Please Define "Too Big to Fail" and "Systemic Risk"

Discussion in 'Economics' started by achilles28, Nov 3, 2009.

  1. achilles28


    How can any organization be "too big to fail"?

    Why can't JPM or Bank of America be allowed to fail?

    Why does the failure of Goldman Sachs or Citigroup threaten the entire Country with "systemic risk"?

    How exactly can one, single Corporation threaten the entire American economy if they go Bankrupt?

    Please explain in detail.

    The "dummies" would like to know.
  2. (republican) politically connected firm...

    definition enough?
  3. Lucrum


    No such animal.
  4. Dustin


  5. achilles28


    Please guys. No one line answers (although some are entirely valid).

    I hoped someone might argue the position of Bernacke, Geitner, Paulson, Ken Lewis, Blankfein etc.

    Can anyone run me through their logic, their math, their economics that justifies "too big to fail"? And how - exactly - one bank can threaten "Systemic risk" to the entire Country?
  6. I'm not an expert on the subject, but I think it all comes down to confidence.

    Suppose BAC was allowed to go bankrupt. Any amount above the insured limit by the FDIC, customers would lose that money. This would trigger an incredible loss of confidence in banks and the financial system in general, resulting in numerous bank runs etc. And we all know what happens at that point...

    Also consider GM. Imagine the incredible shock to the economy if GM all of a sudden went bankrupt, and everyone employed by GM was suddenly unemployed. Again, this would trigger a trickle down effect whereby a loss of confidence in the economy in general would have a devestating effect on all sectors.

    Again, I'm no expert so please comment if you disagree.
  7. It's whatever Bernanke, Geithner, The Powers say it is. That's all you need to know.

  8. uh, why?

    who are you?, or more precisely, from what perspective does seeking answers of insight on these most public persons help in your trading or position management?

    I am guessing perhaps confirming or denying a huge commitment to longterm bond position, or currency hedge?,

    otherwise, for us bit players in equities, what difference could it possibly make?
  9. if you gave a lot of money to obama's campaign, you're 'too big to fail'
  10. ElCubano


    I think the action we saw early last year in the complete vaporization of any bid support for any company on any exchange was a glimpse of what too big to fail means...Could this have been orchastrated? We may very well have witnessed the biggest ransom ever..
    #10     Nov 3, 2009