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October 05, 2012

Historical Echoes: “Too Big to Fail” Is One Big Phrase

Amy Farber

It’s a book! It’s an HBO film! It’s a T-shirt! It’s the subject of one of the two top quotes of 2009! The popular phrase “too big to fail” is associated with both the 2007 financial crisis and work on new legislation designed to prevent the recurrence of such a crisis. Although this phrase has become ubiquitous since 2007, it has been used to describe banks only since the mid-1980s. Actually, the phrase appeared even earlier, in the mid-1970s, in discussions of Lockheed Corporation.

     Most sources say that the phrase was first used to describe bank size in the 1984 Congressional hearing “Inquiry into Continental Illinois Corp. and Continental Illinois National Bank.” The text (p. 300) from the hearing reads:

CHAIRMAN ST GERMAIN.  That is one of the prime reasons for these hearings. We have quite a few, but one of our principal reasons is we have to make a decision. Do we allow, ever, a large bank to fail?
. . .
MR. MCKINNEY.  With all due respect, I think seriously, we have a new kind of bank. And today there is another type created. We found it in the thrift institutions, and now we have given approval for a $1 billion brokerage deal to Financial Corporation of America.
Mr. Chairman, let us not bandy words. We have a new kind of bank. It is called too big to fail. TBTF, and it is a wonderful bank.

     The Wikipedia entry for “Too Big to Fail,” referring to the text above, states that in 1984 Representative Stewart McKinney popularized the term "too big to fail" and that “the term had previously been used occasionally in the press.” However, the Wikipedia entry for Stewart McKinney says that he is credited with coining the phrase “too big to fail.”

     It turns out that the Wikipedia entry for “Too Big to Fail” is the more accurate one. According to Gary Stern, former President of the Minneapolis Fed and coauthor of “Too Big to Fail: The Hazards of Bank Bailouts” (2004), “Although many attribute the genesis of the term too big to fail to congressional hearings on Continental Illinois, this was not the case. The print media had used the term in the context of the Continental bailout even before the congressional hearings.” He cites a July 30, 1984, Newsweek article, “The Continental Bailout.” (The hearings took place in September and October of 1984.) In 2009, Mr. Stern gave an interview about his book in which he discusses developments that have occurred since the book was written. At the beginning of the book is a breakdown (p.14; type “box 2-1” in the search box) of the use of the phrase with and without the banking context.

     Journalist Daniel Gross wrote in a 2008 Newsweek article that Fernando J. St. Germain, the Chairman of the Subcommittee before which the 1984 congressional hearing was held, was the originator of the phrase. Mr. Gross may have been confused or misinformed by his research assistant—the layout of the transcript of the hearing is a bit puzzling (“Mr. Chairman” begins a line, but it is not capitalized, so it is not Chairman St. Germain speaking).

     In 2008, in his New York Times “Language” column “Too Big to Fail or to Bail Out?” William Safire explains the origins of the phrase and its relationship to the phrases “bailout” and “moral hazard.” He mentions a 1975 Business Week article about Lockheed Corporation with the headline, “When Companies Get Too Big to Fail.”

     A discussion of Continental Illinois can be found on the FDIC website as part of its 1997 study “History of the Eighties—Lessons for the Future.”  In addition, Marketplace.org posted a playful piece on why the phrase is irresistible, including a nineteen-minute preview of the film, “Too Big to Fail,” based on the 2009 book by Andrew Ross Sorkin about the fall of Lehman. The preview includes lots of quality talking heads.



Disclaimer
The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.




Amy Farber is a research librarian in the New York Fed's Research and Statistics Group.


Posted by Blog Author at 07:00:00 AM in Historical Echoes
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