The G-20's Solution To Systemically Unstable, "Too Big To Fail" Banks: More Debt

Tyler Durden's picture

It's been 6 years since Lehman went bankrupt overnight, stunning bondholders who were forced to reprice Lehman bonds from 80 to 8 (see chart below) in a millisecond, and launching the world's worst depression since the 1930s, which courtesy of some $10 trillion in central bank liquidity injections, has been split up into several more palatable for public consumptions "recessions", of which Europe is about to succumb to the third consecutive one even if for the time being the Fed's has succeeded in if not breaking the business cycle, then certainly delaying the inevitable onset of the next major contraction in the US economy.

Paradoxically, instead of taking advantage of this lull in volatility and relative economic calm, and making the financial system more stable, all so-called regulation has done, is paid lip service to the underlying problems, hoping that should the next crisis appear the Fed will be able to delay it yet again by throwing countless amounts of taxpayer money at the problem. In the meantime, the biggest banks have gotten so big that the failure of one JPM or Deutsche Bank, and their hundreds of trillions in gross notional derivatives, would lead to the biggest financial and economic catastrophe ever witnessed and make 2008 seem like a fond memory of economic euphoria.

So finally, with a 6 year delay, the western world's "government leaders" have finally decided to do something about a TBTF problem that has never been more acute. According to Reuters, in November said leaders will agree "that the world's top banks must issue special bonds to increase the amount of capital which can be tapped in a crisis instead of calling on taxpayers to come to the rescue, industry and G20 officials said." In other words, suddenly the $2.8 trillion in Fed injected excess reserves, split roughly equally between US and European banks, are no longer sufficient, and while regulators are on one hand delaying the implementation of Basel III and its tougher capital rules, on the other they are tacticly admitting that whatever "generous" capital buffer banks have on their books right now will not be sufficient when the next crisis strikes.

Enter GLACs.

The bonds which will be issued by the top banks known as "gone concern loss absorption capacity" or GLAC, are seen by regulators as essential to stopping the world's 29 biggest lenders from being "too big to fail."

We will have some more to say on the "irony" of that statement in a moment, but here is the punchline - according to the G-20, instead of having to collapse liabilities to offset that scourge of the New abnormal, namely Non-Performing Loans, banks are hoping to lever up, pun intended, the current scramble for yield and instead beef if up their cash asset, even if it means increasing the liability side of the balance sheet by issuing more debt. Because really all the GLAC do is limit how the banks may use the proceeds from such bond issuance. Then again, these being banks, one can be certain that the moment the GLAC cash is wired in, the funds will be used to ramp risk instead of sitting in a drawer somewhere, awaiting rainy days. Because nobody in a bank is paid for avoiding a crisis, and everyone is paid to generate a return even if it means making the systemic bubble even bigger.

The plans are being drafted by the Financial Stability Board, the regulatory task force of the Group of 20 economies which declined to comment ahead of a G20 summit in November, when G20 leaders will discuss the reform before it is put out to public consultation.


The reform would put in place the final major piece of G20 regulation on banking as the global body turns to a "post-crisis" agenda of fostering economic growth and bedding down the rules it has approved.


There had been unease in Asia and parts of Europe over how big the bond issues need to be to provide this cushion but there is now a new optimism amongst bankers and regulators that the G20 will reach a deal in November.

What is unsaid is that the "unease" was there because banks were unsure there would be enough risk appetite for such bond issuance. But now that the central bank credit bubble is so immense it allows Ebola-stricken African nations to issue bonds at a 7% yield, there is nothing preventing the banks from merely funding their way to stability.

Of course, one has to be an idiot at this point and observe that the "risk buffer" would have to come from retained earnings, not from more debt, the source of the risk in the first place. However in a world in which banks can't generate either the required GAAP earnings and certainly cash flows, to build said buffer, the G-20 will hope that everyone is dumb enough not to comprehend the fundamental flaw in this brilliant plan.

