MarketWatch First Take: Actually, Bernie Sanders, companies don’t want to be too big to fail
All of four companies outside the banking sector have been slapped by the federal government with the tag of “systemically important financial institution.”
Two of them responded by voluntarily breaking apart. General Electric GE, +0.63% has moved to spin off the bulk of its GE Capital arm, and on Tuesday MetLife MET, +6.35% said it is looking to split off most of its U.S. retail operations.
MetLife has long complained about its SiFi designation, arguing that the extra regulation that comes along with the SiFi designation will drive up costs too much. Specifically, MetLife is concerned about the extra capital they may be forced to hold.
What GE and MetLife are both doing is driving a knife through the argument — heard both on the left and right on the presidential campaign trail — that “too big to fail” is somehow a desired status. The argument is that companies are able to borrow cheaper because of the perception the government is more likely to step in to bail them out.
The data on that is ferociously debated, and mainly rests on an interpretation of credit-default swap movements.
But whether there’s a funding advantage or not, extra capital is something no financial institution is fond of obtaining, not to mention the extra layers of regulation and monitoring.
And that is the good news. A financial institution’s bankruptcy does not have to be a calamitous, Lehman Brothers-like, recession-triggering event if the firm that goes belly-up is small enough. MF Global in 2011 had what was the eighth-largest bankruptcy in U.S. history and did basically nothing to the U.S. economy, because it was small enough to be manageable.
At a time when “too big to fail” is still in the news, with “The Big Short” in movie theaters and Democratic presidential candidate Bernie Sanders saying he would order the largest banks broken up in a year, it’s noteworthy to remember the role the industry itself can play.
The best way for “too big to fail” to no longer be an issue is if the big financial firms slim down on their own accord. And that process seems to be underway.