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EPISODE TRANSCRIPT:

00:00:02

Alix McCabe: If you've ever worked in sales, you know how painful rejection can be.

00:00:07

Speaker 1: Hello, you're a go for Rick.

00:00:09

Ashley: Hey, it's Ashley from Allianz Trade. Just wondering if you had a chance to consider that TCI package we discussed?

00:00:14

Speaker 1: Yeah, I ran it up the flagpole to the C- suite, but the boss says we're good, because we only sell to the big guys.

00:00:22

Ashley: Hi, it's Ashley from Allianz Trade. Just wondering if you've had a chance to consider that TCI package we discussed?

00:00:28

Speaker 2: Sorry, I think we're going to pass.

00:00:31

Speaker 3: Non-payment's a non- issue for us.

00:00:32

Speaker 4: We don't have any concerns about our clients.

00:00:34

Speaker 1: Our clients are too big to fail.

00:00:36

Alix McCabe: But it's that last excuse that's particularly problematic and it's also a bit played out. So up it goes, earning a well- deserved place on...

00:00:45

Clip: Wheel of Risk.

00:00:45

Alix McCabe: Hi, and welcome to Wheel of Risk, proudly presented by Allianz Trade. I'm your host Alix McCabe. On every episode, we spin the wheel, land on a new worry, and then tackle it head on by bringing you expert insights and advice to help you keep your business solvent, secure and well ahead of the competition. Today, it is my pleasure to welcome a familiar voice back to our podcast. Justin Seedorf is Southwest Regional Vice President here at Allianz Trade in the Americas. What is this, Justin? Your third time on the show now?

00:01:16

Justin Seedorf: Yeah, it is, and it's quickly becoming one of my favorite pastimes, is being a guest on your show here.

00:01:21

Alix McCabe: We are so glad to hear that. We're going to put your name on the marquee.

00:01:25

Justin Seedorf: That'd be great.

00:01:28

Alix McCabe: You know the ropes by now, so it's time to spin the wheel.

00:01:31

Justin Seedorf: All right. Here we go.

00:01:32

Alix McCabe: Go for it.

00:01:33

Justin Seedorf: It's so heavy.

00:01:33

Alix McCabe: It's a heavy wheel. Here we go.

00:01:35

Justin Seedorf: There it is.

00:01:39

Alix McCabe: Okay. It looks like we're going to tackle one of the biggest business myths of all time.

00:01:44

Justin Seedorf: Ooh.

00:01:44

Alix McCabe: You've landed on Too Big to Fail.

00:01:46

Justin Seedorf: All right.

00:01:47

Alix McCabe: It's a good one. Alrighty, let's do some myth busting. Most people are probably familiar with the expression, "too big to fail," thanks to the 2007 and '08 financial crisis, but it actually dates back decades. A US Congressman by the name of Stuart McKinney is credited with popularizing the phrase back in 1984, following the collapse of Continental Illinois National Bank and Trust Company. The philosophy behind too big to fail is that some corporations are so large and interconnected that their failure would be disastrous to the greater economic system, therefore they should be propped up by the government. Does that about sum it up for you, Justin?

00:02:22

Justin Seedorf: Yeah, I mean, if you look at what happened, there was a large number of very big financial institutions, insurance companies that the government basically said, "Hey, if these institutions collapse and fail, there's going to be a widespread impact." And what's going to happen, is the trickle-down effects to all of the people, all of the other companies connected to them is going to be so damaging that they determined the best course of action was for them to step in and to bail these organizations out. And that's why they started saying to let the public know why they were doing it that, “Hey, these companies are too big to fail."

00:03:07

Alix McCabe: Okay. So how would you say that that expression came to permeate the public discourse?

