WSJ On Goldman, Subsidies & Too Big to Fail -- Firms Are Not Industries ~ Steve Blitz Morning Notes
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Wednesday, April 15, 2009

WSJ On Goldman, Subsidies & Too Big to Fail -- Firms Are Not Industries

In today's WSJ editorial on Goldman's desire to return TARP funds and get out from under the yoke of "Federalism" --

"The point is that Goldman and other banks can't have it both ways. If they want taxpayers to save them, then they have to take fewer risks and become smaller. Either that, or we need a new financial resolution or bankruptcy process that lets these companies fail while protecting the larger banking system. We're glad Goldman wants to flee Barney Frank's embrace, but it's still only half way back to the promised land of capitalism -- which includes the freedom to fail."

Saving an industry does not require saving any one firm. Policymakers seem to have forgotten this principle from their Industrial Organization classes. The memory lapse has created a lot of hand wringing and a rush to save firms from collapse -- lest the whole of western civilization would fail because GM stopped making cars and Citibank stopped making loans.

If GM were to stop producing cars tomorrow some firm would manufacture and sell the cars GM sold because the demand is still there. I would imagine Ford and the domestic factories producing Japanese cars would shift into overtime or at least back to full time.

When Lehman went under the impact on risk pricing was enormous and there was probably a better less disruptive way to shut the firm down. Lehman was a mismanaged firm but it was filling an economic need in the financial industry. Hence the firm is gone but the broker/dealer still operates as Barclays in the U.S. and as Nomura in the rest of the world, the Neuberger-Berman asset management arm is under new management, etc. Some of Lehman is gone forever because the demand for CDO structurers and traders is less than it was.

The financial industry exists to intermediate funds between lenders and borrowers so the overall economy can expand. There will be lots of firms filling that role in the years to come because there is a lot of profit in it. The names of the major players may be different as smaller healthier banks step up in class, foreign banks take more active roles, and new broker/dealers and M&A boutiques are formed. Today's boutiques and small shops can very well become tomorrow's Goldman's and J.P. Morgan's.

Government has a role in making sure the financial system continues to function but it is has no role in determining who the major players are going to be. There is a difference and, of late, it is a difference policymakers seem to have forgotten. Next time let Goldman fail -- the Government's only job is to make sure a firm's failure will not and does not take the financial system with it.

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