In my last week blog post, Nothing is too big to fail – Part 1, I shared information about Citibank and CIT, biggest commercial lender. How these big companies are struggling in this tough economy? As I concluded, this week final part will have an another interesting story about Harvard facing hardship on its own. I did my conclusion with lesson learned from these stories. So Read on…
What’s up with Harvard?
It is not just financial companies which are failing in this recession. Harvard University is facing what some say is the worst financial crisis of its 373-year history. While many of the nation’s top universities are experiencing problems as a result of the financial meltdown — even Harvard University, which has the largest endowment of all universities by far. University’s $37 billion endowment a year ago has shrunk to an estimated $26 billion today.
What got Harvard into so much trouble?
Harvard did what many Americans did: It overspent. In this decade, it’s added 6.2 million square feet. That’s roughly equal to the space occupied by the Pentagon. These land acquisitions have cost Harvard more than $4 billion. It has had huge expenses built up while the number of students stayed constant.
“It’s rather like someone who has taken on a mortgage, bought a house that far exceeds what it can afford, and they’re now facing really what is the worst, most dangerous financial crisis in their 373-year history,” according to Nina Munk, contributing editor at Vanity Fair, told NPR’s Linda Wertheimer. To read the article, goto npr.org
Should big Companies allowed to fail?
Thats a very hard question even to Bernake. Being a big shark in a ocean is not an easy task. Playing a big role in the economy doesn’t protect against economy downfall. I see it as a double edge sword. A company has to take chances and risk by investing their money in order to make more money. If it avoids taking risk or chances, consumers won’t see new products and services at the same time company cannot grow and make money.
On other hand, if economy is falling because of companies fault and bad practicies, it does needs to be regulated and corrected. At the same time, If these companies are penalized by allowing to fail for taking risk to grow is not the right way. But I agree a company should act and forecast before stepping into risky modes of operation.
So if these companies are always left to fail, there is a bigger chance of snowball or avalanche effect which is actually averted by Fed last year. Taking last years episode, if every big banks which faced problems are let to fail without bail out, just imagine the impact it would have created. It would have devastating effect twice worse than great depression. It is not prudent to always struggling company to fail. Everybody needs a lending hand sometimes and more so during bad times.
Obviously, it is really hard to say which companies should be allowed fail and not others. It all depends on the time and position. I hope that also answers the question, Why financial institution gets billions to when big GM and Chyrsler are allowed to fail. Check out these articles related to this story from SeekingAlpha and npr.org.
I am fully convinced that no company is too big to fail and government won’t always come for help. So if you are investing in securities and bonds, please be cautions and invest in right company analysing their porfolio and performance. Don’t by stocks just because the company is too big and it will never will fail. As we all know now, NO COMPANY IS TOO BIG TO FAIL.