The Financial Crisis Of 2015 - A Non-Fictional Fiction

Tyler Durden's picture

Via Oliver Wyman,

The Financial Crisis Of 2015

John Banks was woken by his phone at 3am on Sunday 26th April 2015. John worked for Garland Brothers, a formerly British bank that had relocated its headquarters to Singapore in late 2011 as a result of what Garland’s CEO had described as “irreconcilable differences” between the bank and the UK regulators. The last three years had been the most exciting of John’s life. Having led the bank’s aggressive expansion into emerging markets wholesale activities, he had recently been promoted to its executive committee.

John picked up the phone. It was the bank’s legal counsel, Peter Thompson, calling. He had dramatic news. Garland Brothers, one of the world’s oldest banks, would tomorrow declare bankruptcy. As he lay there in his spacious air-conditioned bedroom, unable to return to sleep, John tried to reconstruct the events of the last four years.



Planting the seeds of failure

At the beginning of 2011, the global economy was showing signs of finding a "new normal". With the exception of a few smaller troubled economies, the world had returned to positive growth, and Western stock markets had returned to their levels prior to the Lehman crisis. Banks had started lending to each other again, becoming gradually less reliant on central bank funding. Insurers had rebuilt their capital positions back to pre-crisis levels. Ireland had joined Greece in the list of peripheral Euro countries requiring a bailout, but there was a general sense that the broader contagion problems had been contained.

New bank (Basel III) and insurance (Solvency II, in Europe) regulatory regimes had been introduced and were designed to avoid a repeat of the sub-prime crisis. Banks were phasing in the new tougher controls around capital, liquidity and leverage, albeit over a relatively relaxed timeframe. The Basel Committee's impact study had estimated that the largest banks needed to raise a total of €577 BN to meet the new standards, and several banks came to market in 2011 with multi-billion Euro rights issues.

Beneath this relatively calm surface, however, trouble was brewing. Stakeholders in financial services firms wanted lower risk, but shareholders were still demanding high returns. Executives felt their institutions were holding more capital than they needed, and they were struggling to find investment opportunities that satisfied their shareholders' return requirements. Despite attempts by central banks to inject liquidity into the system, loan growth in Western economies had ground to a halt as consumers continued to deleverage and companies remained reluctant to invest, uncertain of the future interest rate, tax and regulatory environment.
The ability of banks to generate fee income by re-packaging credit books had been eliminated by punitive new securitisation rules. New consumer protection laws prevented the sale of complex derivatives to many customers. Proprietary trading by banks had been outlawed in many jurisdictions.

The talented and ambitious employees of Western banks found themselves under-utilised in an industry that was starting to resemble a utility. They needed to find new outlets for their creativity and drive.


Disappearing into the shadows

Talent began shifting into the shadow banking sector. During the low interest rate environment of 2011, investors were desperate for alternative investments with additional yield. Assets under management in the shadow banking sector grew rapidly during 2011. Asset managers were promising "inflation busting" returns but many of the strategies were based on the short-term growth prospects of the hottest markets and often employed leverage to maximise gains.

New types of specialist loan funds disintermediated the highly regulated banking sector by matching borrowers and investors directly. These funds tapped into the long-term liquidity pools of pension funds and insurance companies. Their pitch books described such investors as "advantaged holders of illiquid credit". Lacking their own distribution channels, these funds relied on outsourced origination, either through banks or networks of "hungry" agents. Credit discipline was poor. Even at this early stage, the pattern was familiar, but regulators did not intervene. Because the asset flows were global and did not have banks at their centre, no single regulatory body felt responsible.


Go East (or South) young man!

