Role of Too Big to Fail Companies in the Financial Crisis

Abstract

The subprime mortgage crisis of 2007 in the US snowballed into the biggest financialmeltdown the world has seen since the Great Depression of 1930s. There have been various reasons cited for this crisis_commonly known as Global Financial Crisis_like deregulation, derivatives, out of control market, greed, undisclosed conflict of interest, bonus culture and credit rating agencies. This case aims to make a connection between the crisis and a handful of companies which are considered as the major contributor to or reason for the crisis. These companies commonly referred to as too big to fail which are so large and interconnected that their failure could prove disastrous for the economy. This phenomenon is most commonly found in the financial sector, especially banks. Here an attempt has been made to examine these too big to fail companies, their perceived benefits and the role they played not only in causing but also exacerbating the global financial crisis. With the benefit of hindsight this case sheds light on what went wrong and more importantly provides recommendations on avoiding a similar crisis in the future.