Too big to fail
It is a movie about how the US Secretary of Treasury Henry Paulson attempted to rescue Lehman Brothers and AIG from the bankruptcy. It doesn’t spend too much time on explaining why that two Wall Street Giants were on the brink of collapse but it does tell the meaning of ‘Too big to fail’.
As we know now, Lehman Brothers filed bankruptcy while the US Federal Reserve saved AIG by using 85 billion dollars of taxpayer money. The most puzzling situation was that the Federal Reserve saved AIG instead of Lehman Brothers that the former one wasn’t directly regulated by them while the latter one was an investment bank under their regulation. In the film, Henry Paulson was asked by a reporter for the interpretation of Lehman’s bankruptcy. He responded the moral hazard had to be taken into consideration when they tried to maintain the stability of the financial market. That means companies should manage their risk carefully and should not take the government financial assistance for granted. Ironically, Federal Reserve saved AIG and Lehman CEO Richard Fuld shouted out a swear word after learning that from the news. Why did Federal Reserve make this decision?
The reason is simple. Too big to fail! When Henry told the office that the Federal Reserve would offer AIG the bailout, his subordinate immediately opposed and thought it was a violation to what he said to the reporter earlier. How did Henry response? I have to put down his original quote from the film.
‘Life insurance, 81 million policies with a face value of $1.9 trillion. Billions of dollars in teachers’ pensions. It’s everywhere. You want too big to fail? Here it is. You got a better idea? The suggestion box is wide open.’
It was not the end. Timothy Geithner, the President of the Federal Reserve Bank of New York, proposed that the investment bank should be merged with the commercial bank so they could obtain cheap capital from the government and depositors.
Henry asked ‘You want to make them bigger?’
Timothy replied ‘It is a trade-off. The upside is it will stabilize them. The downside is they will be really fucking big.
The takeaway from this movie is that the CEO should make the company become too big to fail which can ensure government lend you money under the emergent situation. 😊