Other restless Western banks and bankers moved, not into the shadows, but into the heat of emerging markets. In contrast to the anti-banking sentiment growing in the West, many emerging markets jurisdictions were still viewed as "banker friendly". At the same time, growth opportunities in emerging markets had already encouraged some banks to base their growth strategies on these markets. In early 2011, several small international banks closed down their Western wholesale subsidiaries and re-located them to Singapore or Hong Kong. Garland Brothers was the first British bank to make the move, giving up its UK base when it decided to relocate its headquarters to Singapore in late 2011.
Western banks tackled the emerging markets in different ways. Those that had already established deposit and customer bases in emerging markets continued to grow organically, employing a well-tested and consistent set of risk standards across markets regardless of regulatory inconsistencies. Other Western players, such as Garland Brothers, that were struggling to find an edge, employed unorthodox techniques to build a presence in the faster growing markets. Some began to build large wholesale divisions in Asia and set up complex legal entity structures to take advantage of inconsistencies across regulatory regimes.

Sales of complex derivatives were once again producing a large proportion of many banks' income. Lacking an emerging markets deposit franchise, many of these Western banks started to fund their emerging markets lending activities via the wholesale markets or by tapping domestic funding sources in the West. Problems in the Eurozone meant that many European banks were paying 200-300bps above LIBOR for funding back home, and there were few opportunities in Europe to lend out such funds profitably. European banks found that lending to emerging markets banks and governments was one of the few ways of generating a positive margin over their rising cost of funds. This was part of a general trend among Western banks of moving down the credit spectrum to pick up yield.

Bubble creation

Based on favourable demographic trends and continued liberalisation, the growth story for emerging markets was accepted by almost everyone. However, much of the economic activity in these markets was buoyed by cheap money being pumped into the system by Western central banks. Commodities prices had acted as a sponge to soak up the excess global money supply, and commodities-rich emerging economies such as Brazil and Russia were the main beneficiaries.

High commodities prices created strong incentives for these emerging economies to launch expensive development projects to dig more commodities out of the ground, creating a massive oversupply of commodities relative to the demand coming from the real economy. In the same way that over-valued property prices in the US had allowed people to go on debt-fuelled spending sprees, the governments of commodities-rich economies started spending beyond their means They fell into the familiar trap of borrowing from foreign investors to finance huge development projects justified by unrealistic valuations. Western banks built up large and concentrated loan exposures in these new and exciting growth markets.
The banking M&A market was turned on its head. Banks pursuing high growth strategies, particularly those focussed on lending to the booming commodities-rich economies, started to attract high market valuations and shareholder praise. In the second half of 2012 some of these banks made successful bids for some of the leading European players that had been cut down to a digestible size by the new anti- "too big to fail" regulations. The market was, once again, rewarding the riskiest strategies. Stakeholders and commentators began pressing risk-averse banks to mimic their bolder rivals.

The narrative driving the global commodities bubble assumed a continuation of the increasing demand from China, which had become the largest commodities importer in the world. Any rumours of a slowing Chinese economy sent tremors through global markets. Much now depended on continued demand growth in China and continued appreciation of commodities prices.

The bubble bursts

Western central banks pumping cheap money into the financial system was seen by many as having the dual purposes of kick-starting Western economies and pressing China to appreciate its currency. Strict capital controls initially enabled the Chinese authorities to resist pressure on their currency. Yet the dramatic rises in commodities prices resulting from loose Western monetary policies eventually caused rampant inflation in China. China was forced to raise interest rates and appreciate its currency to bring inflation under control. The Western central banks had been granted their wish of an appreciating Chinese currency but with the unwanted side effect of a slowing Chinese economy and the reduction in global demand that came with it.

Once the Chinese economy began to slow, investors quickly realised that the demand for commodities was unsustainable. Combined with the massive oversupply that had built up during the boom, this led to a collapse of commodities prices. Having borrowed to finance expensive development projects, the commodities-rich countries in Latin America and Africa and some of the world's leading mining companies were suddenly the focus of a new debt crisis. In the same way that the sub-prime crisis led to a plethora of half-completed real estate development projects in the US, Ireland and Spain, the commodities crisis of 2013 left many expensive commodity exploration projects unfinished.
Western banks and insurers did not escape the consequences of the commodities crisis. Some, such as the Spanish banks, had built up direct exposure by financing Latin American development projects. Others, such as US insurers, had amassed indirect exposures through investments in infrastructure funds and bank debt. Inflation pressure in the US and UK during the commodities boom had forced the Bank of England and Fed to push through a series of interest rate hikes that forced many Western debtors that had been holding on since the sub- prime crisis, to finally to default on their debts. With growth in both developed and emerging markets suppressed, the world once again fell into recession.

