In the glossary of economic terms, ‘Too Big to Fail’, stands out as an uncommon colloquialism in a world of erudite technical terms and as an oxymoron that reeks strongly of iniquitous privilege. It is both a troublesome term and a troubling one; provoking ire, scorn and rejection as a flawed piece of inept policy as quickly as it has has made its way into common usage.
The phrase was coined in the USA in the 1980s, and entered popular parlance during the subprime mortgage crisis of 2008, during which several large financial institutions were bailed out from imminent collapse, in spite of being squarely responsible for their own plight, just because of their perceived importance in an economy. AIG, Morgan Stanley, JP Morgan, Merrill Lynch and the Bank of America are all still operating today, in almost the same form and capacity, all thanks to a US$700 billion tranche of emergency government funds used to shore up deficits that were caused by widespread mortgage loan defaults. In the wake of the financial crisis, in order to put a semblance of limitation on bailouts, the US government set the definition of institutions deemed ‘‘Too Big To Fail’ as those with at least US$250 Billion in assets. However, there is much to suggest that the list and scope of the list would readily be expanded in the face of a similar economic meltdown. Based on precedence alone, the all-important auto industry players, General Motors and Chrysler have been beneficiaries of government bailouts in the past.
The business environment in Singapore is a challenging and highly competitive one. An average of two hundred businesses have filed for insolvency each month from 2001 to 2019. In the past 5 years, we have also seen several local Singaporean corporate giants brought to their knees. Some of which were household names, regarded as integral pillars of the national economy or even listed as part of the Straits Times Index (STI) at some point in time in the past. A quick recall would easily bring up company names like NOL, Nobel Group, HYFLUX, MICROPOLIS, Chartered Semicon, Swiber, to name a few. As important and as much as these entities were leaders in their fields at one time in the past, there are few companies that would be identified as integrally Singaporean as NOL and Hyflux would. Why then were these companies left to fend for themselves?
NOL was Singapore’s national shipping line – the flagship carrier of a country in a business harking back to the country’s origins as an important global transhipment port. At its peak, NOL was ranked as one of the five largest global carriers and was even backed by Temasek Holdings which acquired a 67% stake in its shareholdings. When turbulent times beat against its bow, it was divested to a French shipping liner and then delisted.
Hyflux was, likewise, a home-grown success story until it wasn’t, when it made a bad investment by diversifying into power generation with the Tuaspring power project. As a company specialising in setting up desalination plants, it identifies with Singapore’s origins as a sovereign country and its formation having been hinged on water security. It is also worth noting how a company with its expertise would bolster the country’s national security, considering the nation’s lack of most resources, including potable water. Having become insolvent in 2016, the government has categorically stated in Parliament and in the media that it would not extend a bailout offer. If there were any local candidates for a government rescue package, these would be worthy nominees, so why was it not forthcoming?
Prudence and conservatism. These are the hallmarks of good governance. Singapore, ever the pragmatist, has always adopted a restrained approach when drawing from its coffers and, ultimately, taxpayer dollars – a prospect that not all those affected might quietly accept.
A government bailout is not free and the money has to come from somewhere. If not from its reserves, it comes in the form of increased state debt.
It is also thought that bailouts themselves might be a contributing factor to behaviour that increases its likelihood. This is the moral hazard argument whereby more risk than normal is assumed when there is an expectation of a bailout in the event of a negative outcome. After all, who would not take bigger and riskier bets if upsides are retained while only the downside consequences are shared. This would be hugely damaging to any free market system. It is a basic economic tenet that incentives shape behaviour and bailouts may actually be a disincentive to reduce costs and increase competitiveness.
In the same vein, bailing out a distressed company might only be artificial life support for an organisation that should acknowledge that it’s time to bow out. This could be for a myriad of reasons such as inefficiencies, or worse, financial mismanagement – as in the often heard case where top executives receive astronomical sums as remuneration even when companies go belly up. It was widely reported that among banks that were bailed out by the US government during the 2008 crisis, executives still received US$1.6 billion in cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management.
Notwithstanding the benefits of a cautious and tightly restrained approach, a good steward of money may not always be the best candidate to entrust it to. Hindsight is, as they say, twenty-twenty but referring to NOL again, it might have been a little too hasty to diagnose it as a lost cause. Within a year of its divestment, the new owners were able to turn a profit of US$26 million. As Kishore Mahbubani, Dean of the Lee Kuan Yew School of Public Policy was quoted when explaining a reason for Singapore’s past successes, “Pragmatism means that a country does not try to reinvent the wheel.” Pragmatism, however, tends towards conservatism and maintaining the status quo and blinkers one to the still present potential of those deemed not too big to fail. 20ز��d�
