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Too Big To Fail - A Story of Evergrande and Excess

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Written by   15
1 year ago

The year was 2008 and the world was in the midst of the worst financial crisis it had seen in decades. Stock prices swung wildly from day to day. Millions of people lost their homes and their jobs. And companies of all sizes were failing left and right. But none of them were as big as Lehman Brothers.

Before filing for bankruptcy, Lehman Brothers was one of the largest investment banks in the U.S. and had several hundred billion dollars worth of assets. The bank had been in operation for over 150 years and had diversified its investments across a variety of markets and asset classes. That preparation however, failed in keeping Lehman Brothers afloat and its bankruptcy is believed to have played a significant role in what is now known as the Great Recession.

The financial disruption from the bank’s collapse was immediate. The Dow Jones, for example, saw what was then its largest one-day drop since the aftermath of the 9/11 attacks in the United States in 2001. And the effects rippled through the economy for months afterward.

The fallout from Lehman Brothers’ collapse also had a much less apparent effect: it was trumpeted by many as proof of the need for governments and markets to support companies that were deemed “too big to fail”, or in layman’s terms (pun intended), companies that were so interconnected with the markets that their failure would supposedly cause near irreparable damage to the rest of the global economic system.

Why do I bring up what by now in 2021 must seem like ancient history to many readers? Because history may be about to repeat itself.

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Evergrande: By Name But Not By Fortune

Tell me if this sounds familiar: a company with hundreds of billions in assets around the world, diversified across a variety of markets, and whose impending collapse comes during an ongoing financial crisis. If you say yes, you’d be right.

Evergrande is the second largest real estate property developer by sales in China and was the most valuable real estate company in the world just a few short years ago. Evergrande hasn’t just stuck to developing real estate though: it has invested significant amounts of money in unrelated companies like electric vehicles, a media company, banking and insurance products, and even a sports team.

The similarities between Evergrande and Lehman Brothers have caused many financial analysts and media pundits to openly wonder if the former will be characterized as “too big to fail” and eventually rescued financially by the Chinese government. As examples:

  • Over one million people have paid deposits to Evergrande on properties that the developer has yet to build. The loss of those deposits could have spillover effects if it causes those buyers to default on their own debts or if they have to liquidate stocks, cryptocurrencies, and other assets to recover financially.

  • Construction companies, design firms, raw materials suppliers, and other companies that do business with Evergrande have employees to pay and bills to service. Significant losses tied to Evergrande’s financial distress could push many of those companies to file bankruptcy themselves.

  • The majority of Evergrande’s $300 billion dollars worth of debt is owed to several hundred banks and other financial institutions around the world. Evergrande’s default would ripple through these institutions’ balance sheets and may force them to lend less money.

Whether or not Evergrande is deemed “too big to fail”, its troubles are having and will continue to have significant impact on markets around the world.

Bringing It Back To Crypto

So how is this relevant to cryptocurrency and blockchain? This is a crypto newsletter after all.

Firstly, Evergrande is taking the brunt of the blame for roiling markets of all types, including cryptocurrency. Have you taken a look at crypto prices this week? They were red across the board as investors of all sizes decided to take some risk off the table and liquidate crypto assets. The dip comes even though the crypto sphere has seemingly avoided any major bad news of its own this week. The pullback may even become self-fulfilling if prices remain low long enough to cause another death cross of market leader Bitcoin’s major moving averages.

Secondly, cryptocurrency markets themselves have recently come under fire as governments and financial institutions attempt to apply the “too big to fail” label to crypto and related technologies. These critics, of course, don't want to step in and save crypto markets during a crash. They just want cryptocurrencies to go away without causing them any more trouble.

Cryptocurrencies are certainly volatile and both their combined market cap and prevalence in society have grown exponentially over the past few years. However, it’s important to keep in mind who exactly is applying the “too big to fail” critique against crypto: governments, who are the biased, self-appointed arbiters of all that is “too big to fail”, and financial institutions, who are typically a root cause of major financial crises and stand to lose a lot as they get replaced by crypto, blockchain, and decentralized finance (DeFi).

Truthfully, the idea that something is “too big to fail” conflicts with the operation of free markets. After all, markets improve and get stronger as inefficient, bad companies fail and are replaced by better versions or by new technologies altogether.

Cryptocurrencies are no different. Hundreds have failed over the years, and many more will fail, leaving only the strongest and most useful. It is not up to governments or financial institutions to decide who the winners will be. It’s up to each participant, including all of you. Choose wisely.

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This is not financial advice. This newsletter and related content are for informational purposes only. Cryptocurrencies, stocks, and similar assets can be risky. Always do your own research before making any sort of investment.

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