Is the definition of companies that are “too big to fail” getting broader? Or are some industries simply more important than others?
The seizure of the mortgage finance giants Fannie Mae and Freddie Mac is the second time this year, after the rescue of Bear Stearns, that Washington has intervened to prevent a financial collapse.
Now, troubled automakers in the United States are also looking for help, in the form of loans to finance the development of new energy-efficient cars.
Until now, the bailout efforts have largely been reactive, with Washington throwing lifelines over the last decade to businesses in the airline and insurance industries in the wake of the Sept. 11 terrorist attacks and, more recently, those on Wall Street.
Now, many in the financial industry say a more formal debate is needed to set criteria to guide decisions on future requests for help from individual companies or industries. For example, should a large airline be allowed to fail while an automaker is bailed out? Or might one investment bank be judged as less critical to Wall Street’s overall solvency than another?
“This presents a very important policy question that people are going to be grappling with for a long time,” said Robert E. Rubin, who was Treasury secretary under President Bill Clinton and is now a senior adviser at Citigroup. “Bear was not too big to fail; it was too interconnected. Fannie and Freddie are both.”
Hard choices have been made in the past — the once-powerful American steel industry was allowed to shrink to a shadow of its former self.
When Washington did ride to the rescue, the overall risk to the economy was considered greater than the downside of providing help — what economists call “moral hazard,” referring to the risk that helping a faltering company will only encourage others to take even greater risks on the assumption that the government will always be there to provide a backstop.