Too Big To Fail? Little Ol’ Me?

by Stuart Shapiro

Usually businesses like to brag about their size, their acquisitions, their power, etc.  Well now the Treasury Department and the Federal Reserve are deciding which firms present a systemic risk under the Dodd-Frank financial reform statute.  Such firms will be subject to closer government oversight, as their failure could require bailouts to prevent a system wide meltdown.  Now, no one wants to be “too big to fail.”

Hedge fund managers, for example, normally pride themselves on being Masters of the Universe. But armed with PowerPoint presentations and financial studies, representatives from some of Wall Street’s most powerful funds, including D.E. Shaw and Company, Elliott Management and Caxton Associates, met with Federal Reserve staff members earlier this year to make one point: We’re too small to matter. . .

Regulators involved in the determination process say they are skeptical. “It is as if they are the Sisters of the Charity,” said one government official who has participated in meetings with financial companies. “They present themselves as if they don’t do anything complicated. They are playing a very interesting strategy game that nobody believes.”

Some of these firms are unloading businesses to avoid the dubious honor.  This seems fine to me, as it accomplished the goal of the legislation by reducing the reach of some of these mammoth firms.  However, the ones who aren’t downsizing though, and just arguing that they are small little businesses with no impact,  strains credibility.

By the way, if anyone wants to designate me “too big to fail” I will gladly accept the honor.  At my height, it would be the first time I was too big for anything.

By: Stuart Shapiro

Stuart is a professor and the Director of the Public Policy
program at the Bloustein School of Planning and Public Policy at Rutgers
University. He teaches economics and cost-benefit analysis and studies
regulation in the United States at both the federal and state levels.
Prior to coming to Rutgers, Stuart worked for five years at the Office
of Management and Budget in Washington under Presidents Clinton and
George W. Bush.