The Penn Central Crisis in 1970 was a classic case of “too big to fail” involving the nation’s seventh-largest corporation. Rather than allowing the firm to fail while supplying reserves to the market to prevent the spread of the crisis, the fed bailed out the firm, signaling to other sizeable firms that they might not suffer harm from taking risks. The Fed suggested its action was justified due to impacts on the broader financial system, but it effectively signaled that sizable or politically connected firms would have a safety net.
Glossary Term