There are many reasons that always lead to a banking crisis, which always result in bankruptcies or bail outs by the government:
Bank pays too much to expand and huge write-downs follow with other banks pulling the rug.
Banks lend too much money to weak borrowers and projects with the same results.
Banks make long-term loans that funding with short term deposits with the same results.
The first two reasons are as old as banking – it is called “Moral Hazard” – a rather confusing term that is simply an expression for bad management by banks when dealing with other peoples’ money.
One of Europe’s largest and most aggressive banks, the Royal Bank of Scotland, once a huge global bank, did just that when it paid a ridiculous price for a Dutch bank. The British government is still reeling from the losses of saving that bank!
We have seen the first reasons in Finland (KOP, Suomen Yhdyspankki and SKOP) and many banks in the rest of Europe during the 1970s and 1980s that lent aggressively to the real estate market just before massive falls in property values.
The same happened in the United States in the 2007/2008 financial crisis. The American, French and German banks were also caught up in massive losses in real estate lending in the US.
The third reason was seen with a big French/Belgium banking group called Dexia that made loans for up to 30 years to cities and to the municipal sector in Europe, in Japan, and the United States, and funded these loans with mainly short-term funding. When the short-term funding dried up during the financial crisis Dexia was not able to continue lending at the profit and they went bankrupt. This bank had close relationships with the French and Belgian governments, and was regarded to be an important and influential banker. The financial losses were substantial.
WeWork, the American real estate rental company, is just a copycat example of the above – they have expanded very quickly and probably paid too much for long-term rental agreements in major cities. They have probably filled up this space with shorter rental agreements we weak tenants agáfter paying out high renovation costs. It appears that the mismatch between their long-term rental agreements and a short-term agreements with the tenants is the same type of mismatch that Dexia saw in their asset liability management.
Another eye-opening aspect about WeWork is that they received huge support from the world’s largest banks. Banks like JP Morgan and Goldman Sachs, and others, made huge loans to the company. The same banks wanted to manage the IPO of the company and delivered valuations of the company between USD 50 billion and USD 100 billion. When the IPO prospectus was finally published, it revealed great shortcomings in these valuations as well as substantial risks. The IPO was quickly pulled and Softbank, its largest investor ´demanded management changes and a restructuring of the financial statements. The conclusion delivered an implied valuation of around USD 15 billion….
Softbank, is not a bank and has its roots in mobile telephones. It has now expanded as a big investor in new disruptive companies like Uber, WeWork, etc., on a massive scale together with sovereign wealth funds and other big investors. There seems to be no limit to their appetite or ambitions…
… and this is a story we have heard many times before from the banking sector this last 50 years!