revenues were brought in by the five largest global banks (Boone 2010). In an attempt to reign in systemic importance, Dodd-Frank may have done the exact opposite, and assured that all too big to fail institutions now actually get much bigger. If a corporation can get so large that they become important in more than one country, there is no current way to let it fail in an organized way without causing a global financial panic. It seems that there is no way to protect the taxpayers of any of the major financial markets from the existing mega-banks. At least for now, 88% of all foreign investments by American financial institutions are held in the United Kingdom, leaving some potential of an international solution to this problem (Cohen 2012).

The Benefits of Large Banks

Considering all of the potential risks inherent in letting financial institutions grow to be systemically important, there must be some reason that mergers and acquisitions of this magnitude have been allowed to occur. As of now antitrust laws are not capable of dealing with the problem of large banks without reinterpretation. Antitrust laws are written in order to foster price competition in the markets for capital, products, and services (Macey 2011). As these institutions grow, there is no major change in the cost of banking, trading, or insurance, leaving most antitrust laws ineffective. The lack of a major cost increase also shows that there is no real danger to consumers, by the definition of antitrust laws. The other set of antitrust laws focuses on competition. As discussed earlier, the larger financial institutions are driving out competition, but are allowed to continue growing anyway. This is because in most cases it is considered that “The anti-competitive effects of the proposed transaction(s) are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community.” by the judiciary committee that oversees antitrust hearings (Macey 2011). If these mega-banks are considered to be so much more convenient and are meeting the communities needs, then they should not be prevented from forming.
Large financial institutions, while still vulnerable to market instability, do have an advantage over smaller banks for surviving crises because their holdings are more diversified. Three of the five largest banks made it through the 2007 – 2009 financial crisis largely unscathed (Cohen 2012). Canadian and Australian banks were some of the best performing banks in the world during the crisis, because they are incredibly large and centralized (Cohen 2012). Another reason to support having large banks in the United States is that the multinational companies need to borrow vast sums of money, and would prefer to do their business with one large bank, whichever country it may be in (Macey 2011). If there are going to be mega-banks in other countries, not allowing them in the United States will drive billions of dollars of loans and investments overseas.
The more regulations that are placed on the banking system, the more business will be driven to the shadow banking system (Cohen 2012). It is widely speculated that the latest financial crisis was started in the shadow banking system because of risky investments and behavior considered unacceptable in mainstream banking. By letting large banks continue to exist and actually peeling back regulations, there may be more business driven back to institutions that have some transparency and lower risk.
When Lehman Brothers was allowed to fail, they brought down the largest money market fund in the country, Reserve Primary Fund, with them (Cohen 2012). The government made a conscious decision to let Lehman brothers fail, and with it, the stock market. The housing and credit markets were stabilized however by TARP (Bernstein 2012). When proposed in 2008 there were 700 billion dollars set aside for the TARP program, and as of March of 2011, the Congressional Budget Office projected that 430 billion dollars had been dispersed and that the the government would only be able to collect 19 billion of it (Bernstein 2012). As of April of this year, if the United States government were to cash out all of its holdings in TARP companies, including a majority share of A.I.G., they would at worst break even (Bernstein 2012). There is actually a chance that the government might turn a profit from the bailout that was considered by many to be a waste of taxpayer money. If one of the too big to fail companies is propped up and allowed to survive, there is less of a market ripple, and a chance that there is little to no loss over time for the taxpayers of the country, so therefore having and saving the systemically important institutions may be safer for all parties.