00:03:13

Justin Seedorf: I mean, you laid it out there discussing the financial crisis back in 2007, 2008, but the impetus of it was, there was a lot of what was called subprime mortgages that were being underwritten by banks, right? They were trying to make homeownership more accessible to a wider variety of people. And as a part of that, they started underwriting people who didn't have, let's just say, the same credits that previous underwriters would require. So that's where the name subprime came, right? They weren't prime candidates, they were subprime candidates. But what then happened is these banks would write these loans and then they'd package them as investments. They called them CMOs or collateralized mortgage obligations. And hedge funds, insurance companies, investment banks, pension funds, they would all gobble up these investments. And everything would've been hunky-dory except for the fact that a lot of these CMOs were not packaged correctly. But you can say it may have been a mistake or unintentional, but the reality is they didn't perform like they were supposed to.

00:04:28

Alix McCabe: Right.

00:04:28

Justin Seedorf: Because when these subprime mortgages were written, a lot of them were written on variable interest rates or what's called an ARM. And the interest rates started to increase in 2004, 2005 to try to curb inflation, sound familiar? The Fed steps in starts increasing interest rates. And these ARMs that had the variable interest rate meant that the mortgage now costs this person more and they couldn't afford it anymore. So now all of a sudden you've got a very large population of people who have these mortgages they can't afford and so all of these loans started defaulting. So now you have these investment banks, these insurance companies, these pension funds who have invested in these assets that don't perform, and they are now struggling to keep their head above water. And it all starts to fall apart when the government decides they need to step in.

00:05:25

Alix McCabe: Right. So that's where it came into, like we said in the public discourse, but it definitely didn't stop there. The term is used more now, this term, " too big to fail."

00:05:34

Justin Seedorf: Oh, well, absolutely. It started with these financial institutions and these insurance companies, but it quickly started to spread and the government's intervention into other industries, right? Automakers, for instance, they started saying, "Hey, these companies now are on the brink of failure and they're too big too fail. So we've got to step in or we've got to offer them bailouts."

00:05:57

Alix McCabe: And this is still something that comes up today when you're speaking with prospective clients or business owners, et cetera, right? I'm thinking about big companies like your Walmarts, your Amazons, et cetera. Are people throwing around this term, " too big to fail?"

00:06:11

Justin Seedorf: Yes, absolutely. So it started spreading to other industries pretty quickly. What we see now is it's more of a mindset that especially business owners have as they're looking at the companies they do business with. And we hear it all the time, they say, "Well, if so-and-so goes out of business, we've got bigger problems to worry about than them just paying me." Implying that their customers are so big that they're too big to fail. The government's going to step in and bail them out. And I understand the sentiment.

00:06:43

Alix McCabe: Yeah.

00:06:44

Justin Seedorf: They're not necessarily wrong, Alix, in the fact that, "Hey, if these big companies that are some of the most financially sound companies in the world right now get into a situation where they're unable to pay me, I think the world's got bigger problems." And that may be true, but I would submit to them, and we do, that, "Hey, that might be able to be applied to a small handful of companies that are out there." And the reality is, it's that pervasive thought of, "My customers are so big, they're too big to fail," it's starting to just get loosely applied to anybody who has a couple of big customers.

00:07:21

Alix McCabe: Why do you think the myth persists that companies are too big to go under?

00:07:25

Justin Seedorf: You have to think about it from the business owner's standpoint. Does he really want to believe that any of his customers, especially his big customers, could potentially get into a situation where they go under, where they file bankruptcy? No. Psychologically he has to, I guess, keep the proverbial blinders on in order for him to get sleep at night. That's something that as a business owner, they think about pretty consistently, pretty often. And I got to imagine it's driven by their desire to feel comfortable with doing business. So they just tell themselves, "Hey, my larger customers, they're too big to fail, so I'm not taking a big risk by doing business with them."

00:08:07

Alix McCabe: Do you have any examples of companies that went under for one reason or another and left their suppliers or customers facing big losses?

00:08:14

Justin Seedorf: Oh my gosh. Well, we're seeing it almost every day now, Alix. I mean, you can't turn on the news without hearing about another household name that is filing bankruptcy. I mean, just to name a few, Bed Bath & Beyond, Purdue Pharma, Johnson and Johnson has spun off one of their divisions to file bankruptcy. It happens a lot more often than people realize. And we're seeing it now with a lot of the big names, but it happens all the time with your smaller to medium- sized companies.

