On September 15, 2008, hundreds of people poured out onto 1 William Street in New York City, holding their belongings in cardboard boxes.
The media covered the frenzy as these people – once employed by a prestigious Wall Street institution – walked out to join the ranks of the unemployed.
But the crisis wasn’t contained to Manhattan. It was global.
That day, about 25,000 people lost their jobs in offices across New York, London, Tokyo, and other cities around the world.
All because Lehman Brothers – one of my former employers – filed for bankruptcy.
Lehman fizzled into bankruptcy because it got greedy. It overleveraged its bets in the housing market and derivatives.
When it tanked, many claimed that it was an isolated event. Just as Bear Stearns, another now-defunct Wall Street institution, was said to have been six months prior.
Yet, it launched a crisis that had been percolating for years. And which regulators and the Fed had ignored – and stoked – for years.
And for which no one was held accountable.
Today, something very similar is playing out in China. Investigators are encircling Evergrande, the world’s most indebted property developer.
And if Lehman’s bankruptcy taught us anything, in crises like these, the damage is never isolated.
China’s $330 Billion House of Cards
Real estate in China has gone through a series of defaults since late 2021. At the heart of this crisis is Evergrande.
Last month, Evergrande filed for Chapter 15 bankruptcy protection in the U.S. Police then arrested several employees at Evergrande’s wealth management unit.
Evergrande was one of China’s biggest real estate developers, with more than 1,300 projects across 280 cities.
But its debt spiraled so much that it ended up owing $330 billion – more money than any other developer worldwide.
That’s a massive sum. It’s equivalent to 2% of China’s annual GDP. In other words, that’s 2% of all the money China earns in a year. All tied to one company.
In 2021, Evergrande began missing bond payments to investors, leading to a default on its debts.
That triggered a chain reaction. The company had gotten so big, and so connected, that other developers relied on it for resources and loans.
Since 2021, about 40% of China’s private real estate developers have faced defaults, too. And that’s just the beginning.
This Next Problem Is Four Times Bigger
In the wake of the Evergrande crisis, another major property developer is in trouble: Country Garden.
It’s four times bigger than Evergrande, with an estimated 1 million apartments under construction.
At one point, it was China’s largest builder by sales. Now, it’s at risk of defaulting.
Unlike Evergrande, which had been on people’s radar since 2021, Country Garden’s troubles came as a complete surprise last month.
This was supposed to be China’s most robust real estate developer, with a substantial cash reserve.
Country Garden had pledged to deliver 700,000 properties in 2023. But it’s managed to deliver only about half of that.
Its share price has plummeted to just 12 cents, down 69% since the start of the year.
Why? Well, much like Evergrande, Country Garden has also been failing to meet its bond payment obligations to its shareholders.
For instance, it missed bond payments in early August. Country Garden had until early September to make the payments or face potential default.
Last week, creditors voted in favor of extending the maturity of the $67-million bond.
It’s good news in the short term, but it’s just kicking the can down the road. It doesn’t change the fact that the company is on the brink of default.
Country Garden has almost $190 billion in total debt.
That is less than Evergrande’s massive $330 billion debt. But remember, Country Garden is involved in about four times as many development projects as Evergrande.
If it collapses, it could be the straw that breaks the camel’s back in China’s real estate market.
China’s Crisis Could Soon Be America’s Problem
That brings me back to what this all means for the U.S., for Americans, and for your money.
Recall that Evergrande filed for Chapter 15 bankruptcy protection in the United States. Why would a Chinese company resort to U.S. bankruptcy laws?
Because the company owes money to creditors worldwide. It wants to protect itself from being sued in various jurisdictions, including the U.S. legal system.
And guess what? Country Garden owes money all over the world, too. And not just to small mom-and-pop operations.
BlackRock, Fidelity International, UBS, JPMorgan – they’ve all invested in Country Garden’s bonds.
These companies manage a combined $22 trillion worldwide. More than 90% of Americans use them to invest their money and save for retirement.
This means that Americans are potentially exposed to the risk of loss if Country Garden defaults on its bonds.
You see, if big U.S. banks or asset managers have to book losses that arise from Country Garden – or any other Chinese financial firms struggling with related problems – customers could be impacted by those losses as well.
That’s because when banks or asset managers are forced to take losses, they look for other ways to compensate.
I saw this firsthand when I worked at big banks like Chase Manhattan (now part of JPMorgan Chase) for 15 years.
When these banks face troubles, they search for ways to make their customers, and taxpayers, help bail them out and mitigate their losses.
And the easiest way to do this is by retracting their lending to individuals and small businesses – because those groups don’t have a say in the process… Or to reduce the amount of interest they pay on savings and other accounts.
From the standpoint of big banks like JPMorgan, China’s troubles could translate into more stringent processes for providing loans to customers in order to protect more capital.
And if asset managers take losses, customers will see them in their fund statements.
In the end, it’s a matter of size, too. The bigger the problems of – and exposure to – China, the more the financial ramifications can hit Americans.
As we saw during the financial crisis and are now seeing with China, when one part of the financial system coughs, the rest of it can catch a cold.
That’s why China’s crisis is not just China’s problem.
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins
P.S. China’s real estate crisis is not the only developing situation I’m concerned about…
Right now, the Federal Reserve, the White House, and other financial elites are enacting the biggest change to our money since 1971.
Pulling your money out of the bank won’t be possible… But I’ve found a way to help you become your own banker and escape the clutches of this power grab. To learn more, watch this.