The Next Financial Crisis

Washington, D.C., May 27, 2025. Just four months into his first term, President Scott P. Brown faces what is rapidly becoming a severe financial crisis, with the collapse yesterday of yet another Stable Wind Farm Trust. The failed institution, Magna-SWIFT, is the largest thus far, with over $90 billion in assets. Rumors also continued to swirl about the condition of the Houston Power House, one of the nation’s largest clearinghouses specializing in weather and power derivatives. Experts warned that a major clearinghouse failure could have devastating implications.

In a prepared statement, Treasury Secretary N. Gregory Mankiw urged investors to remain calm. Secretary Mankiw also noted the strong balance-sheet positions of the nation’s leading commercial banks, including Citigroup, J.P. Morgan, Goldman Sachs, and Bank of America. None of these banks have participated materially in the wind-farm boom of the past several years, and all maintain equity capital levels well in excess of the minimum regulatory requirement of 15 percent.

The SWIFT industry’s explosive growth dates to the beginning of the Palin Administration in 2017. Spurred by President Palin’s aggressive subsidies to clean-energy sources and a series of technological breakthroughs, wind power quickly displaced almost all other forms of energy. The huge scale of wind-farm construction—the total value of wind farms worldwide exceeds $5 trillion—was facilitated by the innovation of the SWIFT structure. A SWIFT is a specialized investment fund that holds a broadly diversified portfolio of wind-farm assets. These assets generate revenues that are tightly linked to the price of electricity: When electricity prices are high, SWIFTs enjoy higher revenues. SWIFTs have become expert at using customized derivatives to offset the risks associated with these revenue fluctuations, yielding net earnings that, until recently, had appeared to be virtually risk-free. They then issue short-term debt backed by these stable earnings. A typical SWIFT finances 90 percent of its assets using overnight notes that yield only slightly more than Treasury bills.

Importantly, SWIFTs are not banks; they are more akin to private investment pools, like hedge funds or private equity firms. Moreover, they have universally opted to keep their assets below the $100 billion “Too Big to Fail” threshold that regulators use to classify any financial institution as systemically significant and hence subject to added supervision. Given these two facts, SWIFTs have not been subject to the strict capital and liquidity requirements imposed on banks in wake of the global financial crisis of 2007-2010. In the meantime, the major banks, unable to compete with the low funding costs of the SWIFTs, have stuck to more traditional lines of business, which, while steadily profitable, have shrunk considerably in recent years.

The first cracks in the SWIFT model appeared in October of last year, with the failure of the relatively small Pro-SWIFT. Pro-SWIFT had an imprudently large fraction of its assets invested in a single Georgia wind farm, which was forced to shut down for two weeks over protests that its turbines were killing large numbers of local waterfowl. The resulting revenue loss forced Pro-SWIFT to sell assets in an effort to service its maturing short-term debt. Although only $10 billion of assets were liquidated, they fetched just 60 cents per dollar of book value. J.P. Morgan, in purchasing the assets, noted that, “Our more conservative financial policy puts us at a disadvantage in buying wind-farm assets—hence the large discount.” As a result of the fire sale, Pro-SWIFT creditors experienced significant losses.

These losses were the first in the history of the SWIFTS, and they had a powerful effect. Creditors of other SWIFTs, awakened to the risks involved, began to refuse to roll over short-term loans. This has led to further liquidations, bigger fire-sale discounts, and a cascading effect. To date, over 50 SWIFTs, representing over $700 billion in assets, have failed. Yesterday, it was reported that Berkshire-Hathaway was in discussions to acquire Magna-SWIFT’s wind-farm assets for 30 cents on the dollar.

The clearinghouse industry has been another victim of the crisis. Clearinghouses grew rapidly in the wake of 2010 reforms that targeted the over-the-counter derivatives market. Clearinghouses were meant to bring a greater level of stability and transparency to derivatives trading. But this industry has become more fragmented than originally envisioned, and some argue that competition among clearinghouses has led to a “race to the bottom” whereby the clearinghouses require insufficient collateral from the SWIFTs they deal with. The Houston Power House is said to have large, uncollateralized exposures with Magna-SWIFT, and observers estimate it could lose $8 billion from these exposures alone. Power House Chief Executive Officer Fabrice Tourre was unavailable for comment.

Thus far, consumers and non-energy-related businesses have not felt much of a credit pinch. Yet, analysts warn that, in spite of the strong position of the banks, a powerful credit crunch is inevitable. “This is going to be worse than 2008,” said Nouriel Roubini of NYU. “Sure, the banks look healthy now. They have been well-regulated and very prudent. But somebody is going to have to buy up trillions of dollars of these liquidated wind-farm assets. The huge discounts will make it impossible for the big banks to say no to this bargain. And when they do, they will have much less left over for their traditional lending activities.”

In a related development, a spokesman for Goldman Sachs denied allegations that the firm had taken a large short position in a synthetic SWIFT in April of last year.

Jeremy C. Stein is the Moise Y. Safra Professor of Economics at Harvard University.

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