Batuhan: Too big to fail?

·3 min read

“On Sept. 16, 2008, the Federal Reserve provided an US$85 billion two-year loan to AIG to prevent its bankruptcy and further stress on the global economy.

In return, the Fed took ownership of 79.9 percent of AIG’s equity. That gave it the right to replace management, which it did. It also had veto power over all important decisions, including asset sales and payment of dividends.

The bailout occurred exactly one day after US Treasury Sec. Henry Paulson said there would be no further Wall Street bailouts. That move forced investment bank Lehman Brothers into bankruptcy.” (“AIG Bailout, Cost, Timeline, Bonuses, Causes, Effects,” Kimberly Amadeo, The Balance, Nov. 16, 2020)

This was the background story on the bailout of the insurance giant AIG, orchestrated by Henry “Hank” Paulson, who was treasury secretary under then-US President Barack Obama at the time. The intervention of the Treasury in behalf of the company gave rise to the phrase “too big to fail,” referring to the ailing financial institutions that had to be bailed out by the government, because their failure would have led, in their estimation, to the detriment of the US and the wider global economy.

This was something not commonly done by the US government. After all, the capitalist system of economy that it lives by rewards risk taking with huge profits, but equally punishes reckless behavior with huge losses, thus keeping the system in check. This has been, by and large, the equilibrium that has kept the American economy as the engine of global economic growth.

In the 1970’s then US President Ronald Reagan also decided to step in and rescue ailing auto giant Chrysler, likewise in the name of protecting the US economy from the fallout that such a huge organization would precipitate. Back then, it was the automakers that were the ones considered too big to fail.

How times have changed.

Half a century ago, it was carmakers whose demise could not be countenanced. In the first decade of this millennium, it shifted to the banks and financial services companies that could not be allowed to fail, lest the economy suffer from their disappearance.

But what of a decade hence? The answer, it seems, are companies of the more intangible kind – those in the realm of social media. Think about Facebook, for a moment. Born out of controversial circumstances between its various founders, the social media giant has been variously accused both of benign neglect and also malicious intent, in how it conducts its business practices.

It is now widely accepted that the company was not nearly attentive enough to the machinations of political manipulators using its social media platform to propel controversial populist leaders into power. Leaders like Bolsonaro, former US President Donald Trump and even our very own President Rodrigo Duterte were alleged to have been assisted by political actors who were savvy in the use of social media to shape news and information to favor their candidate.

And just recently, Facebook and sister-company Instagram have been pointed out as potentially being harmful to the mental health of young people, whose views of themselves and their sense of self-worth are being almost exclusively shaped by what they see from these social media platforms.

Despite these missteps, however, there have been few attempts at constructive intervention. Facebook has been, by and large, left pretty much to run its own show as it chooses.

Where it was Chrysler in the 1970’s, AIG in the early 2000’s, is it perhaps now the turn of Facebook and other social media giants to get the government’s velvet glove treatment, because they are now the ones that have become too big to fail?

(Belated greetings to my wife Cynthia, and my brother Aris.)

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