Too big to fail

In Brunei, every once and awhile we do get to hear shops or restaurants shutting down due to the lack of business. Although I do feel sorry for the owners who probably have mountain of debts to settle and a number of employees retrenched, who by most account would be made up of foreign workers, I do not think however it is a matter of public concern as we do know for every shop or restaurant that shuts down, there will always be another one or two that will open their doors for business. The truth of the matter is that its pure economics of demand and supply. If there is more supply than demand in a market then competition to attract customers especially in a country with a very small population will become very stiff. Obviously the stiffer the competition, the more cut throat the market becomes and it will be something of a survival of the fittest. The fittest in this case would be the ones whose owners have good business acumen, good strategies and good financial cashflow and those who understand the market and the business they are in. As in any business, risks of failures will always be there.

If however such restaurant venture failed, should the govervment get involved and used the public funds to, for use of the common term, provide a bailout package? The answer that we would say would probably be a no since it does not make any sense on why should public funds be used to save a private venture turned bad. But what if the business entity is one that employed thousands of our own people and by its going bust would affect almost the entire population of the country? The term "too big to fail" is now a common term used for huge conglomerates in the USA which during the financial crisis faced the prospect of going bust but if they did would have affected millions of people. Jobs and millions of dollars worth of pensions, insurance plans and savings funds were simply wiped out because these companies somehow did not anticipate some investments they made took a very hard beating.

Now let me come back to the ealier example of the restaurant. Say it undertook the grandest expansion plan and every one of us put our money into it as an investment because the manager of the restaurant was a MBA graduate out of the Ivy League who was able to sweet talk us to part with our savings. And imagine if that same MBA graduate was one whose pay package and bonusses were pegged with the number of restaurants and revenues he could open and generate in a given year. He knew he was only an employee and not the owner of the restaurant so he bore no risk apart from the possibility that he might get fired if his maverick venture turned out to be a bad decision. But what if this clever chap also borrowed money from banks on behalf of the company and knew that since most of our money were tied in the restaurant, any moment the company went into financial trouble, it would have affected the most of us. What also if this clever chap prepared himself early, that should he be fired he had himself covered with a generous severance package? The Government would have a recipe of a financial conundrum of having to rescue one company to save a nation from facing a huge financial and possibly a social and political problem and left no choice but come to the rescue by using public funds. That was not just it but here is the thing. there is, again for use of another term that we hear often these days, "a moral hazard", a situation where Governments would have no choice but bail out big companies that took huge financial risks because the CEOs or the COOs "smart" enough to understand that these companies would never be let go bust under the hammer because they were just "too big to fail". The "moral hazard" in this case would be that the MBA chaps of all these companies will go on and continue to take extreme investment risks knowing full well that the government would bail the companies out should something bad to happen as they are just "too big to fail".

Thankfully we didnt face this situation partly I think because our financial system is not as complex as those in Wall Street and our people have not been exposed to complex investment instruments that nobody could understand except those MBA smart alexes. But this is not to say this could not happen here. Of late, we have had encounters with dubious pyramid schemes where hundreds of people were duped into investment schemes offering huge financial returns that were too good to be true. Of course with pyramid schemes, if you were the earlier punters, you would probably be getting huge "returns" from your so called "investment". But lets not forget, these "returns" were actually principal monies from the later members who opted into the scheme. Such scheme would appear to work well for as long as new members kept coming in but like any deck of cards forming a pyramid there will always be a limit on how high this pyramid can grow itself without crumbling down. The very moment new members became hard to come by, the scheme would start to crumble especially when the existing members started to demand their so called "investment" back and if you happened to be at the bottom of the pyramid, you can be sure to kiss your money goodbye.

I am happy to learn that our Government is taking serious actions against these schemes which are very clearly unsustainable business model which are actually illegal in most countries. During His Majesty's recent Birthday celebration, he made the announcement of the formation of the Monetary Authority of Brunei which will come into effect next year. If my hunch is correct, this new outfit will closely follow the set up of the Monetary Authority of Singapore. If this is so, it will be our de facto central bank and a financial regulatory authority at the same time.

Ps I'm starting my 2 1/2 weeks leave as of today. I hope I will be able to post some nice pics of the places that we will visit in the coming days. Ciao :-)

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