Too Big To Fail But Not Too Big To Screw You

“They’re too big to fail” is one of the phrases I often heard when I got into the investing industry at the beginning of the Great Recession in 2008. I later heard this phrase a lot during the Covid Crash of 2020. I am going to generalize on my explanation of the phrase here: It is often used by someone who is deciding to invest in a company that appears to be in some sort of financial trouble. The optimism in line with making the investment is that while the company is in some sort of financial trouble, the company cannot go out of business because it is such a large part of its industry or what it does cannot simply be carried on by another company in a practical manner. Because of this, the company is worth buying and holding onto as an investment because, eventually, things will turn and the company will ascend from its troubled time period via either a turn in the business cycle or perhaps a bailout by the government. After all, “someone has to do what they do” is often used as a justification for investing in a company using the logic. This type of thinking is extremely flawed and completely wrong.

For starters, let’s look at the notion that a company is literally too big to fail. What does that mean? Most likely, it means that a company is at or near the top in market cap for its industry. In 2008, Lehman Brothers became the largest company in American History (it was the fourth largest investment bank at the time) to fail with a peak market cap of just under $60 billion. It is well-documented that several measures were explored to keep the company afloat. And, while we may never know exactly why Lehman wasn’t bailed out with absolute certainty, the fact simply remains that it went under and highlighted much of what we call the Great Recession. Shortly after Lehman brothers went out, Washington Mutual became the largest bank failure in American history (which still stands to this day). What remained of their assets was sold to JP Morgan Chase at a steep discount, but for all intents and purposes, investors in Lehman and Washington Mutual lost everything.

Looking at more recent history, one might say the Silicon Valley Bank wasn’t going to “fail” from the standpoint of investors losing their money. While investor deposits were guaranteed and bank assets were purchased by First Citizens Bank, stock trading was halted on the morning of March 10th. This means the stock cannot be bought or sold and it is essentially frozen - as is - for an indefinite time period. At this time, there is nothing to but wait if you hold the stock and get what you get when an ultimate resolution is made.

So, it’s apparent that some companies can and will go out of business, but surely not all of them, right? “Some companies just do too much for the government to let them go out of business.” Or, so goes the thinking. The best example to look at here is with General Motors. You can read all about their Chapter 11 bankruptcy reorganization here (side note: Wikipedia is great for the cited footnotes). In 2009, GM common stock became essentially worthless as General Motors struggled at the height of the Great Recession. The company sold its assets, trademarks, and intellectual property (the good assets), among other things, to a new entity. Everything else (the bad assets) stayed in what would then be renamed as Motors Liquidation Company. That entity then went through bankruptcy proceedings, wiping out the common stock and a large chunk of its retirees benefits in the process. The other entity (with the good assets) later rebranded itself General Motors, and today it’s as is nothing ever happened. You can even buy GM stock under the same ticker symbol as you could before 2009. All GM really did was ditch all of their bad expenses and liabilities (and pensions and common stock) to fix their balance sheet. There was even a small lawsuit years later over some of the shadier parts of the deal but people are quick to forgive and forget. In America, we call this being business savvy. I do not, however, call this investing responsibly. And if you buy a company because you are certain that they will always be around in some capacity, you are going to make a poor investment sooner or later.