Judgement day for sovereigns

The final phase of the crisis saw the US, UK and European debt mountains emerge as the ultimate source of global systemic risk. Long-term sovereign yields had been gradually rising during the last few years, but analysts had assumed that this was because of increasing inflationary expectations. With the advent of the new commodities lending crisis, rising sovereign yields were suddenly being attributed to the deteriorating solvency of the sovereigns. Their high debts, combined with increasing refinancing costs, made it apparent that the debt burden of many developed world sovereigns was unserviceable. It was judgement day for sovereigns.

Those sovereigns that were highly indebted and needed to roll over large amounts of short-term debt were forced to either restructure their debts or accept bailout money from other healthier sovereigns. This period, which spanned 2013 to 2015, was the single biggest rebalancing of economic and political power since World War II.

The final irony in the tale was that the large sovereign exposures that the banking system had built up as a result of the new liquidity buffer requirements left the banking system, once again, sitting on the edge of the abyss.

Our unemployed protagonist

As John ran through these facts it became clear to him that not enough had been learnt from the sub-prime crisis. Bankers had gone chasing the next rainbow only to find another pot of toxic waste rather than a pot of gold. The new wave of regulations had proved ineffective at stopping another bubble from forming. John was struggling to understand what he should have done differently. Heads would certainly roll. But who was really to blame this time around?

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ACP's picture

No need to go that far. Let's start with 2012 and go from there.

SmallerGovNow2's picture

EXACTLY ACP, this story is a very apt description of what is happening RIGHT NOW!!!

lewy14's picture

Sorry, no.

The narrative is predicated on cost-push commodity inflation so severe that the BoE and the Fed are compelled to raise rates.

Not happening.

Copper and Iron can double and oil can go to $250 and poor people will riot for corn and wheat and Ben is Not. Gonna. Budge.

It may go down but it won't go down like that.

AldousHuxley's picture

get rid of social security and medicare taxes and have it all paid out by federal tax.

cut state taxes by half.

that should give everone 10% of their money back who will then spend it.


increase capital gains taxes to EQUAL middle class income tax.

increase inheritance tax to 99% so that rich are encouraged to spend it before they die and not hoard it till the grave. That would be like stocking up with 200 years worth of food when you will only live until 80.....just to starve the others.


start persecuting banksters so capital markets gain back credibility from foreign investors.


Even stupid Arab princes can watch Marc Faber on youtube and have doubts on US banking system.

Bananamerican's picture

I like the inheritance tax part...Most of the Founding Fathers didn't think much of inherited wealth either (for obvious reasons).

This whole piece reads like soft porn for bankers though....It refers to "talent" and implies another trip to the global ponzi trough....


as the late great motherfucker george numbnuts the clusterfuck Bush hilariously said...

"Fool me onceshame on........ shame on you...... Fool me....... you can't get fooled again!"

twotraps's picture

You have got to be kidding.........punish people twice for their success?? Pathetic. Remove inheritance tax, it's insulting. Do some homework first next time.

markmotive's picture

Fed raised rates as commodity inflation trickled through the economy around 2006. So whoever said this is impossible isn't looking at recent history.


nofluer's picture

"that should give everone 10% of their money back who will then spend it."

No. They won't. In uncertain times, people tend to hoard resources to ensure survival. They will NOT spend it. They also will be unlikely to "invest" it (ie trust third parties to preserve it for them). It will go into a sock under the mattress or in a tin can in the back yard.

The rest of your post demonstrates a lack of understanding of human motivation. You propose that success be punished by confiscatory policies - thus you would remove all incentive for effort. Success will then be defined as "successfully hiding resources from the Tax Man" and most people will excel at that.

