Too big to fail?

Published on Don’t Panic on 5th July 2010:

Andrew Ross Sorkin, author of the critically acclaimed Too Big to Fail, spoke last Wednesday at LSE’s New Academic Building. The focus of his lecture was on the financial crisis, its aftermath and the future. The audience was a mix of two part professionals to one part student; the majority of whom were big, big fans.

His lecture was well rehearsed, punctuated with timely anecdotes that were richly rewarded with laughter from an eager audience. Unsurprising given the number of times he’s delivered it. Much of the lecture’s content came from the book and his journey to its creation, a quick look at the introduction and acknowledgement will tell you as much. The book itself has been addressed as the story behind the institutions and the people in it who thought they were invincible, woven to the web of the 2004 film Crash.

For me, the interesting parts in the discussion weren’t so much about the contents of the book, the outcome of which we are living. Rather it was Sorkin’s commentary on what happened next. Something which he touched on time and time again was regulation, or rather, the lack of it since the financial crisis. He emphasised that despite living in these cycles of booms and busts, there has been little change to remedy the underlying issues or to prevent them from happening again in the future.

The regulators failed in the first instance to prevent such a crisis. Although much needed change is now promised, is it too little too late? And what of the auditors who allowed for all these empty financial instruments to be traded at grossly inflated values, creating vast empty bubbles? Just because it’s a valid accounting technique, doesn’t mean it’s financially sound. Maybe it should be down to the shareholders to push for change, after all, they hold the real power in the boardroom. But while it may be in everyone’s best interest to do so in the long run, in the short term, this doesn’t seem so profitable an option.

The term ‘too big to fail’ is generally taken to refer to an institution which if failed, the consequences would be too disastrous to consider. At the same time, who says it can’t be an organisation so vast and expansive that everyone has a stake in its success, rather like Reginald F. Johnston’s ‘nei wu fu’? [Editor’s note: The ultra-bureaucratic Imperial Household Department that ran the Forbidden City before the Chinese revolution of 1911, as depicted in the film The Last Emperor.]

All this corrupt bureaucracy suggests that the lack of regulation and being too big to fail are closely related. Sure, a few giants have fallen here and there sending shock waves across the world since the crisis began in September 2008; but few have been brought forward to justice, whether it be the junior who acted irresponsibly or the senior manager who turned a blind eye. Like Sorkin, I can grant the complexity of the case but I can’t help but wonder, in this industry that’s kept ticking by vested interest, how easy is it to find the culprit or a cure?