What History Has Shown so Far

“It's possible to have a banking crisis even without too big to fail. It was a lot of small banks that collapsed the financial system in the 1930s.” Paul Krugman (PBS 2010). Banks will fail throughout the future, but only if there is some sort of plan, and the resolve to follow that plan, will there be orderly resolution of failed banks without a financial system meltdown. When Continental Illinois National Bank and Trust Company failed in 1994, it was the largest bank failure in American history (Macey 2011). In order to prevent a massive run on the bank, the government paid off all of the uninsured depositors (Macey 2011). This is evidence of lawmakers inability to regulate effectively during a crisis. The investors knew that their deposits were not insured against failure, but no elected official wants to be the person who voted for their constituents to take a loss. There have been bailouts after bank failures in many other industrialized nations to date as well, and all of them are democracies (Macey 2011). The Federal Deposit Insurance Corporation Investment Act in 1991 gave the FDIC access to the United States Treasury in order to set up intermediate companies while seeking out the lowest cost resolution to financial institutions failures, unless that institution is deemed systemic. This decision is made by the FDIC, the Federal Reserve Board of Directors, and the Secretary of the Treasury with direction of the President of the United States of America (Macey 2011). There is no definition of systemic influence in the Dodd-Frank bill, which leaves the decision to bail out a company to the discretion of a few people who tend to overreact in the face of a potential crisis.
Commitments to protect certain creditors make it near impossible for the government to avoid bailouts, and everybody knows that bailouts are essentially guaranteed (Macey 2011). After the passage of the Dodd-Frank Bill, Fitch, Moody's, and Standard and Poor's all downgraded the credit rating of Bank of America and dozens of large banks (Cohen 2012). Dodd-Frank may not prevent bailouts in the future, but it sends a signal to the financial world that they are not inevitable. The average financial crisis over the last forty years has cost that nation's economy approximately 19% of GDP (Cohen 2012). Since 2001 the United States GDP had been growing at a rate of 300 billion dollar per year until the financial crisis started in late 2007 (see chart in appendix C). While the TARP money may all be paid back, if there had not been a crisis, GDP should be at 14.1 trillion dollars in 2010 instead of the 13.25 trillion it was at (see chart in appendix C). As of this year, the five largest banks in America have 8.5 trillion dollars in assets, or 56% of the entire United States economy (Gray 2012). There is no way that in the event of a crash the government could even afford to bailout these banks. While it was many small banks failing that triggered the Great Depression, in the Great Recession, there have been 319 banks with less than 2.5 billion dollars in assets that were allowed to fail (Cohen 2012). The financial system absorbed that loss but would not be able to sustain the loss of the largest banks.

Conclusion

“Never again will the American taxpayer be held hostage by a bank that is too big to fail.” were the words of our president after taking office in the midst of a financial crisis that was worsened by the too big to fail banks (Boone 2010). If there is a solution to too big to fail, the government has not implemented it yet. The Volker Rule, which was cut out of the Dodd-Frank bill, was an attempt to reinstate a modified version of the Glass-Steagall Act. If approved, this rule would have again restricted banks proprietary trading, trading for their own accounts, investing in or owning hedge funds or private equity funds, and proprietary trading for their own profit (Macey 2011). The difference between this and the original Glass-Steagal Act is that banks would have been allowed to participate in some of these practices for clients profit. This rule also would have dwindled banks size by limiting each bank to no more than a 10% market share (Macey 2011). The Dodd-Frank Bill that did pass is a step in the right direction, and during its deliberation, President Obama was “…absolutely confident that the bill that emerges [Dodd-Frank] is going to be a bill that prevents bailouts. That’s the goal.” (Macey 2011). The act states that in order to enact a Title II resolution for a failing systemically important institution, there would need to be a two thirds vote by the Board of Governors of the Federal Reserve System, and two thirds of either the FDIC or Federal Insurance Office boards must write a recommendation to resolve the company and how to, and then the Secretary of the Treasury along with the President must decide to wind down the company. The winding down would be done according to the living written by that company's executives that would have been required to be provided by another section of the Dodd-Frank Bill (Fitzpatrick IV 2011). The guidelines for deciding to resolve the failing institution are:
Whether letting the company default or close down completely would be more cost effective
Whether or not bankruptcy would cause instability to the economy
Whether a Title II resolution would be any better than bankruptcy
Whether or not there could be a private sector resolution (Fitzpatrick IV 2011).
By giving the government a plan in the event of a catastrophic failure, and by including guarantees that the leaders of the failing banks would be held accountable for risky and ultimately foolish investments, there is a way to avoid future bailouts. The problem with the Dodd-Frank bill is that if the people who decide whether or not to wind down the company see no other option, bailouts are still a likely possibility.
The option that I have found that appears to be an effective and objective solution to the problem was presented by the authors of Failure is an Option (Macey 2011) and referred to as the “Bright Line Limit”. This rule would require the downsizing of all financial institutions with aggregate liabilities that are more than 5% of the FDIC’s targeted Deposit Insurance Fund (DIF), which right now would equal close to 3.1 billion dollars. The DIF is the fund that pays out insured deposits in the event of a bank failure (Macey 2011). Each bank would have time to stage an orderly downsizing now instead of trying to reorganize as they are failing, and have a very low value. If these systemically important institutions did not downsize voluntarily, they would risk a mandatory government run breakup. This would assure that in the event of a failure, there would be enough money to cover all insured liabilities preventing panic and a bank run. More importantly, this rule would have an objective number that will determine the exact size a bank is allowed to grow to and will not change on a whim. As banks spin off their other financial services divisions to meet the required size, there would be more competition encouraged. There would also not be any mega-banks for smaller banks to try to emulate in order to raise their own profits. This would reduce the risk that one particular segment of the economy failing would drag down a majority of banks that all have similar holdings and practices.
Taxpayers do not like bailouts, but policymakers are terrified to let large financial institutions fail on their watch, especially if a bailout adds value to the economy. Banks will not downsize voluntarily or decline bailout money if they fail. This means that there must be some sort of government intervention, because private institutions will not self regulate, to keep the taxpayers from such an unwanted and extremely high risk. Over-regulation after a crisis can hurt market growth, but under-regulation during good times can lead to risky behavior by the financial industry. Regulation is not the answer, because it will always be a compromise in order to pass through Congress, and therefore will continue to be ineffective. The only way to prevent a single financial institution from being able to hold all American citizens, and if large enough, the entire world’s population hostage, is to prevent it from existing in the first place.

