Who Else is Too Big to Fail?

The notion that some companies are “too big to fail” — too large and too interconnected with the rest of the economy for their failure to be permitted by government — is lamentably familiar to most of us in the wake of the 2007-2010 financial crisis. The term has most famously been applied to the biggest American banks (e.g., Bank of America) and insurance companies (e.g., AIG), and it motivated the multi-multi-billion-dollar government bailouts of 2008/2009. In some ways, it’s a radical notion: for most of modern economic history, the assumption has been that the economy could operate according to something like survival of the fittest. If a company is so mismanaged that it fails, so be it. That’s life in a competitive market. Of course, governments have from time to time propped up companies seen as particularly important employers, but such moves are always divisive. There has seldom been such widespread agreement that certain companies really are so big, and so important, that they cannot be allowed to fail.

But outside of the financial industry, what companies might reasonably be thought of as “too big to fail?” Are there companies the failure of which would be truly catastrophic? What companies are there such that, if they suddenly ceased operations, the result would be disastrous not just for individual customers, employees, and shareholders, but for society as a whole?

I’ll mention a few possibilities, and then open the floor for discussion:

BP, Chevron, and the other very large oil companies. As unpopular as they are, it’s hard to deny that their product is utterly essential, at least for the time being. Any one of the biggest companies going out of business would, I suspect, have a terrible impact on the reliability of supplies of gasoline and heating fuel, and would most certainly result in increased prices. On the other hand, most of the world’s oil supply flows through the big state-owned oil companies of the middle east, rather than through private companies like Exxon and Shell the others, the ones that come most readily to mind for North American and European consumers.

Big pharma. Again, not a popular industry. And much of what they produce — treatments for baldness, erectile dysfunction, etc. — is far from essential. But some of their more important products, including things like antibiotics and vaccines, truly are essential and an interruption in their supply could have catastrophic consequences, from a public health point of view. But then, that industry has enough players in it, with overlapping product lines, that it’s unlikely the collapse of any one company would have a huge impact. But really, I’m guessing here. Perhaps the collapse of the maker of whatever the single most antibiotic is would be catastrophic. (Does anyone know?)

What about UPS? That one may surprise you, but the company handles something over 5 million packages per day, which I’ve heard adds up to a non-trivial percentage of American GDP. If UPS disappeared tomorrow, of course, Fedex and the USPS would take up some of the slack, but the short-term effect on American business (and hence consumers) would be significant.

Locally, surely, there are lots of companies that might be considered essential. Companies involved in ensuring the quality of municipal water supplies might count (including the ones that provide the chemicals needed for water purification). And in places where fire departments are privately-run, those would obviously count. But really, I’m looking for examples of companies the failure or disappearance of which would have widespread effects from a social point of view.

Of course, the phrase “too big to fail” isn’t just descriptive. In the world of finance, it is seem as having immediate policy implications. In 2009, Alan Greenspan, the former chairman of the US Federal Reserve (and no fan of government intervention in the economy), said “If they’re too big to fail, they’re too big.” Are there companies outside of finance where such an argument could be made?

13 comments so far

  1. Romy on

    Thanks for the post…”economy could operate according to something like survival of the fittest”..I’m totally agree with this statement. big companies making profit for the shareholder and directors lets way..that’s the way company working nowadays..

    However, when the big companies face problem, government intervention to make thing better again (make sure the big fish not get caught)..government bailout using tax payer money..”to the action of the big company and the expense to the tax payer(moral hazard)”..it just unfair..the profit is enjoyed by shareholders and directors..but when thing get bad, everybody involve.

    “too big too fail” is not for 20 century..

    thanks just my point of view..might not acceptable to certain people.

  2. Tom Herrnstein on

    I’m not sure that any of those examples are analogous to a financial institution. The point of a bank being too big to fail, as I understand it, is that its failure would spread so much distrust through the system that the system would crash and cause any given business anywhere to fail because it cannot get credit. Your examples are companies that provide essential goods or services. A collapse of one of them would be extremely disruptive and harmful – and would have negative ripple effects throughout economies – but I’m not sure any of them would collapse the system of money and credit that our interconnected business world is built upon. Other businesses would step in fairly efficiently would they not?
    That being said, I think the obvious candidate for being the most important good is oil. If the world oil supply were suddenly severely curtailed then things get real ugly real quick. Everything else (making drugs, delivering stuff) is dependent on energy.

    • Chris MacDonald on

      Tom:

      I agree. None of my examples quite works. But I think it’s worth pointing out that the precise causal mechanism leading a business to be TBTF isn’t really important. Whether the key is a spread of distrust, or a lack of fuel to keep the ‘wheels’ turning, the point is that some companies just cannot be done without.

      One factor that I didn’t mention in my blog entry is concentration. The US banking industry is problematic because it is so highly concentrated (in a way that is problematic given the current regulatory scheme). I suspect that in order to find other, non-financial examples of TBTF, I would have to find other industries that are as concentrated as that one.

      Chris.

  3. Randy Grein on

    Correct – the mechanism isn’t the primary problem (although there may be legal and ethical issues) but the sheer size of a company, comprising so much of the market that failure would cause partial of complete failure of the entire system is something that needs to be prevented. We all know about the ATT breakup and subsequent re-formation based on the Standard Oil breakup about a hundred years ago. ATT and Verizon are outstanding examples of companies that are too big to fail. A collapse of either would destroy untethered communications in this country for several years. The biggest 3 oil companies would be another example. With production and distribution running over 97% capacity even a temporary problem causes vast moves in the market – and not coincidentally huge profits for the industry.

