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Too Big to Fail?

Politics / Credit Crisis Bailouts Jan 11, 2009 - 05:34 PM GMT

By: Rudy_Avizius

Politics Best Financial Markets Analysis ArticleA mortal threat to the nation's economy and national security - As our economy continues to decline and we have bailouts, loans, and guarantees that now total into the $trillions of dollars, let's examine who is getting these funds and why. These funds are not going to the community banks, mom and pop stores, or other small enterprises. They are going to huge conglomerate corporations that have been deemed “too big to fail” and therefore represent a threat to the nation's financial security. These conglomerates are the result of acquisitions and mergers over the last few decades that had the effect of reducing competition and consumer choice. In the end this has the ultimate effect of raising prices which would by definition increase profit margins.

It is a small wonder then that these mergers and acquisitions play a large part of the corporate finance world. It's far easier to acquire an existing company than to do the hard work of starting a new one, creating a new business model, and creating the market for it. These deals often run into the $billions and for too long they have served as a substitute for true economic growth. However because they are so profitable, they have become commonplace and have the effect of driving out the smaller players, thereby further reducing competition. This provides the masses with the illusion that the economy is growing, but actually there is no real economic growth taking place here. It is time to end this illusion.

These acquisitions do nothing to increase productivity, they simply move large sums of money around enriching those involved in the process. To these people the amount of money made is the equivalent of winning the lottery, while providing nothing to the nation at large. The stock values rise, again giving the illusion of wealth being created, but in the end it is all an illusion with the results that we are experiencing today. Our corporate controlled media has again failed the nation by not reporting these facts and limiting our knowledge of this.

The problem becomes critical when these conglomerates become so fat that they are “too big to fail”. According to our “experts” (I use this term very loosely), these conglomerates must not be allowed to suffer the natural consequences of making bad decisions that normal businesses must experience. These are the same “experts” that failed to foresee the economic tsunami that was coming and failed to warn us. Many of the administrators of this bailout of the “too big to fail” corporations were themselves complicit in creating this economic mess.

So our brave and wise “leaders” (I use this term very loosely as well), throw $billions at these companies in an effort to shore up their balance sheets. These are the same “leaders” who regularly accept campaign donations from these very same conglomerate corporations. The list of these conglomerates includes Goldman Sachs, JP Morgan, Fannie Mae, Freddie Mac, Morgan Stanley, AIG, and others. Some others like Merrill Lynch, IndyMac, Bear Stearns, Washington Mutual, Lehman Brothers were either force fed to other larger corporations, or were acquired by others on their own accords making the acquiring entities even larger.

It does not take a PhD in economics to figure out that these “too big to fail” conglomerates present a mortal threat to our nation's economy and national security. A 5 th grader would tell you that something needs to be done to break these companies into smaller pieces. Instead, the policies our “experts” and “leaders” are implementing are making the “too big to fail” conglomerates even bigger. Not only that, our “experts” are providing the insolvent banks with liquidity in the hopes that they will start lending again. However, rather than lending, these same insolvent banks are instead using the funds to acquire other banks, which now makes them even bigger. That same 5 th grader would tell you that this does not make much sense. Too bad our “experts” haven't figured that out.

Even as this article is written Morgan Stanley is looking to pay Citigroup as much as $3 billion to acquire it. How does this help to improve our financial stability? How will making Morgan Stanley even bigger reduce the economic and national security threat to the nation by making another company even fatter and larger than “too big to fail? The worst part of this is that Morgan Stanley has received $10 billion bailout money (so far) from the taxpayers and is now using this money to acquire another company. This is not an effective use of the bailout funds! Why are our “leaders” not outraged and forbidding this misallocation of taxpayer funds? Add to this the fact that there is no transparency about where this money is going and who is getting it. How can we have given away over $300 billion of taxpayer money so far and not be informed on who is getting it and how it is being spent? Where is the media outrage?

If we look back into history, we can see that there are some parallels to this in our past that may provide some answers to our future. Once the Civil War ended, huge amounts of money were being spent to create very large corporations and trusts that often engaged in monopolistic, parasitic, and anticompetitive activities. This situation soon started growing out of control so badly, that it forced Congress to pass the Sherman Antitrust Act in 1890. This act was so badly needed that the Senate passed the act by a 51-1 vote and the legislation passed in the House unanimously 242-0. This act gave the federal government the power to regulate these entities. However, the law was hardly ever enforced because we did not have the political leadership needed to take these powerful corporations on.

Enter on the scene, President Teddy Roosevelt. He believed that these corporations and trusts were a cancer on our system and aggressively took them on. As a result of one these suits, in 1904 the Supreme Court forced the dissolution of the Northern Securities Company. This was a large railroad corporation that had recently merged and the Supreme Court forced it to dissolve. As a result of this successful use of the Sherman Antitrust Act, the Roosevelt administration filed a total of 43 “trust busting” suits. He took on mining companies, Standard Oil, and even J.P. Morgan himself. He challenged these trusts because he believed that average citizens had no control over these corporations and only the government could keep them under control.

So what we need today is a true leader with the courage of Teddy Roosevelt to assert government control over these fat “too big to fail” corporations and break them into little pieces. If necessary, additional legislation should be passed that allows the government to do this to “any corporation that would need to be bailed out if it were to fail”. This legislation is in our economic and national security interest. Our 5 th grader would make sure that this happened! Think about this, if Fannie Mae and Freddie Mac were originally made up of 50 different entities, one for each state, we would have a much more manageable problem to deal with than we now have. What if AIG was a number of much smaller companies?

It is time to end the illusion that bigger is always better. It used to be that once people invested money in companies to provide capital for production expansion, increased marketing, research and development, and other productive activities. Lately, our investment funds have been used for acquisitions, mergers, corporate takeovers, leveraged transactions, and other equally unproductive ventures. Instead of wasting our precious and limited investment resources in nonproductive mergers, acquisitions, and other paper profits, it is time to start channeling our investments into activities that will improve productivity, exports, energy independence, and will reduce environmental degradation. By doing this, we will in turn the lay the foundation for a stronger nation and economy for the future.

By Rudy Avizius

Rudy Avizius is a retired school district administrator and a former Director of Technology who has been following economic and political news very carefully for the last 2 decades. He has recently become active in trying to make sure that the government spends taxpayer money wisely with long term benefits to the nation.

© 2009 Copyright Rudy Avizius - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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