"Too big to fail" (TBTF) is a famous statement popularized by Steward McKinney, who was a US congressman. It refers to banking institutions that are so influential that their mishap would translate to an economic crisis. Therefore, the government puts everything into preventing such institutions from failing. According to Finance Yahoo, no other time proved the "too big to fail" theory than the Great Recession. It's the COVID-19 pandemic that separated the bigwigs from standard business setups, so if you're looking to invest in the future or already have five retail stocks that are too big to fail.
If any company has survived the economic crisis that the COVID-19 pandemic brought, Amazon is it. By 2017, its shares were below $1,000. The summer of 2020 marked when the online retailer's stock skyrocketed to $3,500. From that angle, you can see that the pandemic was a blessing in disguise because online shopping became more popular. One interesting thing about Amazon's shares is Jeff Bezos's contribution to its growth. Did you know that he was the pioneering person to have a personal fortune valued at more than $200 billion? That made him the wealthiest person at the time. Consequently, Amazon and another giant retailer from the same category raked in around $116 billion during the pandemic, but they kept the profits to themselves.
4. The Goldman Sachs Group Inc.
New York City is the hub of a US-based multinational investment bank and financial services called the Goldman Sachs Group Inc. Founded in the late 19th century, Goldman ranks number two on the list of investment banks globally. Consequently, it fits the bill featuring under the TBTF stocks since it set the pace in 2008. By 2018, the bank's shares were worth $160 per share. The following year, the market share dropped to below $140 due to the COVID-19 pandemic. It bounced back to reclaim its lost glory by trading at more than $334 per share, as fate would have it. Its shares rose more than two times because it came up with fantastic innovations to ensure online banking services remained in control during the pandemic. It is no wonder Wall Street analysts and investors couldn't hide their excitement when they heard of Goldman's "element of surprise."
3. The Bank of New York Mellon Corp
The Bank of New York Mellon Corp seems small from its physical outlook. However, that doesn't put it under the little investment choices for Americans. Instead, it is one of the oldest and most essential institutions worldwide, founded by Thomas Mellon, Alexander Hamilton, and Aaron Burr. The bank has a business model considered one of the most robust in the industry. During the COVID-19 pandemic, when most banks succumbed to the economic recession, BNY Mellon managed to stay afloat because it's a custody or trust bank. By 2021, the bank will have a market capitalization of around $37 billion. Its shares have gone as low as $26.40 but slowly rose to $40 per share. Its closest rivals are Goldman Sachs, Deutsche Bank, and State Street.
2. General Motors (auto company)
They say, "what's good for General Motors is also good for the country." If the century-old automaker sinks to the ground, then a significant portion of the US economy will be on its knees. Its collapse would immediately send tens of thousands of Americans packing. Also, auto dealerships across the country will be walking on eggshells. These risks make it a "too big to fail" stock worth investing in. At the time of this review, GM's market shares opened at $40.20, making it one of the most lucrative stocks worth investing in.
According to Finance Yahoo, Apple is one of the companies that maximized the blessings in disguise that came with the COVID-19. Before that, it was trading at $37 per share. Today, the figure has skyrocketed to $120. Its shares rose due to the need to use gadgets to abide by the "stay at home" policy. People used them as lifelines during the pandemic, prompting Apple to make more products. Surprisingly, Apple's store closures during the pandemic attracted a loss of $435 billion in five weeks. It wouldn't have survived the massive blow if it didn't belong to the TBTF category. Towards the end of 2020, it had bounced back, netting a market value of $2.29 trillion, an increase of 133%.
The benefits of bailing out too-big-to-fail institutions
There is only one reason government bails out on such companies: to prevent economic disruption. The government aims to protect the stability of a market by offering such companies loans and other subsidies.
1. Moral hazards
Let's say Company X belongs to this category. In that case, its creditors will believe that it's not mandated to fail, so they won't feel entitled to as much compensation for risks as expected. Consequently, TBTF institutions might take more risks than expected, hoping the government will come to their aid.
2. Unfair competition between small and big firms
If a company is too big to fail, there will be unfair competition with small firms. The former increases the risk of raising their market share at the expense of economic efficiency and financial stability. Think of it as an entitled entrepreneur who believes they are untouchable and hence lacks the motivation to compete healthily with their competitors.
3. They become a risk to themselves
In an economic crisis, a TBTF institution becomes a significant risk to themselves on matters of financial stability should they not be allowed to fail. This worsens the crisis and the recession by interfering with the money markets, thus hurting confidence.
The five companies listed above are TBTF, and this article has explained the reasons. So, if you're looking for a long-term investment with minimal risks, even during an economic recession or crisis, it would be best to settle on any of these companies.
Written by Allen Lee
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