References

Bernstein, J. (2012). TARP worked, but it's not the end of financial reform. http://blogs.cfed.org/cfed_news_clips/2012/04/tarp-worked-but-its-not-the-en.html retrieved 7/23/2012

Boone, P., & Johnson, S. (2010). Way Too Big To Fail. New Republic, 241(18), 20-21.

Cohen, H. (2012). Preventing the Fire Next Time: Too Big To Fail. Texas Law Review, 90(7), 1717-1743.

Dayen, D. (2012). Here we go again on the “TARP worked” meme retrieved July 23, 2012 from http://news.firedoglake.com/2012/03/09/here-we-go-again-on-the-tarp-worked-meme/

Fitzpatrick IV, T. J., & Thomson, J. B. (2011). An End to Too Big to Let Fail?: The Dodd--Frank Act's Orderly Liquidation Authority. (Cover story). Economic Commentary, 2011(1), 1-4.

Grant, J. (2010). What the financial services industry puts together let no person put asunder: how the Gramm-Leach-Bliley Act contributed to the 2008-2009 American capital markets crisis. Albany Law Review, 73(2), 371-420.

Gray, C. Boyden 08/07/2012 Dodd-Frank Helps Big Banks at Expense of Small Ones. The Washington Post

Macey, J. R., & Holdcroft, J. P. (2011). Failure Is an Option: An Ersatz-Antitrust Approach to Financial Regulation. Yale Law Journal, 120(6), 1368-1418.

Markham Jr, JW - Fordham J. Corp. & Fin. L., 2011 Lessons for Competition Law From The Economic Crisis: The Prospect For Antitrust Responses To The “Too-Big-To-Fail” Phenomenon Retrieved 7/23/2012 from bepress.com

PBS news hour from April 06, 2010 Small Banks vs. Big Banks retrieved on 8/4/2012 from http://www.pbs.org/newshour/extra/video/blog/2010/04/post_19.html

Appendix A: Critical Thinking Six Steps Used to Draft Your Paper

Compose your reflections below.
Step 1. Demonstrate a positive attitude toward solving a problem.
This topic was one that really interested me, and I actually looked forward to doing the research. Not only was this a class assignment for me, but also a chance to investigate my own beliefs. Already having an opinion on the topic, it was great to see the floods of articles that agreed with my ideas and shaped them much more elegantly and with more facts to back them up. I also liked looking up the opposing view so that I could have a more balanced thought process, and to judge the opposition points with my new found knowledge. Turns out I was surprised by the amount that I actually agreed that big banks seem to be more stable.

Step 2. Focus on the accuracy of the assumptions and conclusions.
I tried to look up resources by probable accuracy. The Capella University library gave a synopsis of the author’s credentials with the articles the host, making it likely that I was not wasting my time reading biased, uninformed propaganda. With the internet searches, I would look specifically for an article or blog post about a very specific piece of information such as figures about TARP, GDP by year, and size of bank investments. By looking for specific facts, and checking citations, I could make sure I was using reliable information. As far as my assumptions and conclusions, I tried not to let my assumptions form my paper, and then drew new conclusions based on the research that I had just finished, which were actually not entirely different then my assumptions.

