Last summer, Eric Dash of the New York Times wrote an excellent article on the problems associated with big business in the U.S. Dash noted that almost 100 years ago, Supreme Court Justice Louis Brandeis wrote prophetically about the “curse of bigness.” Justice Brandeis denounced generally the influence that big business had on U.S. politics and its economy.
Today, Brandies’s “curse of bigness” is incorporated into the less pejorative term for large U.S. companies — companies that are “too big to fail.” Certainly in light of the recent U.S. financial crisis, people are well aware of the influence that these large U.S. companies have on U.S. politics and its economy. But these “too big to fail” companies may also be creating moral hazards in business operations, and the U.S. has yet to establish a unified system for dealing with the business of bigness.
Amidst the recent financial crisis, deeming companies “too big to fail” legitimized the government’s bailouts of large U.S. companies facing financial ruin. The U.S. feared that the failure of a “too big to fail” company would not only affect the company and its immediate stakeholders, but such a failure could also bring down the country’s broader economic system. Accordingly, companies invoked the “too big to fail” exception to financial demise, imploring the government to save a company to avoid far-reaching adverse affects on the U.S. economy if the company should be allowed to fail. In less than five years, the U.S. Department of Treasury has committed almost $590 billion to bailing out 833 companies. To date, less than a third of that money has been returned.
The “curse of bigness” is also present in the context of corporate compliance monitoring of large U.S. businesses. At Marquette Law School’s recent Hallows Lecture, former U.S. Deputy Attorney General Mark R. Filip cautioned against aggressive monitoring of U.S. corporations. Filip noted that an indictment of a company is essentially the death knell for that company. In his discussion, Filip pointed to the example of the prosecution of Arthur Andersen, which at one time was one of the “Big Five” accounting firms. Despite a guilty verdict that was ultimately overturned by the Supreme Court, Arthur Andersen had lost its business reputation and has never returned as a viable business. Filip noted that 28,000 employees in the U.S. lost their jobs ultimately because Arthur Andersen was simply indicted, but never found guilty of any wrongdoing.
So how should the United States deal with these large companies that constitute U.S. “bigness”? Should we be inclined to bail them out when they face financial collapse? And do we likewise hesitate to prosecute them for potential wrongdoings in order to avoid another Arthur Andersen? Given that the demise of such large companies — even as result of a mere indictment — potentially has significant adverse effects on jobs and the U.S. economy, the sensible approach may be to bail out certain companies and to proceed with caution when investigating those same companies for non-compliance.
But if the U.S. takes such a position, it may also create moral hazards in business operations. Many commentators have recognized that these mega-companies may be more inclined to make risky business decisions knowing that the government is willing to bail out the companies to avoid the effect of companies’ collapse on the broader U.S. economy. Likewise, companies may be less willing to toe the line of legality in their business operations knowing that the government would hesitate in indicting them for any potential wrongdoings.
Not surprisingly, some believe that if a company is “too big to fail,” then it is “too big to exist.” In fact, Senator Bernie Sanders of Vermont introduced the “Too Big to Fail, Too Big to Exist Act of 2009.” Briefly, the bill seeks to have the Secretary of Treasury identify the “too big to fail” companies and break up those entities.
Yet that approach seems like a knee-jerk reaction to a crisis situation, if not fundamentally against an economic system that encourages economic growth. Undoubtedly, outside the financial crisis, large businesses have benefited the U.S. economy.
Other more conservative approaches view the “too big to fail” companies as a secondary problem. Rather, the problem is that the U.S. has failed to establish a uniform system for monitoring and restructuring the large U.S. businesses if they should face collapse.
Yet, at least with respect to increased monitoring, such an approach may lead to undesirable results similar to the Arthur Andersen result. And if Congress allocates money to increased monitoring, there would most likely be increased pressure for results in the form of cases brought and indictments — the exact result that former U.S. Deputy Attorney General Mark R. Filip cautioned against.
China’s approach is simply to refuse to recognize companies as “too big to fail.” Yet that approach seems overly simplistic, and may in fact lead the broader U.S. economy into financial collapse.
Certainly, the “curse of bigness” still presents significant problems to the United State almost 100 years after Justice Brandeis coined the term. And perhaps the greatest dilemma is finding a cure that is not worse than the curse.
The “to big to fail” label is unwarranted in most instances. Was Arthur Anderson—a Big Five Accounting firm employing 28,000 employees—“too big to fail?” The accounting work it once did could be done by competitors in the marketplace, and many of the former employees found work with these other accounting firms that stepped (or in some cases, grew) into the void. So the market worked; the company was not too big to fail.
I could understand the argument that some *banks* were too big to fail—not because the employees would be out of work; they would find other work (and I don’t say this lightly—I’m an employee of one of the nation’s largest banks) but rather because large bank failures would so negatively affect the integrity of the nation’s financial system. Our system relies upon private banking entities at least as much as it does upon the Federal Reserve to maintain the money supply and ultimately to keep the economy going. It’s true that bank failures have been commonplace in the past several years, but they have mostly been non-events since larger or wealthier banks have been able to step in and buy the assets of failed banks in deals overseen by the bank regulators, and sometimes (but not always) subsidized with FDIC money. Depositors at these banks have seen no negative effects beyond a name change on their bank statements. But as larger and larger banks failed, the government addressed the question: who can step in and buy the biggest banks if they fail? The answer being “nobody,” action was taken to ensure the biggest banks didn’t fail. They were “too big to fail” not because they employed a lot of people, but because huge, unmitigated bank failures might have overwhelmed the FDIC and truly sent the nation’s financial system into a long tailspin. Some of us might have been back to putting our money under our mattresses or burying it in jars in the yard like our parents or grandparents did (which, incidentally, would earn you almost as much interest as you have been getting in cash investments lately).
In sum, though other big companies *affect* the financial system, banks *are* the financial system. Thus, the biggest banks might be too big to fail, but most other big companies are not.