By Amb. Emmanuel Mwamba
Thinking Loudly
Too Big to Fail, Government should bail out LSF Group of Companies.
Seeing recent happenings at the Lawrence Sukutwa & Associates Group of Companies, one is made to think loudly.
LSA is one of Zambia’s leading Insurance, Financial and Investment services and diversified group of Companies.
I have no particular details of the financial state of the group, but going by numerous recent media reports, many Zambians remember the companies’ crisis of the 90s and can smell an impending fail from miles away.
Thinking loudly.
Will we watch it fail and collapse?….or we can save it?
Can we use the opportunity to cure the inherent challenges, and save it, save jobs and save a pride of Zambia’s home-grown companies?
Thinking loudly.
The “Too Big to (let) Fail” theory asserts that certain corporations, particularly financial institutions, are so large and so interconnected that their failure would be disastrous to the greater economic system of a country, and that they therefore must be supported by government when they face potential failure.
This is properly illustrated in the 2009 Andrew Ross Sorkin book,’Too Big to Fail’ chronicling the 2007–08 global financial crisis.
THE CASE OF THE USA
After the collapse of Lehmans Brothers and Bears Stearns, which were respected investment banks, during subprime mortgage crisis that spawned a global economic crisis, the USA Federal Government moved in with billions of dollars to save other large corporations threatened with collapse because of the domino effect.
Government bailed out large corporations which included JP Morgans Chase, American International Group(AIG), Goldman Sachs, and auto-mobile makers such as General Motors and Chrysler.
Twelve years later, all these companies are doing well and healthier than before and have since paid back the bail-out monies.
Critics to the Too Big to Fail theory, see the policy as counterproductive and that large banks or other institutions should be left to fail if their risk management is not effective.
It is also argued that Government bailouts often create a moral hazard problem. Big companies might be inclined to take bigger risks if they assume that a bailout would be inevitable.
But of the $700billion paid by the USA government as bail out money, $390 billion of the principal amount has been repaid, and the Treasury has collected revenue from its investments of $364 billion earning a profit of $121 billion.
CONCLUSION
It must be stated that if there is criminal liability or ethical misconduct by shareholders, director or managers, that has to be dealt with.
What you save is a company, which is a seperate legal personality because of the need to preserve jobs and the threat it pauses to the economy because of its connectedness to the market.
So in the case of LSF, probably government should move in and save such an institution with a bail-out package with the promise to pay back.
Colleagues, what are your thoughts?