What does America value? The answer is simple: building the biggest and riskiest companies in the world. If you achieve world-class levels of size and risk, the U.S. government will use everything in its power to rescue you if you get into trouble and let you pay yourself billions in bonuses if things are going well. With $23.7 trillion of taxpayer money at risk to bail out those huge institutions -- almost twice U.S. GDP -- there can be no doubt how great the reward is for failing big.
This spells trouble for 99.9 percent of the businesses in the U.S. If the failure of your business will not cause a so-called systemic risk -- namely costing trillions in losses around the world or throwing millions of people out of work -- you are on your own. This comes to mind in considering the latest test case of the too-big-to-fail idea -- CIT Group (CIT) -- which, despite raising $3 billion from its biggest debt-holders, appears headed into bankruptcy.
How so? The FDIC does not want to let CIT move its riskiest assets to its Utah banking subsidiary because it believes that this Utah bank will use hot money to finance itself which will ultimately lead it into the arms of the FDIC. And given that CIT does not hold systemically risky toxic waste -- such as mortgage-backed securities (MBSs), collateralized debt obligations (CDOs) or credit default swaps (CDSs) -- its failure can be contained and thus is not worthy of U.S. intervention. Simply put, CIT did not take enough risk to warrant a U.S. rescue.