Are Commodity Trading Firms Too Big To Fail?

Includes: GLCNF
by: Craig Pirrong

In response to Bank of Canada Deputy Governor Timothy Lane's speech about the systemic importance of major global commodity trading firms (GCTFs), the FT's Javier Blas asks: "Has Glencore become 'too big to fail'?"

And I answer: Hell no.

I will write much more on this subject- much more- when a few things clear. For now, a few of my reasons:

  • GCTFs- even the biggest, like Glencore (OTCPK:GLCNF), Cargill, and Koch- just aren't that big. Glencore, the biggest, has about the same amount of assets as Kraft (KFT) and Fiat (FIATY.PK) and Hitachi (OTC:HICTF) and Fubon Financial Group (OTC:FUISF) (assuming you've heard of it). Are those TBTF too? The biggest GCTFs have asset values an order of magnitude smaller than the banks that have been designated SIFIs by the Financial Stability Board. Again: not that big, in systemic terms.

  • GCTFs aren't highly leveraged.

  • GCTFs don't engage in extensive maturity transformation. Indeed, current assets and current liabilities are closely matched, and for many firms the maturities of their liabilities exceeds that of their assets.

  • Commodity trading firms, e.g., Enron, have failed without significant knock-on effects. Indeed, an entire commodity trading sector- the merchant energy sector in the U.S.- imploded without disrupting the financial system, or the trade in physical power and gas.

  • GCTFs weathered the 2008-2009 financial crisis fairly well.

  • Even if a large firm were to fail, disrupting commerce in commodities for which it accounts for a significant fraction of the trade, (a) the quantity of trade in these commodities is very small relative to total international trade or GDP, (b) other firms are likely to be able to fill the gap quickly, in part because the assets used in commodity trade can be redeployed quickly, and (c) disruptions in trade have few knock-on effects on global or even regional GDP. As an example, the 2011 Japanese earthquake and tsunami severely interrupted trade in electronics and auto parts, but the effects on GDP in Asia were small and transitory, and the effects on GDP outside of Asia negligible.

This is not to say that GCTFs are always on the side of the angels- definitely not. Nor is it say or that some additional regulation (notably in the nature of disclosure, and better anti-manipulation laws) is not worth consideration. It is just to say that we don't need to add them to the list of too big to fail enterprises. We should be looking to pare that list, not expand it, and GCTFs do not pose the systemic risks that warrant SIFI designation.

Again, more to come in the weeks to come.