BAE Shows Manufacturers Are Too Big to Fail

It is not only banks that are too big to fail. The treatment of corruption allegations against BAE Systems shows some manufacturing companies must be protected from their own excesses too.

As Britain's biggest industrial company, BAE is too important to be severely punished. It employs more than 100,000 staff, earns foreign income from exports and supplies the hardware to defend the nation. And given the international counterparties to its questionable payments, prosecuting the UK company could risk upsetting important allies abroad.

So following the Serious Fraud Office's decision to scrap its inquiry into Saudi Arabian arms contracts because of national security interests, the SFO and US Department of Justice have now extracted the maximum fines from the aerospace company that do not cause wider damage. Hurting BAE would endanger not only its own payroll but also the 400,000 workers at its suppliers.

The American prosecutors have thus imposed a $400m fine for providing inaccurate information while the UK fines it £30m on an accounting irregularity. The cost is bearable for a company valued at £12bn and with sales almost double that, but BAE emerges innocent of any serious charges and free to continue supplying governments.

The settlement is the equivalent of the US and UK governments injecting funds into the banks that caused the financial crisis, rescuing rather than punishing them. Britain can no more function without a major defence supplier -- never mind employer and exporter -- than without a banking system.

As at the banks, BAE's board has been cleaned out, a new code of ethics written, and tougher regulation imposed, but it will be allowed to flourish because, like the lenders, it is too big to fail.

That was the test applied to British manufacturing industry many years ago and used to justify the wave of nationalisation after the Second World War. In the 1970s, Rolls-Royce and British Leyland were rescued by the state because the aircraft and car companies were considered too big to fail -- and the US government adopted the principal last year to save Chrysler and General Motors.

But having been held to ransom by the banks, governments are urgently examining how to stop companies again becoming too important to lose. Barrack Obama wants deposit-taking banks to shed their risk-taking activities such as private-equity and hedge funds. The UK's parliamentary inquiry into exactly that danger will report soon.

If "too big" becomes unacceptable, politicians must rethink their views on big business. Anti-trust and competition rules have been used to prevent consumer exploitation rather than break monopolies because their size endangers supply or could cause consequential failures.

But unless the risk can be taken out of commerce, or unless governments turn against big business, the state must be willing to accept companies can fail or prepared to step in when they make mistakes.

Whether car companies, defence companies or banks, it is the economy that the state is protecting, not the erring corporations.