00:08:44

Alix McCabe: Bed Bath & Beyond, I outfitted my entire college dorm room from there back in the day using 20% off coupons.

00:08:51

Justin Seedorf: Exactly. I think we have a drawer full of them that we'll never get to use now.

00:08:54

Alix McCabe: When you take those examples of these big guys, what would you say is the impact on their suppliers or others who are doing business with them?

00:09:03

Justin Seedorf: Well, it can be catastrophic, quite honestly. When you look at some of these larger companies, let's just use Bed Bath & Beyond. I mean, they have thousands of suppliers, most of which are small companies. And for a lot of those small companies, Bed Bath & Beyond was their largest customer. And so even though they watched the news, they saw what was going on, they also felt like they were in a situation where they had to keep doing business with their largest customer and just hope for the best. But the reality is much different in what usually ends up happening, is they hope for the best, but especially if you're a small company and your largest customer goes bankrupt, it usually has a domino effect that either severely impacts your business being able to continue to operate, or worst case scenario you have to follow suit.

00:09:54

Alix McCabe: Yeah. And so I mean, in that sense, it impacts the entire supply chain, really.

00:09:58

Justin Seedorf: Yeah. Well, yeah, not just the suppliers, but the trucking companies, the trucking companies that deliver the product to Bed Bath & Beyond, now, they've lost a large portion of revenue. The fuel suppliers that sell diesel to the trucking companies, those trucking companies aren't running those routes anymore. In fact, we just saw a large trucking company file bankruptcy, YRC or Yellow Trucking Company. And so the diesel fuel suppliers now have lost a large customer. And I mean, you can follow the supply chain all the way up and down and see where these large type of bankruptcies and failures impact hundreds, if not thousands of different companies.

00:10:38

Alix McCabe: It's a ripple effect. So imagine a scenario where we have two identical companies that are doing business with a company that they consider too big to fail, only it does fail. And then one of the companies has credit insurance and the other doesn't, how would that play out?

00:10:54

Justin Seedorf: So imagine two homeowners, the same type of house, next door neighbours, and both houses catch on fire, and one of them has homeowners insurance and the other one doesn't, that's what we're talking about here. When a company does not protect that revenue stream, their accounts receivables with that large customer and that large customer files bankruptcy, as I had previously mentioned, oftentimes we see that supplier to that large company go bankrupt as well, because they don't have a backstop to that bad debt. They're hoping for something to fall out of the bankruptcy, some sort of recovery, but that typically doesn't happen. Or if it does happen, it's pennies on the dollar and it's not enough to sustain their business.

Now, contrast that with a business owner who's supplying the same large customer that files bankruptcy, but they took a prudent step in protecting that exposure, protecting their accounts receivable with a trade credit insurance policy. So now when that customer, large customer files bankruptcy, they are able to actually plug that cashflow gap with a claim payment from their insurer. So they file a claim with their insurer, their insurer pays that claim, and now they're able to keep operating, keep paying their employees, keep buying inventory. And they're not being held hostage, waiting to see what happens with the bankruptcy court. And it's the difference between continuing to grow as a business or potentially dying as a business.

00:12:34

Alix McCabe: I like your analogy about the homeowners, it's a good analogy. So you've given us a ton of examples that show us that, " too big to fail" is a myth now, right? So how do you combat the faulty logic that allows it to persist?

00:12:47

Justin Seedorf: Yeah. Well, that's the million-dollar question that my team is constantly trying to figure out. And at some point, the chief financial officers, the presidents, the business owners who are responsible for running their businesses, they have to just be honest with themselves and think through the real life ramifications if one of their big clients or customers did fail. I mean, quite literally, they have to remove the whole faulty thought process of, "My customers are too big to fail," or, "My customers are too good to fail." Every company is one lawsuit away from filing bankruptcy. We see it time and time again.

And so the first step is really trying to help these business owners, these executives that are responsible for the financial health of their companies, be pretty honest with themselves about those ramifications, right? "Yes, I know your customer is big and they're good, but what happens if there's a lawsuit and they have to file bankruptcy? How would that impact your business?" And get them to talk through that to the logical end of what that would mean for their company, so that they can then do an analysis based off of that and determine what's the best course of action to protect them in the event that does happen. Again, it goes back to the analogy I use about the homeowners, right? If they are a homeowner, are they going to ensure their home against a loss that might come from a fire? Yes. Do they expect their house to catch on fire? Absolutely not. But they're still going to protect themselves in the event that it does happen.

