Essay on Economy: The Too Big to Fail Problem

1162 Words 5 Pages
“Too Big to fail” was first known in a 1984 Congressional hearing where Congressman Stewart McKinney discussed the Federal Deposit Insurance Corporation’s intervention with Continental IIIinois. The idea interprates that certain financial institutions are so large, if any of them fails, it will bring an unexpected disastrous effect to the economy. As we all known, the 2008 financial crisis had arose the “too big to fail” problem to the peak controversial point. Banks, insurance companies, auto companies are part of the big company industry. They make profit by creating and selling complicated derivatives and trading loans, commodities and stocks. When the big economic environment is prosperous, those big companies make a competitive advantage and try to take some small firms to become bigger. If their investments are experiencing a failure, their customers and also the taxpayers will be forced to take the risk of the collapse of the global economy.
Kimberly Amadeo describes an example of how the “too big to fail” problem applied to American International Group (AIG) which is one of the largest insurance company in the world. Amadeo records, “Most of its business was traditional insurance products. When it got into ‘credit default swaps,’ it got into trouble. These swaps insured the assets that supported corporate debt and mortgages. AIG was too big to fail because, if AIG went bankrupt, it would trigger the bankruptcy of many of the financial institutions that bought these…