EDGE (Estimated Debt Guarantee Expenses) Database

Widespread public disdain—even outrage—exists concerning the too-big-to-fail problem in the financial sector and nonfinancial corporate bailouts. Yet the too-big-to-fail and bailout problems persist. Aside from political favors, reasons for guaranteeing debt may include the government wanting to

• prevent a corporation that facilitates government efforts to realize policy goals from failing during national emergencies, such as wars, pandemics, or financial crises;
• prevent sudden, large increases in unemployment following a large corporation’s failure; and
• continue a distressed corporation’s provision of goods and services deemed part of the social contract.

The credit-risk industry provides corporations—including those whose debt might be guaranteed—with estimates of distance-to-default and the probability of default. Policymakers may want to know in real-time what, if anything, to do when a large corporations face distress and how taking action might affect the government budget and ultimately the taxpayer. As a rough guide to keep track of these potential costs, the EDGE (estimated debt guarantee expense) Database provides lower-bound estimates of possible ex ante costs to guarantee debt for all available publicly traded corporations. This, however, does not mean that the government has guaranteed, or will guarantee, that debt.

The idea for the database draws from the contingent claims analysis of corporate balance sheets pioneered by Nobel prize winner Robert Merton in 1974 and 1977. In that literature, there exists an analogy between the market value of a corporation’s equity and a call option on its assets; this is because equity holders, as owners of the corporation, have a claim on the corporation’s assets. Similarly, there exists an analogy between a debt guarantee and a put option on the corporation’s assets; this is because the guarantor would take possession of the assets of a failed corporation in the event of a default.

From Q4 1971 to the most recent available date (as the data is released and the estimates can be updated), the EDGE Database reports the value of the debt guarantee, the estimated volatility of each corporation’s assets, and an indicator of whether a corporation has a quasi-market leverage ratio—the ratio of the market value of equity relative to the quantity of the sum of book assets minus book equity plus the market value of equity—that lies below 20 percent and below 5 percent, as corporations with lower quasi-market leverage ratios lie closer to default.