Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
'TBTF' at its best...yet again - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Sep 23, 2008

    'TBTF' at its best...yet again

    Here is an old but interesting story of two friends who went to a jungle. They saw a hungry lion there. As soon as they saw the beast, they understood that they are going to be history. One of those guys took a pair of brand new shoes and started wearing them. His friend was surprised at his action and asked him, "Do you think that you can run faster than the lion with those shoes on?" This guy replied him, "Dude, I need not run faster than the lion. I just need to run faster than you!"

    So, what is the moral of the story? You have to be fast enough to survive in this competitive world. In the parlance of financial markets, you have to be 'too big to fail' - TBTF!

    Wikipedia explains the TBTF policy as the idea that in banking regulation the largest and most powerful banks are 'too big to (let) fail', which ultimately means those banks would have less incentive to practice thrift and sound business practices, since they would expect to be bailed out in the event of failure.

    Mr. Ajit Dayal, the co-founder of Equitymaster explains the concept even more simply - "In banking terminology there is a saying - 'If your customer owes the bank a little money, that is fine because the customer will always be in trouble since he owes you (the bank) money. However, if the customer owes the bank a lot of money, then the bank is in trouble!' If that large customer fails to pay back the large loan from the bank, the bank may be bankrupt!"

    He goes on to say, "The same equation applies to the size of the financial institution or bank: the bigger the bank, the less likely it will be allowed to die a natural death and 'fail'. Because of its sheer size the closure of such a financial institution is likely to have a larger impact on the economy and the financial system in general."

  • Also read - Habits die hard: TBTF

    It is this very policy of TBTF that has saved the likes of Freddie Mac, Fannie Mae and AIG in the US, while the 'too small to be saved' breed like Bear Stearns and Lehman Brothers were allowed to die (in some way or the other).

    And now, the US government and Fed have laid the path for formation of a few more TBTF kind of institutions. The conversion into bank holding companies of investment banks like Goldman Sachs and Morgan Stanley is ideally a way that will make them TBTF.

    A report on Bloomberg clearly brings out the entire picture. The report talks about how the takeovers of Merrill Lynch and Bear Stearns will increase the liabilities of Bank of America and JPMorgan Chase respectively by big amounts. Specifically, the latest deal (between Merrill and Bank of America) will boost the latter's liabilities by a whopping 60% to US$ 2.5 trillion.

    And then there is Citigroup, which has almost US$ 2 trillion of liabilities. This makes all these three banks TBTF. The report on Bloomberg further reports - "It might be a better idea to prevent banks from growing to the point that we couldn't accept their failure. The problem is not the combination of banking and securities per se. It's a function of sheer size."

    And you know what, we have some live examples of the TBTF kinds in India as well. Ajit puts it very clearly - "IFCI, ICICI, and IDBI were all developmental financial institutions that lent good money to bad projects. By 1999 many of these financial institutions were in trouble. Why? Because there were a few larger business houses that owed them a lot of money and, since industry was in bad shape, no one could pay so these financial institutions were in trouble and needed to be rescued by a combination of money, change in management, or change in business strategy. Today, all 3 institutions stand alive - some prospering, some tottering. But they stand."

    "Over the same time period, many smaller banks and cooperatives have been shut down. These smaller banks made the same mistakes as the larger banks and institutions but they were not likely to have such a large impact outside a specific geographical area. So they were allowed to 'fail'."

    There you have it. TBTF works…in the US, in India, everywhere!



    Equitymaster requests your view! Post a comment on "'TBTF' at its best...yet again". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    5 Attributes Of Lord Ganesha You Can Apply To Your Personal Finance (Outside View)

    Aug 24, 2017

    With Lord Ganesha's attributes and teachings, awaken your inner-self and inculcate these financial habits for a sound future.

    Why Shopping Online This Festive Season Makes Better Sense (Outside View)

    Aug 24, 2017

    Online shopping if done sensibly can help you save money and carries many other advantages.

    Mr Trump Has Been Broken (Vivek Kaul's Diary)

    Aug 24, 2017

    Kelly, Mattis, McMaster, Cohn, and Mnuchin are in charge. But these Pentagon bureaucrats and Wall Street hustlers may be worse than a loose-cannon president.

    Were You Lured By Mr Market's Bait? (The 5 Minute Wrapup)

    Aug 23, 2017

    Mr Market lured investors into believing they'd bitten into a crash. Did you take the bait?

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working(Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Think Twice Before You Keep Money In A Savings Bank Account(Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 24, 2017 02:57 PM