MARKET PERSPECTIVE
By J Mulraj
NOV 8-14, 2025
Too Big To Fail firms pose a huge risk
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The term ‘too big to fail’ (TBTF) was coined by Congressman Stewart McKinney at the Congressional Hearing after the collapse of Continental Illinois Bank, then the 7th largest US Bank with assets of $400b.
It was a mistake, as it encouraged future institutions declared TBTF to become reckless and profligate. If a business is assured of a rescue its management takes unwarranted risks. This is a moral dilemma. In the 2008 crash, for example, leading TBTF banks lent money to sub prime borrowers, those with no income, no jobs and no assets (acronymed NINJAs), then de-risked themselves by securitising the loans, selling them to retail investors after slicing and dicing them. When the borrowers default, which was inevitable as they had no jobs, no income and no assets, the crisis snowballed.
So the labelling of banks/mortgage lenders as TBTF encouraged them to originate loans to NINJAs, which they would never otherwise have done, and to evade the inevitable default on the loans by palming them off to retail investors who were blithely unaware of the lemons they were buying. Rating agencies like Moody’s collaborated in the scam by generously rating some slices AAA! An article in the Economist post the 2008 GFC, said that Moody’s did an internal review of it’s ratings and, after a 3 day review, downgraded, in one step their own rating from AAA to junk. Of course, that was too late to save the hapless investors who relied on their ratings.
The TBTF firms and colluding rating agencies got away with light raps on the knuckles even as the whole world was in pain during the crisis.
Well, the world is soon to pay a heavy price for the 1984 velvet gloves treatment of Continental Illinois Bank as Too Big To Fail, compounded by the insouciance of financial regulators and leadership who let off perpetrators of fraud lightly. Which, sadly, they will continue doing.
The TBTF firms, with gargantuan appetites, have grown much, much larger.
Recently, Jamie Dimon, Chairman & CEO of J P Morgan Chase, America’s largest bank by assets (but #6 globally, after 4 Chinese and 1 Japanese bank) commented that if you see one cockroach there will be more. He was referring to two mid sized US companies that had just gone bankrupt. One was Tricolor, a sub prime auto lender (owners didn’t learn the lessons of the catastrophe of sub prime housing loans?) and First Brands Group, a major supplier of auto parts, which had acquired several companies through debt. At the time of its recent bankruptcy filing, it apparently owed $ 8.4 billion, comprising $ 6.2 b. in loans and $ 2.2 b. in supply chain financing.
He was right. Shortly thereafter, Renovo Home Partners, founded in 2022, by Auras Private Equity and later acquired in 2024 by BlackRock TCP Capital. Renovo was a home remodelling company which acquired several other family owned similar companies under one platform.
BlackRock is the world’s largest Asset Manager, with assets under management (AUM) in Q3/25 of $ 13.4 trillion! That makes it the biggest gorilla in the room, with control of financial assets exceeding the GDP of all but two countries! It is a wonder then, is it not, how group company BlackRock TCP Capital, which focuses on direct lending to mid market companies, acquired Renovo, which went belly up a year later. When Renovo went bankrupt, it’s assets were under $100,000 and debts were between $100 – 500 million! (). That’s a huge cockRoach!
The private credit market in USA is about $3 trillion, and rapidly growing. It provides finance to mid sized companies from which, for various reasons, traditional bank lenders have withdrawn. Investors are attracted by the higher rates they get lending to such firms. Attracted by the higher returns, lending firms don’t exercise the required due diligence into the collateral being offered (https://youtu.be/bqhtv5blPdE?
How does this impact the average American? Well, consider what happened in UBS, the Swiss Bank ranked 20th in the world, by assets. It should down it’s OConnor family of real estate funds, which were underperforming. They had exposure in First Brands. Investors in these funds included pension funds. The average American putting money into his 401K pension plan wouldn’t even be aware of where his money goes, until one day something smelly hits the fan.
The biggest problem with TBTF organisations is that nobody dares, by virtue of their hold over many businesses and over multiple levers of power, to stand up to them. And the absence of pushback leads to arrogance of infallibility, aka as pride. You know what comes after pride, don’t you?
This raises an important point for discussion – is it time for regulators to step in and call for a breakup of such TBTF firms? As they did, in 1984, with the then telecom giant, AT&T. AT&T, called Ma Bell, had a monopoly over regional and long distance telephony. Under regulatory pressure to prevent misuse and to encourage competition, it was split into seven regional Baby Bells. Ma Bell retained long distance/international telephony, some manufacturing capacity and it’s highly regarded research arm, Bell Labs.
That was the last time a regulator succeeded in forcing a large corporate restructuring effort. Subsequent efforts by Dept of Justice and the Federal Trade Commission, which deals with trade and antitrust issues, to restructure companies like Microsoft, Google and others, but they were unsuccessful. Perhaps because of weak political vertebrae or because of judicial underreach, or anything else. But a discussion to curb the powers of TBTF entities ought to begin.
The BSE Sensex hovered around the 84000 level last week, despite the likely implosion in the private credit market which, as in 2007, can lead to a freeze in transactions, hence in liquidity, as both sides distrust each other. And despite the continuation of global wars, especially the Russia-Ukraine war where NATO continues to prop up a dead horse with supply of weapons and funds.
Such is the perfidy of war! An investigation in Ukraine has revealed that a group of insiders close to Zelenskyy has likely embezzled $100 m. Such is their duplicity that the group continues to battle, on grounds of patriotism (when its actually for personal greed), and make the country’s youth, it’s very future, die for the purpose!
Such is the perfidy of war that NATO, and USA, knowing the futility of this war, continued prolonging it by supplying weapons and funding, to feed their own MIC, Military Industrial Complex, without risking the lives of their own soldiers; in essence, by outsourcing death!
Such is the perfidy of war that mainstream media, aware that Ukraine was being destroyed, cheered on the war, like spectators in a Roman arena applauded gladiatorial deaths!
Such is the perfidy of war that each and every country is now over indebted, whether it is US, or China or EU! These foolish ‘leaders’ (hah!) would rather borrow and destroy economies than save and build them?
With such imminent dangers posed by careless TBTF entities, and with such callous global leaders egging conflicts, Santa Claus will surely be displeased. One is fearful that, instead of the traditional gifts, he may be so disenchanted that he may usher in a collapse, reminiscent of 2008.
When will people learn?
Comments may be sent to jmulraj@asiaconverge.com
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