Urban Redneck's picture

The notion of rising (or falling) "cost" is predicated upon a constant medium of exchange.

There are bigger storm clouds on the horizon for the finance industry

EM borrowers have significantly less interest rate sensitivity than developed market borrower, their primary sensitivity is to exchange rate fluctuations.

Given the Fed's past, present, and declared future monetary policy, and barring the Fed undergoing some sort of religous conversion to the cult of Paul Volker or Ron Paul- the EM borrowers are well positioned, perhaps not so much in the case of the banks (if they are simply taking what they thought "worked" in developed markets and transplanting it, but I don't see that sort of stupidity as widespread.

Beautiful sand castle though... 

nofluer's picture

"The notion of rising (or falling) "cost" is predicated upon a constant medium of exchange."

Ummmm.... no. "Cost" has nothing to do with the medium of exchange. Cost is EXPRESSED using mediums of exchange as measuring sticks - not as the underlying values. Cost can be expressed in monetary units, in percentages represented by underlying value of the commodity being exchanged/bought/sold, etc. In a "purchase" transaction, COST is what one party gives up to acquire what the other party has - and expresses how much each party values (a personal metric) the item(s) being exchanged. Using mediums of exchange like "money" yu would also have to consider not only the "cost" of the exchanged items/goods, but also the "cost" of the medium of exchange.

As to investing in EM economies - that practice is all well and good and can rack up some meaningful "profits" until you run into a Cristina Kirchner - when you learn (if you were dumb enough to not realise it up front) that in EM markets - there are no rules, and the laws are the whims of the "local governments".


Urban Redneck's picture

Expropriation is a relatively small risk and is easily insured against (if you are wiling to take paper of Uncle Ben's Banana Republic in trade)

What the article gets backwards with regard to financial risk in EM lending is that (traditionally) the borrower (and his local currency ) is the primary inflation risk.

Boris Alatovkrap's picture

"Ben is not.gonna.budge."

Lending is long, borrow is short. Raising is rates crush member bank.

vast-dom's picture

i think you mean 2013 mr bank.

toady's picture

They wish it doesn't happen until 2015

A Lunatic's picture

For your listening pleasure........


Deep Purple Lazy

Yen Cross's picture

 The Asian markets are just about ready to get 'Water Boarded/Borded"!

Jendrzejczyk's picture

Thanks for the heads up Yen.

RafterManFMJ's picture

"Talent began shifting into the shadow banking sector."

Oh yes that ol' banking talent we've been seeing in action.  How about the re-write goes "talent began shifting into shallow, unmarked graves..."

RiverRoad's picture

Ah so........ now we understand a little more why GE just moved out of their investment in a Thai bank.

Urban Redneck's picture

Jeff Assclown & GE don't know shit about jobs, business, or finance.  They traded Neutron Jack & Six Sigma for the Douglas Corrigan Strategy.

Bank of Ayudhya would be a better long bet over the long term than GE.

DormRoom's picture

god only knows how many re-hypothecated chains are predicated on commodities, which will collapse, if China has a hard landing, or slow growth from an appreciated yuan.


Abrupt Shortening of re-hypothecated chains may cause the next great systemic collapse, since it's likely to be very deflationary for the real economy.  

Yen Cross's picture

That piece was a " Juggernaut", being the unlimited inflation"Central Banks" hath cast upon us!

  People are getting restless. gas is over $5 in Cali. The masses are shifting, and no amount of shielding will quell"HUNGAR"!


edifice's picture

History and generations typically unfold in 80-year cycles, which are divided into four phases. Right now, we're in the Crisis phase of the current cycle. Schools don't teach this; they teach history linearly. And, thinking in linear terms, people always wonder why history repeats itself.

So, now we're in the Great Depression II / World War III phase, which should resolve itself between 2020 and 2025 (hopefully). 80 years before today, we had the Great Depression and World War II. 80 years before that, we had the Civil War. 80 years before that, the Revolutionary War.

kito's picture

And ww1 ??...war of 1812???....and the vietnam war? ..and korean war??....iraqi wars.????...war on terror?.....war on drugs???....... Help me out here......not getting it.....