Step 3. Break the problems into workable parts
My work started by reading a long detailed account about too big to fail policy that went into great detail about problems, case studies, and a possible solution. This article gave me a frame of reference with which to create my questions about the topic and form an outline. Once I had my outline, I had more specific topics to research, that helped focus what I was doing and shape the paper.

Step 4. Do not guess or jump to conclusions.
I admit that my topic statement says that too big to fail financial institutions are a bad thing, and I had not done any research before forming that statement. This is definitely jumping to a conclusion, but I did look into the idea that having just a few very large banks could actually prevent financial instability. The reading that I did pointed in one direction much more than the other however, so I drew my final conclusions based upon evidence.

Step 5. Employ meaningful self-dialogue throughout the process, including written or drawn prompts as well as spoken words.
Throughout my process I kept two pages of notes. One was for journal research, the other for internet research. Both were divided into sections following my outline. As I read, I filled in sentences, in different colors indicating the source, under the appropriate heading. When I started writing, the notes were organized well enough to help the paragraphs form easily around them.

Step 6. Briefly describe what it felt like to go through the process.
This felt like most other research papers I have written in the past except that in this class, we were required to turn in more segments along the way. By turning in small parts of the paper during the process, I was forced to not procrastinate which is one of my biggest flaws when it comes to school work. The process of developing a thesis statement and checking for its accuracy makes me feel like I have not only educated myself on the topic, but also like I have solved a puzzle.

Appendix B: Critical Thinking Six Steps Used to Revise Your Paper (Unit 6)

Compose your reflections below.
Step 1. Demonstrate a positive attitude toward solving a problem. I was aware while writing, that I had made a few errors that were overlooked at the time. I did want my paper to be a well written as I was able, so I looked forward to rereading and correcting it. I found when I read it a few days after writing it that there were a few spots that were not as easy for me to follow as they were while I was writing which helped me see my paper from a reader's perspective which I find helpful.

Step 2. Focus on the accuracy of the assumptions and conclusions. As I wrote the paper, I was sure that my thoughts had been laid out in a clear logical manner. After reading my peer reviews, it seemed that I had almost succeeded, but not as well as I had assumed. While revising, when I put myself in the reader's position, I was able to find the flaws (hopefully) that I didn't realize were there.

Step 3. Break the problems into workable parts. The first set was to reread the paper. When I got to the end, I thought about questions that I had, or awkward parts that did not seem correct. Then I read through the paper again making corrections as I went. Then I read the paper one more time and found it to be satisfactory, then had my girlfriend proofread it a final time.

Step 4. Do not guess or jump to conclusions. I waited three days after finishing my writing to read my paper so that my thought process had left my head. When rereading my paper, it was kind of new to me which helped me have fewer preconceived notions about the merits of my paper.

Step 5. Employ meaningful self-dialogue throughout the process, including written or drawn prompts as well as spoken words. The second time I reread my paper, I worked out questions that I had and awkward phrases aloud until they sounded correct to me. That is when I made the correction, and tried again from further back to see if the flow was disturbed.

Step 6. Briefly describe what it felt like to go through the process. This process was not just a helpful step, but a necessary one to insure that my work reflected my thoughts properly. During the first write, I was more focused on getting the correct ideas down in the correct order, that grammar and phrasing suffered. I felt relieved when revising that my work shaped out the way that I hoped it would from the beginning of the process.

Appendix C: Optional (not part of the grade

http://janikpc.com/gdp.htm…...

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...LEHMAN BROTHERS: TOO BIG TO FAIL? WILLIAM RYBACK LEHMAN BROTHERS: TOO BIG TO FAIL? Copyright by the Toronto Leadership Centre. This case was prepared exclusively for a class discussion at a Banking, Insurance or Securities session offered by the Toronto Centre. Information has been summarized and should not be regarded as complete or accurate in every detail. The text should be considered as class exercise material and in no way be used to reach conclusions about the nature or behaviour of any of the persons or institutions mentioned.. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form without the permission of the Toronto Leadership Centre for Financial Sector Supervision. Sources: This document is based on information that was in the public domain at the times mentioned or which became public after the resolution of the issues. It does not include information confidential to the financial institution involved. 1 LEHMAN BROTHERS: TOO BIG TO FAIL? WILLIAM RYBACK This case study is written and presented by William Ryback, former special advisor to the Financial Supervisory Service in Seoul, Korea; Deputy Chief Executive of the Hong Kong Monetary Authority; and career bank supervisor in the United States. The material presented is derived from public media sources. INTRODUCTION In this case study an example of a large bank failure and its after effects on the financial markets is......

