...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 are...
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...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 saying...
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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...
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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 presented...
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...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 of...
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...Andrew Sorkin wrote a book titled Too Big To Fail. This book focus on the collapse of the investment bank Lehman Brothers, Merrill Lynch was sold by Bank of American, Freddie Mac and Fannie Mae was nationalized, and the government took 80 percent of AIG that took place on the weekend of September, 15, 2012. Significantly, he examined the financial markets reactions to the bankruptcy of Lehman Brothers. It starts with the failure of Bear Stern, one of the biggest banks in American. Bear Stern found the bank having too many toxic assets and could not cover its liabilities. The United States implement their own economy in the history of the largest and deepest government intervention. In May of 2008, the Federal Reserve did sale support to the fail Bear Stern to JP Morgan. Something similar happened to Lehman Brothers in September 2008, Lehman was one of the American five original investment banks. The author discusses that because of bad investment in the subprime mortgage market, insolvency, and shattered investor confidence led to the inevitable downfall of Lehman. At the beginning, Lehman was looking for 30 to 50 billion dollars in financial support by Warren Buffett. Moreover, Lehman tried to seek the financial assistance of the Korea Development Bank. The bank also wanted the government to provide financial assistance. But the results have failed. On September 12, 2008, many different banks including bank of America, JP Morgan, Goldman Sachs, Merrill Lynch, and Barclays...
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...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...
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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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...“Too big to fail” retells the true events taken place during the financial crisis of 2008. It centers its focus on Henry Paulson’s (Secretary of Treasury) attempts to contain the economic issues that arose in the period of August - October of that year. CEO of Lehman Brothers, Dick Fuld, tries to obtain external investment as their stocks began failing drastically. However, investors were doubtful to consider purchasing Lehman due to its exposure to toxic housing assets. Paulson works towards trying to convince CEO’s from major banks to buy Lehman stocks discretely since the Treasury was “opposed” to offering any kind of bail out as occurred to Bear Sterns. Lehman expressed to have been negotiating the sale of the company with Bank of America and Barclays. However, Bank of America decided to purchase Merrill Lynch. While Barclays was beginning to accept the terms of this merger, British bank regulators refuse to approve the deal. At this point Paulson sees no other solution and advices the CEO of Lehman Brothers to file for bankruptcy. Paulson quickly learns that Lehman's counterparty risk is impacting the entire financial market and the stock market is in freefall. Another crisis arises as AIG begins to collapse. Paulson's team realizes that if AIG is allowed to fail, its entire insurance portfolio will default and the entire financial industry will suffer massive losses. The Treasury decides to takes over AIG. Ben Bernanke, Chairman of the Federal Reserve, then argues that...
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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 “help”...
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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 concretaron...
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...Too Big to Fail The financial collapse of 2008 was something all of us felt in one way or another. At the time, this author’s employer kept itself intellectually honest by acknowledging the fact that it may have turbulent waters ahead due to the credit crisis. Much of this author’s employer’s day-to-day operations was funded by credit – or, borrowing money. When credit was frozen, there was serious concern that operations of this author’s firm could halt. Worse, the organization confirmed a resonant fear that its next payroll could be in jeopardy. If that were to happen, a multi-billion dollar company could be brought to its knees in a matter of days. The book Too Big to Fail highlights the seriousness of this epidemic when it speaks of General Electric, the world’s largest company, and its concerns about the credit freeze. This report will highlight numerous points in the financial crisis of 2008. This author will attempt to educate the reader with a firm and academic understanding of business ethics. It will attempt to highlight the turning points in the economic crisis and bifurcate back to the ethicality issue. A brief history of the stock market and Securities and Exchange Commission will be offered. This author will then identify the various ways the crisis could affect a business in the private enterprise. Lessons of the crisis will be presented along with managerial recommendations. Business Ethics Enron, Arthur Andersen, WorldCom, Adelphia, Martha Stewart…these are...
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...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 Federal...
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...“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 even...
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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 regulation...
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