Michael Pettis on Evergrande and "too big to fail" in China

Borrowing for large Chinese companies like Evergrande has never been a problem in the past.  It was widely believed that they would ultimately always honor their obligations.  It was expected that local governments and regulators would always intervene at the last minute to restructure liabilities and, if necessary, recapitalize the borrower. 

As a result, there was very little differentiation in lending in the credit markets.  Banks, insurance groups and fund companies fought over issuing loans to large, systemically important borrowers. 

Nobody worried about possible losses.  In other words, the entire credit market was marked by moral hazard. 

~ Michael Pettis, "The significance of the Evergrande crisis for China," The Market/NZZ, September 21, 2021

CB Insights: Is WeWork too big to fail?

WeWork currently manages more than more than 5.2M square feet of commercial real estate in New York City alone. This puts the company in a unique bargaining position. Although it may not be healthy for the economics of the business, it’s hard to imagine that WeWork would be allowed to rapidly fail without some external help, according to the New York Times’ Andrew Ross Sorkin.

With so much space under its management, if WeWork were to fail, its sudden departure could cause commercial real estate prices in key markets such as London and New York to plunge. This would be more problematic for investors and other interested parties — like the government — than helping prop up the company.

~ CB Insights, "WeWork's $47 Billion Dream: The Lavishly Funded Startup That Could Disrupt Commercial Real Estate," 2019

Richard Fisher on moral hazard of "Too Big to Fail" and creation of megabanks

Here are the facts: A dozen megabanks today control almost 70 percent of the assets in the U.S. banking industry. The concentration of assets has been ongoing, but it intensified during the 2008–09 financial crisis, when several failing giants were absorbed by larger, presumably healthier ones. The result is a lopsided financial system.

Today, these megabanks—a mere 0.2 percent of banks, deemed candidates to be considered “too big to fail”—are treated differently from the other 99.8 percent and differently from other businesses. Implicit government policy has made the megabank institutions exempt from the normal processes of bankruptcy and creative destruction. Without fear of failure, these banks and their counterparties can take excessive risks.

Their exalted status also emboldens a sense of immunity from the law. As Attorney General Eric Holder frankly admitted to the Senate Judiciary Committee on March 6, when banks are considered too big to fail, it is “difficult for us to prosecute them … if you do bring a criminal charge, it will have a negative impact on the national economy.”[1]

The megabanks can raise capital more cheaply than can smaller banks. Studies, including those published by the International Monetary Fund and the Bank for International Settlements, estimate this advantage to be as much as 1 percentage point, or some $50 billion to $100 billion annually for U.S. TBTF banks, during the period surrounding the financial crisis.[2] In a popular post by editors at Bloomberg, the 10 largest U.S. banks are estimated to enjoy an aggregate longer-term subsidy of $83 billion per year.[3]

~ Richard Fisher, Ending 'Too Big to Fail', Remarks before the Conservative Political Action Conference, National Harbor, Maryland, March 16, 2013

1. For a recap of comments made during the Q&A period following Attorney General Eric Holder’s Senate testimony, see “Holder: Banks May Be Too Large to Prosecute,” Wall Street Journal, March 6, 2013.
2. For one example of the TBTF advantage observed in the spreads paid for longer-term debt, see “BIS Annual Report 2011/12,” Bank for International Settlements, June 24, 2012, pp. 75–6.
3. See “Why Should Taxpayers Give Big Banks $83 Billion a Year?” Bloomberg, Feb. 20, 2013.

Jim Grant on the Too Big to Fail banking doctrine (1990)

If anything is new about banking in the 1980s, it is the substitution of federal guarantees for the liquidity of individual banks. It is the policy that, even in smaller institutions, depositors will be protected. It is this regulatory sea change that distinguishes the current debt expansion from so many earlier ones. Rothbard’s theory holds that a run-resistant, semi-socialized, fractional reserve banking system is a house of cards. 

~ Jim Grant, "Bring Back the Bank Run," The Free Market, February 1990

George Soros on the "too big to fail" banking doctrine

One of the reasons banking is getting so concentrated is because everyone wants to get to the point where they are too big to fail. I don’t think that is such a wonderful thing.

It should shrink. It has really got overblown. The size of the financial industry is out of proportion to the rest of the economy. It has been growing excessively over a long period, ending in this super-bubble of the last 25 years. I think this is the end of that era.

~ George Soros, "How to stop the next bubble," Prospect, July 2008

George Will on Wall Street bailouts from Chrysler to Bear Stearns

[S]uddenly the Fed is undergoing radical "mission creep." The description of the Fed as the "lender of last resort" is accurate without being informative. Lender to whom? For what purposes? Last resort before what? Did the bank "lend" $29 billion to Bear Stearns, or did it, in effect, buy some of the most problematic securities owned by Bear? If so, was this faux "loan" actually to J.P. Morgan Chase? The purpose of the money was to give Morgan an incentive to buy Bear -- at a price so low that an incentive should have been superfluous.

In 1979, when the government undertook to rescue Chrysler, conservatives worried not that the bailout would fail but that it would work, thereby inflaming government's interventionist proclivities and lowering public resistance to future flights of Wall Street socialism. It "worked": Chrysler has survived to endure its current crisis. The fallacious argument in 1979 was that Chrysler was then "too big to be allowed to fail."

Today's argument is that Bear Stearns was so connected to the financial system in opaque ways that no one could guess the radiating consequences of its failure -- the financial consequences or, which sometimes is much the same thing, psychological.

But what is now the principle by which other distressed firms will elicit Fed interventions in future uncertainties? By what criteria does Washington henceforth determine whether a large entity is "too connected to fail"?

The Fed has no mandate to be the dealmaker for Wall Street socialism. The Fed's mission is to preserve the currency as a store of value by preventing inflation. Its duty is not to avoid a recession at all costs; the way to get a big recession is to engage in frenzied improvisations because a small recession, aka a correction, is deemed intolerable. The Fed should not try to produce this or that rate of economic growth or unemployment.

After the tech bubble burst in 2000, the Fed opened the money spigot to lower interest rates and keep the economy humming. And since the bursting of the housing bubble, which was partly caused by that opened spigot, the Fed has again lowered interest rates, which for now are negative -- lower than the inflation rate, which the open spigot will aggravate.

~ George Will, "The Fed Muddles Through a Bailout," Townhall.com, April 20, 2008

Dick Bove on Bear Stearns bailout

What the Fed did was absolutely necessary. If Bear Stearns had failed, it would have crashed the financial markets.

If a financial firm of this size fails, it pulls all the others with it.

~ Dick Bove, banking analyst at Punk Ziegel, "Bear Stearns Dives After Fed Steps In With Bailout Funds," IBD, March 17, 2008

(He added that Bear's woes threaten banks overseas that are tied to the firm via a web of reciprocal guarantees and agreements. )

BusinessWeek on the repeal of Glass-Steagall

The implications of the new law [the repeal of Glass-Steagall] are enormous. For instance, like other deregulated businesses, a merger frenzy of potentially unprecedented scale and scope is likely to be unleashed in the financial-services industry. Regulators rightly worry that these new behemoths will be considered too big to fail, encouraging their managements to throw the dice by lending recklessly throughout the global economy. These companies would profit handsomely if the gambles pay off, and taxpayers pick up the tab if they don't -- shades of the 1980s savings-and-loan crisis.

~ BusinessWeek Online, "Goodbye Glass-Steagall, Hello Big Mergers -- and Big Fees?," October 29, 1999