Speaking of the plan, it continues:

"The industry is definitely in favor of making resolution, supported by an appropriately flexible concept of GLAC, work. That is the key pending aspect on ending too-big-to-fail," said Andres Portilla, director of regulatory affairs at the Institute of International Finance, a Washington-based banking and insurance lobby.

So according to Mr. Portilla, the solution to a TBTF problem resulting from record amounts of debt is more debt? Ok, just making sure everyone got that.

"What is likely to happen is that there will be a consultative proposal, but without all the detail that a lot of people would like," Portilla added.

However, a G20 source said a deal was not only expected but would also be more detailed than some parties anticipate, which is essential for conducting a thorough impact assessment before finalizing the rules.  "The authorities and the FSB are working to have a proposal that will contain sufficient granularity of numbers to be a meaningful consultation and quantitative impact study to calibrate the final rule," the source said.

Top banks expect they will have to hold GLAC bond capital equivalent to about 10 percent of their risk-weighted assets on top of their core capital buffers which currently stand at around 10 percent. But they hope for some leeway if they can show that they can already be wound down smoothly in a crisis because of simplified structures.

The G20 source poured cold water on this, saying regulators believe all the world's top 29 banks earmarked for tougher supervision will need a significant cushion of such so-called "bail-in" bonds for some time to show they can be shut without public aid.

Regulators ultimately want to price bank debt better and end the cheaper funding that too-big-to-fail banks enjoy because markets assume governments would never allow them to collapse.

And the hilarious conclusion:

"Adopting GLAC is the final chapter in reforming the condition of banks," said Thomas Huertas, a former UK banks supervisor and now a regulatory consultant with EY.


The plans for bail-in bonds are among the last of what G20 officials call the "heavy lifting" on banking industry reforms that came in the aftermath of the financial crisis.

So, to summarize: in lieu of being able to actually generate and retain funds from operations, banks will once again scramble to raise epic amounts of debt, only this time, the proceeds will be retained "pinky swear" as a capital buffer, i.e., cash on the books. Cash which nobody makes a single dime in bonus on anywhere in the bank's org chart. Would anyone wish to wager how long before the trillions in GLACs are "mysteriously" found to have funded shanty town developments in Shanghai, to buy the S&P500 at the all time high, and naturally, the purchase of a golden commode or two in various US banks? How could this possibly fail...

And the absolutely brilliant punchline: who do these regulators and "leaders" think will be the purchasers of said debt? Why other systemically important, TBTF banks of course! Which means that, in the by now quite familiar "daisy-chaining" of counterparties and collateral, once one bank fails, its exposure via collateral, repo and certainly, funding of other bank balance sheets, everything will promptly freeze as risk reprices, a la Lehman bonds.

Because if one thing is certain when one bank's liabilities are another bank's assets, it is that such an arrangement is simply screaming for a systemic crisis to prove to everyone just how dumb this idea was from the get go.

And another certain thing: the only entity on the hook when this plan unravels like a house of cards the second a bank with a few trillion in "assets" collapses, will be the same one as always: the taxpayer. Only this time the total amount that will be handed over to the bankers who control the central banks pulling the strings of the next bail out, will be that much bigger, or X+GLAC for those mathematically inclined.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
TeamDepends's picture

One more for the road...

philipat's picture

So let me see if I understand this correctly. Even with non-GAAP accounting, using mark-to-myth "asset" valuation, dumping all the bad mortgage debt on the Fed, off-balance sheet SPV's and being given free money by the the Fed, they still can't make money to repair the self-created problems? I suppose it will be Pension Funds that buy these wonderful new instruments, just to ensure that Pensions and 401K's can be gutted now that all souces of income and savings have already been gutted? Aren't our "Leaders" wonderful......

jellen's picture

Now Im really confused, Bank A buys bonds from Bank B, Bank B buys bonds from Bank C, and Bank C buys bonds from Bank A and all banks will keep the proceeds from the sale of thease bonds as cash reserves???? Yea this should work well.

espirit's picture

I have un-rehypothecated collateral.