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...Review of Too Big To Fail - In this movie following Treasury Secretary through the 2008 financial crisis as it morphed into a national and international crisis, the mix of staged and true-to-life news recaps was quite compelling. Although I personally know the turn of events (I have several investments that saw the effects of the 2008 financial crisis) I found it unique to start the movie with true news clips which brought great validity to the story line. I personally was constantly questioning “did that really occur or was that Hollywood’s input?”. The start of the movie where a government official – the Treasury Secretary – was asked to call a private investor (Warren Buffet) to assist Lehman Brothers shocked me. Did/Can he really do that? I find that event to be bordering on unethical behavior and wonder what Buffet thought of our government when they asked him that. Later in the movie, Buffet is called again – what power Buffet has!? I also questioned the fact that our Treasury Secretary had former employment ties to Lehman Brothers and could be a bit jaded. His professional experience obviously was something the government wanted to capture. The hasty firing of the higher executives at Lehman Brothers was a bit hasty in my opinion. The movie depicted that their personnel replacements were not well thought out as well (poor handling of the meeting with the Korean representatives). Following that, I found it very odd that our government asked other companies to......

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Too Big Too Fail

...The movie “Too Big to Fail” based on the financial problems on Wall Street since 2008. It focuses mainly on the free fall of the United States economy, and what measures were taken to try to resolve the issue. This movie reveals what was really going on in the Stock Market during 2008. Hank Paulson, Secretary of Treasury, finds himself in a position where he is forced to make some very unfavorable decisions as the investment banks, such as Lehman Brothers and Bear Sterns, begin to fall. When Bear Sterns was almost forced into bankruptcy, the Department of Treasury offered them a bailout, and was able to save the bank. Richard Fuld, CEO of Lehman Brothers, expects the same treatment when his bank begins to fall. Because of some of the investments Lehman Brothers had made, outside investors were wary of putting money into this bank for fear that it might put them in the same spot in a short period of time following their investment. It is also revealed the Dick Fuld was offered many deals that he denied because he believed that Lehman Brothers was worth much more then was being offered. Hank Paulson is then put into the position to decide whether to offer Lehman Brothers a bailout or force them into declaring bankruptcy. Paulson soon realizes that a snow ball effect is in existence. Once the investment banks start failing, so do other companies such as AIG, who depended on the investment banks, and GE, who is also failing on daily obligations. Soon enough the whole economy is......

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Too Big to Fail

...Too Big To Fail Chapter 19 Setting This chapter starts with Lloyd Blankfein, CEO of Goldman Sachs (GS), thinking about his company’s future. Stock market is dropping and the regulators still haven’t decided on what, when and how to fix the financial system. Henry “Hank Paulson” the US Treasury Secretary at the time, strongly believes the only way to build confidence in the market place was to have the government pass the Trouble Asset Relief Program (TARP). He had a big task ahead of him because it would be difficult to get lawmakers to agree his plan. Currently Wachovia another well known bank is in crisis. Its two month old CEO, Bob Steel, is trying desperately to broker a deal without government intervention, with either Citibank or Wells Fargo and Company (WFC) to save his bank. In the meantime, investors’ confidence in Morgan Stanley is waning and the company is urgently trying to close a deal with the Japanese company Mitsubishi to get more capital on the books. Companies across the board are trying to become more liquid in the tight credit market. Major Players Hank Paulson is trying his best to reach an agreement with Congress, so he can get TARP passed as quickly as possible. He dislikes politics but knows he has to work with the politicians or his bill would die. His solution to the financial crisis is TARP and working with lawmakers would be the only way to get this done. To get Congress on board, he would also have to work with the chairwoman of the......

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Too Big to Fail

...The idea that a business or a financial institution becomes so large and powerful that it is ingrained in the economy and that if it fails it will have a ripple effect throughout the economy. The phrase “too big to fail” is directly associated with the government providing financial assistance to prevent the failure of such businesses. The failures of these companies are directly interconnected with the economy. Large companies usually do business with other large companies, and if a large company fails, then the companies that rely on the business will also be brought down, this directly affects business institutions and the employment market. The number of jobs related to that business will have a downturn, and because these companies are so large that the employee number is also ridiculously high. The phrase “too big to fail” arose in the financial crisis of 2008. The government had to bail insurers, banks, and auto companies. These companies became big by swallowing smaller companies that in the end, they took competitive advantage and knew that the government would have to bail them out or else risk economic collapse of global proportions. Too big to fail does not literally mean that a financial institution cannot fail, but that it is not allowed to fail. Being too big to fail does not mean that there are no risks, in fact it means the opposite. Financial institutions are really fragile inherently, as intermediaries they are exposed to all different kind......