00:14:30

Alix McCabe: But everyone has homeowner's insurance. Because it's perplexing to me, based on our discussion, why wouldn't every company just protect their AR with insurance?

00:14:40

Justin Seedorf: Well, you're right. Most people, almost everybody has homeowners insurance. But think about why, the reality is it gets presented as a requirement, especially if you have a mortgage on a home. You have to have the type of insurance that your bank tells you that you have to have, or they're not going to give you that mortgage, right? That's the prevailing mentality of most people when it comes to insurance, they're only going to get what they're required to have, right? Auto insurance, I'm required to have it if I want to have a car and have it registered and have my license, so I'm going to get it.

And with things like trade credit insurance, it's not always required. In fact, typically it's not required. So we see a lot of companies that should have it, they forego having it, or they don't even know about it. So they don't put a policy in place that could protect them, that would be a prudent choice to not only protect their company, but to really help them grow their company. But I think you can sum it up with just saying, "Hey, if I'm not required to have this type of insurance, I'm not going to pay the money for it."

00:15:46

Alix McCabe: Yeah. And I mean, I get that mentality not always required, but a very prudent choice to protect your revenue streams and also grow them.

00:15:53

Justin Seedorf: And I can tell you from firsthand experience, when business owners and CFOs they opt to put this type of policy in place, this type of coverage in place, they're always coming back to us saying, " I don't know how we operated our business without this." And I'm just nodding my head grinning a little bit. " Yeah, yeah, I don't either, but thank goodness you made the decision to do it."

00:16:19

Alix McCabe: Oh, Justin. Just like the Oscars, when someone's acceptance speech goes on way too long, that music means we need to wrap things up.

00:16:26

Justin Seedorf: Okay.

00:16:27

Alix McCabe: They're playing us off. Before we close, I would love for you to sum up what we talked about today. So what's the main thing you'd like our listeners to remember or consider about the phrase " Too big to fail?"

00:16:37

Justin Seedorf: The main thing to remember is no company is really too big to fail. If the government has to step in and bail a company out, that's not a good thing. And the reality is that phrase was coined as a way to help sway public opinion on the actions the government took. But make no mistake, if a company gets labeled as "too big to fail," that means it's on the brink of failure, so you can't apply that thinking to any of your customers. The best thing for a business owner, the best thing for a CFO or a president of a company is to take a realistic look at, "Okay, here's my largest customers, and they might be too big for me to take a loss on, but that doesn't mean they're too big to fail." So if they're too big for you to take a loss on and to continue to operate as a company, you need to protect yourself and you need to ensure that exposure.

00:17:31

Alix McCabe: That's great advice as always, Justin. We're going to have to get you a special trophy or a jacket or something to acknowledge that you're now a three- time guest on Wheel of Risk.

00:17:41

Justin Seedorf: Oh, wow.

00:17:41

Alix McCabe: You can put it on your shelf, you can wear it around.

00:17:43

Justin Seedorf: Yes. A jacket would be really nice, I'd like the yellow jacket for the Hall of Fame, maybe.

00:17:49

Alix McCabe: Yeah.

00:17:49

Justin Seedorf: Okay, great.

00:17:50

Alix McCabe: Okay, we'll get working on that.

00:17:51

Justin Seedorf: Well, thank you for having me. I really appreciate it.

00:17:53

Alix McCabe: Thank you so much for being here. My guest today has been Justin Seedorf, Southwest Regional Vice President at Allianz Trade Americas. I'm Alix McCabe, and this is Wheel of Risk, brought to you by Allianz Trade. Thanks so much for listening. If you learned something from this episode and we hope you did, we'd be very grateful if you could leave us a positive review. And we'd love to connect with you on social media, you can find both myself and Justin on LinkedIn. Thanks and talk to you soon.