Too Big to Fail – Before Crisis  Too big to fail financial institutions brought down the US economy and almost the whole world in late  These concentrated and systematically important institutions, for example AIG, Lehman Brothers, Bear Stearns, and the ones that were bailed out.

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.

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.

Big Oil still rules  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  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  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 single- regulation 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.

Policy Options continued…  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  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.