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...Reflexión de la película Too big to Fail Básicamente la película narra lo que fue la crisis económica de los EstadosUnidos. Esta nos muestra los dilemas que tuvieron los participantes de los bancosen problemas y más que eso como el gobierno tuvo que intervenir para que noexistiera una catástrofe financiera. Una de las principales causas de esto fue ladesregulación de los mercados financieros.De principio muestra como el secretario de la reserva federal de los estadosunidos ve caer a las acciones de bear stearns teniéndolas que vender a laempresa JP Morgan a partir de allí todo se convierto en caos. Analizando más afondo considero que todo esto caos lo ocasionaron los bancos gracias a suflexibilidad a la hora de brindar préstamos a personas que eran incapaces depagar sus deudas pero solo por las ambición de ganar más dinero ya quecualquier persona consiente sabría que un futuro esta burbuja explotaría.El segundo punto fue la caída de Lehmans brother para el concepto de todos fuela más dura de las caídas ya que esta fue la que desencadeno la caída de otrasempresas. El presidente de esta empresa se niega a vender las acciones a unprecio bajo a pesar de estar enfrentando una situación que no solo lo hunde a elsino también afecta al mercado en general y lo lleva directamente a la quiebra, yaque también paulson se negó a ayudarle para supuestamente crear unaconciencia de que los presidentes deberían ser responsables de sus actos.Empresas coreanas intentaron comprarlas pero no......

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Too Big Too Fail Movie Review

...“Too Big To Fail” Movie Review Too Big To Fail The story took place when America faced financial meltdown in year 2008. This story focusing on the actions of U.S. Treasury Secretary, Henry Paulson to contained the problems during the period of August 2008 to October 13, 2008. Dick Fuld, CEO of Lehman Brothers, is seeking external investment, but investors are wary as Lehman is seriously exposed to toxic housing assets and the Treasury is ideologically opposed to offering any sort of bailout as they did for Bear Stearns. Paulson directs Fuld to declare bankruptcy before the market opens after both Bank of America and Barclays, whose express interest in Lehman's "good" assets fails the deal. The crisis then has spread to Main Street after GE is unable to finance its daily operations. Paulson decides that the only way to get credit flowing again is direct capital injections. The banks agree with the terms of that they will be receiving mandatory capital injection and they must use this money to get credit moving again, but Paulson balks at putting additional restrictions on how the funds are to be used. Paulson's Treasury deputy for public affairs laments that the parties who caused the crisis are being allowed to dictate the terms. At the end, although markets did stabilize and the banks repaid their Troubled Asset Relief Program funds, credit standards continued to tighten resulting in rising unemployment and foreclosures. As bank mergers continued, these banks became......

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...“Anything that is too big to fail is too big to exist”. Simon Johnson. Discuss. Simon Johnson is an American economist working as a professor in the MIT Sloan School of Management. He is known for his positions against the unregulated Wall Street and what he tries to tell here is that any system, the banking system in particular, that cannot survive without an element of the system is not viable. The term “too big to fail” refers to the big banks deep rooted in the banking system such as Goldman Sachs or Lehman Brothers. The size of these entities is so big that should one of them bankrupt it would soon drive the whole system into bankruptcy. Here Simon Johnson advise us to reduce the size of big banks in order to limit the risks of another collapse of the world’s finance. This statement is strongly related to the notion of Moral Hazard, as the banks are too big to fail, they know that public authorities will do anything to prevent there collapse in case of a problem. That is what happened in 2008 with the Emergency Economic Stabilization Act, which consisted in a bailout of the U.S. financial system representing more than $700 billions as an answer to the subprime crisis. With that in mind we can understand better the logic of Moral Hazard, the bailout of 2008 set a precedent for banks and they know they have a safety net so they can take more risks in their activities. This self-destructing logic is a manifestation of crony capitalism, it is like there is no......

