Too Big To Fail can be solved with a single SEC regulation, and the beautiful part of this plan is that it will be only market forces that dictate precisely how the rule will affect each company's fate.
In America, the Securities and Exchange Commission (SEC) regulates stock market activity via their regulations. Similar regulatory bodies operate world-wide, so international agreements can be reached that extend this concept globally, but I will present this idea from the American point-of-view.
My proposal is one simple SEC regulation that will stop upside trading in any company's stock when the company's market capitalization exceeds some universal threshold value that is arbitrarily chosen so as to prevent all companies from becoming Too Big To Fail.
I call it The MaxCap Rule.
How does The MaxCap Rule work mathematically?
(Market Capitalization) = (Number of Outstanding Shares) x (Price per Share)
The number of outstanding shares of any stock is a well-known fixed quantity. It can be changed, but not without being well-publicized. Think of the number of outstanding shares of each company's stock as a numerical constant that is individualized to that company.
Thus, applying a single maximum allowable value universally to all companies' market capitalizations will have the effect of creating an individualized maximum value on each company's stock price.
How does The MaxCap Rule affect companies?
The MaxCap Rule will have no effect whatsoever on small-sized and medium-sized companies, and the Management of such companies will never have to think seriously about it. Only companies that are already big-sized will need to worry that they could become TOO big-sized to exist as they are.
As any big company grows, Management is keenly aware of its market capitalization. It will NEVER come as a suprize when The MaxCap Rule gets close to being implemented.
As the company approaches its individualized threshold stock price, Management will have more than enough time to prepare for it and to take action that will protect the interests of its shareholders.
This is the beautiful part of the rule: It will be entirely up to Management how to respond when the MaxCap limit approaches. Government will not dictate the nature of the response, but any management team that fails to respond will be forever known as irredeemably stupid.
How will Management respond as the MaxCap Limit approaches?
Very simply, Management will break up the big company into small pieces as its share price approaches its MaxCap Limit.
Think of the 1984 AT&T breakup. A judge took a monolithic, near-monopoly, that was not reponsive to its consumers, and broke it up into seven Baby Bell companies plus the remnants of the old company. Ever since then, the cost and convenience of American telecommunications has been spectacularly improved.
Quite simply, by breaking up a big company like AT&T, the smaller companies became competitors, thus improving the industry.
Shareholders were protected in the process, too. Each AT&T shareholder was issued a "basket" of stocks in the resulting smaller companies that was equal in value to their original holding, but the shares in the "basket" traded indepenently.
In the end, the one giant corporation was broken up into smaller companies by government fiat, but everyone came out a winner.
The same will happen to any overly-large company under The MaxCap Rule but without the government dictating the terms of the breakup. It will be up to Management, under pressure from shareholders, to organize and implement the breakup in a timely and profitable manner.
In the end, the nation's economy and the company's customers, employees, and shareholders will win, and no company will EVER be allowed to become Too Big To Fail again.
Other issues with The MaxCap Rule
It may be necessary for Congress to enact legislation to prevent overly-large foreign companies from doing business in America. Such laws would have the effect of reducing the size of foreign competitors to match the size of the new, smaller, American companies. It would be good both for America and for the rest of the World.
Implementing The MaxCap Rule will take some planning, so a year's warning should be given, but as long as the rule and the date it will go into effect are made clear, Management will have ample time to consider it, and prepare to make it happen.
Finally
I have deliberately avoided suggesting a specific value as the Universal MaxCap Limit. I have found that to do so only invites arguments over how big is too big. Feel free to make suggestions in the comments of you like, but I'd rather discuss the abstract idea rather than specific values.
Corporate Apologists will scream that this idea is some sort of Communist or Socialist plot, but I defy you to find any detail in it that is anti-Capitalist. It's not anti-Capitalist, it's just anti-Supercapitalist.
The MaxCap Rule will increase competition, increase jobs, and give cities large and small, a chance to build or maintain their economic base.
To Big To Fail should NEVER again be an excuse for keeping a dying company alive.
Too Big To Fail should mean Too Big To Exist.
The SEC could do it tomorrow.