  4. Keesha Bolt on

    This article is appreciated. I just made a comment recently to a friend. We were talking about big business and the lack of integrity in operations. We have allowed things to go too far. Yes, and the area of ethical practices have become watered down, murky and a huge area of gray.

    What many of these large corporations fail to see is that we all suffer in the end. Lack of quality education, and the cost of living do not just choke out the poor, but it empowers some in both negative and positive ways. Some will push to survive by and some will rebel against society. Crime does not just stay in the “poor” areas or ghetto’s, as people become more and more desperate, it reaches every pinnacle of society. Stealing from people or taking huge tax breaks and not sowing back into society responsibly, Makes one a thief and a hoarders, regardless if you are rich or poor. They are truly living for today and not for our children. Prov.13:22-23 says that righteous men reap material & spiritual blessings & leave an inheritance to their children. Well it was not written to sit there, but to make it applicable to our lives. So many people say they believe and pray, but then become indignant when they feel convicted, or water it down and make it this huge grey area of taboo. Corporations need to take the place of the righteous man and society will receive the blessings and inheritance…..SUSTAINABILITY.

    I feel that if business were held accountable, I mean really accountable, and pushed to have social responsibilities, society as a whole will be in a better place. Just like a child who is out of control. If you spoil him and let him get away with things. He will lose control, and become a huge problem. Well we have to tighten the rope now! We must not allow integrity; trust, accountability and ethics get away.

    So I propose as a solution that big corporations must take those huge tax breaks and loop wholes they seem to wiggle through, and give a large percentage to education. No, and this does not mean that the government then take greater cuts, but at least keep education contributions constant,(government must behave ethically as well!) The extra monies from the corporations could supplement many programs in character education, Multiculturalism, and much needed research based, proven methods of teaching and learning academics. In the long run, we will have ethical, brilliant, young people, running corporations.
    Thank you.

    Keesha D. Bolt Ed S.

    Bridges2Life Community Development Corp.
    Columbia, SC 29229

  5. Niki on

    Please excuse my English…
    the comments before think about bad big companies, but what about caritas? Are they not too big to fail? I’m not catholic, but I think they play a big part in society and you would immediately recognize them missing. Furthermore they are the biggest entrepreneur in Germany and maybe worldwide!? A lot of people would be unemployed, others would miss the help they received before. Without Caritas, I can’t imagine how life would change from one moment to the next.

    • Chris MacDonald on

      Niki:

      I assume you’re talking about charities. They do lots of good work, but there’s no individual charity I can think of that is “too big to fail.” There’s no one charity, as far as I can think, that has such wide-reaching impact that its failure would have massive social implications. Can you suggest one that fits that description?

      Chris.

      • Niki on

        hi,
        yes I was talking about charities, but Caritas is the name of a big one that I mean can not fail http://caritas.org/

  6. Jen on

    My personal opinion is that TBTF is a fallacy in and of itself. If a company that big fails, it does have a lasting impact on people and long term trust is affected, but what makes this a bad thing? Isn’t it part of the problem that people in general are too trusting of these big entities? Aren’t we just a little too dependent on them to begin with? Why is it accepted practice that a smaller business must have a LOC just to operate on a daily basis? Wouldn’t that business be more stable if it had its own resources to draw on?

    So, when the people lose trust in the big corp, won’t they just become more self-reliant and stable? and wouldn’t that be a good thing in the long run?

    Ask Dave Ramsey what he thinks and I bet you’ll get some real food for thought.

  7. Randy Grein on

    Too big to fail is the waterlogged mountainside that crushes the whole village. Too big to fail is the tsunami that wipes out hundreds of thousands and destroys the homes of millions. Too big to fail is an intertwined financial ecosystem that, should it fail would destroy business, governments, and put us back to a middle ages economy.

    Unfortunately none of us have the necessary skill sets to survive in that kind of economy (and we couldn’t grow enough food anyway) so the resulting famine would kill off most of the population. It is very popular in some circles to romanticize rugged independence and self reliance, but they don’t do all that well in real life. Man is a social animal – slower and weaker than other predators our strength has always been our brains and each other. Like it or not we contribute to, and are dependent on society as it exists. ‘Just let them fail’ was tried, it was responsible for the 20 year boom-bust cycle of the 19th century which ended with the great depression. That should be enough reason for anyone.

    • Bob on

      I agree with you. My issue is that we and our elected officials should be on the look out for these entities and should be taking decisive actions to dismantle them in a way to does little or no harm to the economy but still keeps companies from so dominating a particular area that they are TBTF.
      Bob

  8. Megan on

    Interesting to think about, if TBTF is elsewhere, perhaps removed from spotlight for one reason or another. I have been thinking about this and remembered a case study in my business course about Alcoa. They were broken up once before, and I’m not well versed on their current business structure in detail but with aluminum prices rising, our govt getting involved and protecting US metal industry from imports from China, might this be an example?

    The ability to manufacture for Homeland Security reasons and to keep plants alive so our weapons are not all produced off shores would play a huge part in keeping a giant like Alcoa prosperous, wouldn’t it? What would happen if Alcoa “failed”? What impact would it have on companies like Boeing? Would the effects be more devasting than keeping it afloat?

    Just thinking out loud, I’d love your perspective on this. Thanks Chris

  9. […] to go under. As a result, billions of taxpayer dollars are spent to bail them out. Once “too big to fail” is ended, taxpayers will be protected from these bailout […]


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