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...States Secretary of the Treasury to spend up to $700 billion to purchase mortgage-backed securities and other troubled assets in order to prevent the collapse of the U.S. financial system (Nolen). Ultimately, the policy resulted in federal bailouts intended to strengthen consumer confidence, increase liquidity, and stabilize the credit market by protecting “too big to fail” banks from failure. Supporters of the bailouts argued that, though it may not be ideal, protecting the largest banks against failure was necessary to prevent an even larger financial crisis from devastating the entire U.S. economy (Slavov). The 2008 financial crisis highlights the dilemma created by “too big to fail” banks, a term given to financial institutions that are so intertwined in the economic system that their failure would result in economy wide repercussions and ultimately give rise to a recession. This was the argument in favor of bailouts in the subprime mortgage crisis. These major banks are so crucial to the economy that if they collapse, other institutions that are financially connected to them may also fail, creating a domino effect across the economy (Leeson). As a result, many policy makers advocated in favor of creating a security net for these institutions so as to prevent against a total financial meltdown and a collapse of the American economy. An unintended consequence of the financial bailouts was that they encouraged risky lending by insuring......

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...“Too Big To Fail” Paper The HBO presentation, “Too Big To Fail” explains the events leading up to and a result of the 2008 stock market crash/recession and how Secretary of the Treasury Henry Paulson and his associates work against time to solve the crash before the entire global economy fails. The problems that led up to the market crash of 2008 are numerous, yet a select few are widely regarded as the problems with the largest impact on American markets. For example, mortgage companies would acquire a multitude of mortgages, bundle them all together and then sell them on the market. The problem with this method of business is that if a few of the mortgage owners couldn’t make their payments, they dropped the whole mortgage entirely, exactly what happened in 2008. In 2008, buyers that bought bundles of mortgages would often suffer losses as soon as home prices dropped due to the lack of difficulty in obtaining housing loans. This easy access to housing loans resulted in predatory lending, since mortgage companies like Fannie Mae and Freddie Mac weren’t affected if the mortgage payers failed to make payments due to insurance from mostly AIG. However, as soon as home prices began to drop, massive amounts of people began to bail from their mortgages, resulting in AIG being forced to pay billions upon billions of dollars to mortgage companies at the same time, nearly bankrupting AIG. In addition, Lehman Brothers was a key buyer/seller of mortgage bundles, a business venture...

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... The cost to society from the failure of a large, complex bank (what is known as Too Big To Fail) is considerably higher than the cost to society of the failure of a non-systemic bank. This is because of their complex interconnectedness with the other institutions in the market. TBTF banks engage into activities and services with a network of other institutions in such a way that if a TBTF bank becomes insolvent, all those in the network will be at risk. For example, following the bankruptcy of Lehman Brothers, contagion spread by many channels, including prime brokerage, OTC derivatives positions, money market mutual funds, tri-party repo and wholesale funding markets. The cost to society of such failures is tremendous. One example is the increased tax burden on tax payers as a result of governments bailing out those banks. Views including the lack of proper regulation and the engagement in complex finance activities such as CDS have been blamed for the TBTF phenomenon. There have been a number of proposed solutions put forward to tackle the problem of TBTF whether on the regulatory side such as the separation of commercial and investment banking or on the disclosure side such as Basel 1,2 and 3 accords. By critically reviewing the arguments and evidence presented in the literature, this essay determines how effectively the solution of separating investment and commercial banking proposed by regulators of financial markets will deal with the problems of institutions which......

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Too Big to Fail

...First of all, it’s necessary to understand the Too Big To Fail (TBTF) doctrine to understand the quote. Too big too fail concept appear in 1984 and imply that a company cannot fail because of the systemic failure its bankruptcy could lead to. More, the banking and the insurance sector have a social impact on the economy by his status of keeping customer’s money. Also, by support in the economy, a lack of confidence in banks could lead people to withdraw their money bringing the system into collapse. Those reflections have created the TBTF doctrine. Obviously, this idea leads to a number of questions and especially the existence of this doctrine in a capitalism economy. Without the notion of bankruptcy linked to responsibility, the being of Too Big To Fail is dangerous. It’s the idea of Simon Johnson saying that this this kind of company shouldn’t exist. Because a company can’t fail, the behavior of the whole company could lead people not to be responsible because there is no consequence. If we agree that the incentive of most companies is to make money no matter what kind of industry it belongs to, the lack of consequences of their bad decisions could lead its management to take more and more risk without any compensation in order to make as much money as possible. The too big to fail principle avoid any bankruptcy by having in most cases the government as a final warranty to save the company in any situation. To avoid those issues, Simon Johnson and more voices are raising......

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