Firms Too Big to Fail May Grow Stronger
Tuesday, September 23, 2008
The government's recent intervention in the financial markets is separating companies into two categories: Some are too big to fail, and others are too small to bother rescuing.
The big have the potential to get even stronger because the perception that the government stands behind their debts can make it possible for them to borrow money more cheaply.
The small could find themselves at a deepening disadvantage.
"If there is a group of financial institutions in the United States that are immortal and others -- thousands and thousands -- are too small to save, then the immortals clearly have a leg up," said Kenneth A. Guenther, former president of the Independent Community Bankers of America.
The result will probably be a shakeout leading to greater concentration of power, less competition and higher prices, some industry watchers say.
The trade-off for the dominant players could be tighter regulation. For example, as Wall Street investment banks Morgan Stanley and Goldman Sachs turn themselves into bank-holding companies to avail themselves of the federal safety net, they will have to abandon some of their profitable ways.
Whether stricter oversight will trump increased market power remains to be seen.
"The losers, I think, are the consumers at the end of it," said Douglas A. Dachille, chief executive of the New York investment advisory firm First Principles Capital Management.
It has long been a truism that some financial institutions are too big to fail, meaning that their collapse would cause too much collateral damage for the government to let it happen. The recent bailouts of American International Group, Fannie Mae and Freddie Mac have reinforced the idea.
The thinking goes like this: If the government agreed to lend insurance giant AIG $85 billion, what are the odds that it would let banking giants J.P. Morgan Chase, Citigroup or Bank of America go under?
Fannie Mae and Freddie Mac long benefited from a similar logic. They were chartered by the government to provide funding for mortgage lenders, and investors assumed that the government implicitly guaranteed the bonds they used to raise money. That perception was worth billions of dollars to the companies annually, according to federal studies.
The perception proved true this month when the government seized control of the companies and pledged to prop them up with as much as $200 billion of taxpayer money.