JLee2027's picture

It's just a theory from a book, the fourth turning. I can't see a currency crisis lasting until 2020/25. That's insane.

GeezerGeek's picture

First, schools no longer teach history, they indoctrinate students to match the fever dreams of progressives. The ability to think rationally and critically is suppressed, lest students see through the deceptions.

Second, your 80-year cycle seems incredibly US-centric. Does the rest of the world have no place in your cyclic world? Where does Napoleon fit in, or the Russo-Japanese war? Were there no cycles before 1776?

kito's picture

Just exactly which healthier sovereigns will be lending the u.k. japan and u.s. money as this author imagines?

cbxer55's picture

An alien race we have not had the pleasure of meeting yet.

In exchange for the financial help, they have this big book, To Serve Man.  ;-)

toady's picture

Krugman was right!


JLee2027's picture

I can see many possibilites before 2015:


- China gets enough Gold to take a stab at being the next world reserve currency, dumps it's US Bonds - and we're there.

- Silver explodes to $75 or so and blows up JP Morgan, causing a rush to precious metals and out of banks, setting off hyperinflation.

- Germany leaves the EURO, which collapses and causes the next banking crisis

- Some other event causes a system crisis which even the Fed can't solve and the derivative bomb goes off, wiping out all the banks.

- etc.




Crisismode's picture

Isreal launches an attack on Iran's nuclear facilities. Iran blocks the Straits of Hormuz. US Carriers bomb Iranian military positions. Iranian missiles sink several US/British warships and several oil tankers. The Straits are effectively shut off to oil traffic. Oil prices jump to $300./barrel. The world proto-recession slides into a full Depression, accompanied by massive bank runs, major sovereign defaults, and a shutdown of global trade.

I think that about covers it.



kralizec's picture

I'll go with A - China Gold Card.

rosiescenario's picture

.....I'll take Door #2....thanks so much....

Venerability's picture

Did you Fellas ever consider moving to Hollywood or Bollywood and becoming screenwriters for Disaster Movies?

Maybe you'd make more money, reap more glory, and not have to harm the markets with Uber-Bearish sentiment any longer.



James's picture

What is this "Market" you speak of?

Proof of that would be turning off the power @ the Mariner Eccles bldg. tomorrow.

If Ben quits printing it's all over. Globally.

That is not a market.

And it was'nt I who downvoted you.

Probably a pissed off bear.



tabasco71's picture

With your sunny outlook, will you please move to a ratings agency, then you can repair the ratings with your cheerful and optimisitic perspective.

Chicago bear's picture

Confirmed last night that FINRA regulations (essentially only FINRA regulates- vs meek SEC) of broker dealers dominate and no reason to believe they will ever stop; just as plausible they regulate internationally now and more into the future. FINRA does not report to Congress and this does not care about us. Lastly, the key to 2012 is the fact that hordes of client money is resting in broker cash accounts not in trades. Moving that money into commissionable trades is the focus of FINRA.
The day that licensed BDs inside the system begin to act contrary to their license covertly or overtly in specific understanding that what they are doing is virtuous but directly results in losing a career and possible adding a jail term, may begin a genuine transformation of daily market practices.

falak pema's picture

thank you ZH for picking this up in more detail.

goldfreak's picture

there will be another crisis sooner or later because they fixed nothing of what caused the one in 2008. The amount of derivatives is close to a quadrillion depending on how you count them.

Since the only tool they have to fix every problem is to print money, they will print even more until the dollar cracks, the FED buying every piece of junk it can find to support the banks.

Am I wrong anywhere?

Grand Supercycle's picture

Longs please be careful.

Due to recent central bank intervention and short covering spikes, these daily charts are extremely overextended and significant correction expected very soon:


ChacoFunFact's picture

rule #1: history is more defined by countries failing than by countries succeeding.

rule #2: see rule #1