Too Big To Fail – If Only Banks Made Cupcakes

Hostess, the makers of Twinkies, Ding Dongs, and Wonder Bread, went bankrupt in 2012. It was actually the second recent bankruptcy the company had undergone, but this time it meant shuttering the company for good.

Hostess had too much debt, particularly investor loans and employee pension debt. It also didn’t have enough cash in the bank to fund ongoing operations, despite sales of over $2 billion. How can a company sell $2 billion worth of bread and Twinkies and not turn a profit? Largely because the cost to make those Twinkies was too high. Particularly painful was that despite the recession, there wasn’t the normal recessionary drop in ingredient prices. (See: Ethanol: How Politics Takes an Interest in You.) So Hostess had been on shaky footing for a while, and the straw that broke the camel’s back was a union’s refusal to cut employee costs in order to keep Hostess solvent. With no cash to fund operations, Hostess closed its doors.

There was an immediate run on Twinkies at local grocery stores. People started hoarding them. Amazon’s Twinkie sales increased 31,000 percent in one day. Many were afraid they’d never get to buy Hostess products ever again.

But just a few months later, and with much fanfare, Hostess rolled out on grocery and convenience store shelves again. Same packaging, same prices, same Hostess. And those folks who spent $100 for a box of Ding Dongs on eBay were feeling pretty sheepish.

What happened? How was Hostess miraculously resurrected? Well, the old Hostess wasn’t very good at baking profitably. So it failed, and new owners bought its name and recipes and went right back to work. This is how markets find the best way to give us what we want. Now, if Hostess weren’t just a Twinkie maker – if it were a bank or a car company – politicians would be talking about bailing them out because they are just so essential to our economy. But as we’ve seen, this never works. In the real world sometimes companies fail and we don’t just hand over taxpayer money to hide the obvious problems the company has. We let them fail when they’ve messed up, and we let better cupcake-makers take over. The same should go for banks and carmakers. The only reason politicians bail them out is because bankers and carmakers give them lots of campaign money and then vote for whoever bails them out the most. In fact, if Hostess had one major failing, it’s apparently that it didn’t lobby Washington D.C. hard enough.

Dig Deeper

Article: Hostess Brands Closing For Good

Article: Twinkies Hoarding Begins

Article: Why Hostess Had to Die

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