What have they got?

Molon Labe.

Oracle 911's picture

Bunch of sneaky bastards, I mean the leaders of G-20. It is such a devious game, they intentionally imploded the Western banking system.

It is so simple, they basically said "let them not just continue the fraud, but multiple their bets". And of course they will fall, and the anger will be directed towards politicians and banksters. And the whole stuff doesn't end here. Because the Chinese and Russians purchased or will purchase some Western banks outside of/on periphery of banking Cabal.

My point is this: When the TBTF banks finally implodes, who will be standing and laughing?

Exactly, the Chinese and Russian banks,. Elegant albeit dirty move for eliminating the concurrency and the treat.

OC Sure's picture

Macroprudential solutions to busy giddy minds away from the Microreckless cause of the problems.

More Fractional Reserve [Lending] of counterfeit for believers that productive work can be conjured.

Will the debt funding come from the existing pool of currency or will new currency be "produced?"

knukles's picture

And.... the excuse list!
Volcano in Iceland (travel disrupted, good for -10% GDP)
Earthquakes in CA  (fear of earthquakes in CA curtail expected shopping spree in Ohio and Kentucky) -1%
Global Warming during the coldest year on record (Confuses consumers so they buy neither winter coats or bathing suits) -4%
Cordon Sanitare quietly enforced about West Africa.  TPTB say no such thing as Ebola ( 1,000,000 brown people die, white people cheer, +5% GDP)
Broken windows in Ukraine, Syria need replacing (Krugman Brand Windows, buy 3 get 6 for free) +10%
ISIS/L whoeverthefuckitisnow Lays waste to already waste area of middle east.  No material damage, but press hype and confusion cause gun and pepper supplies to skyrocket because of threat to Las Vegas (+1%, all cash)

Net net of all events, +1% to global GDP to help offset -2% due to crappy economies.... only 1% decline amidst localized rioting in Western wrold blamed on the non-religion of peace that doesn't exist and increased harmony of races, increased social and financial equality.

There... fixed it for ya.

Stackers's picture

For the record: Lehman did not "go bankrupt overnight". Lehman was purposely collapsed by JPM in the same play book the bankers have been using for centuries of coordinated deflationary collapse to be able to go around buying up assets for pennies on the dollar.... and like other times, they lost control of their own overleverage system.


As covered here

Oldwood's picture

we will all be offered the opportunity to buy these bank bonds as the only means of preserving whats left of our savings. we are trapped...there's no way out.

El Oregonian's picture

You know if you cram enough paper in a very hot desert out-house sometimes you'll get spontaneous combustion.

In other words, when you get enough heat, along with enough paper-stuff'in in a closed-system outhouse, eventually the law of thermo-dynamics kicks in.

Can someone say "KA-BOOM!"

Rakshas's picture

..... you wouldn't happen to know what two houshold chemicals spontaneously combust when mixed would you?? - for the record I just don't want to store them next to each other in my cleaning closet.... ;-)

jefferson32's picture

Potassium permanganate and glycerine

Da Yooper's picture

Stop bailing out the tribal banks


Bail out the people


at least they will spend the money


the bankers just butt stroke each other & call it good


what a friggen scam & the taxpayers pay for it

Rakshas's picture

the circle of death is complete ..... ok death spiral 

Western Politicians Banksters special interest groups are all locked in a lufbery circle against the taxpayers..... actually lets say the enslaved citizenery  and oh what a  series of scams they've hatched to rob America of it's resources - not the least of which its human resources turning the nation into the bipolar ticking time bomb that it is today



teslaberry's picture

there is no such thing as a bailout of the people. you are a fucking liar. there is something called a 'jubille' which is a forced government destruction of debt with the creditors taking the hit. 


this is what you mean. many of the free shit army types want free everything from government to balance the socialism for the banks and the rich. 



disabledvet's picture

How about Social Security asshole.

Da Yooper's picture

this is what you mean. many of the free shit army types want free everything from government to balance the socialism for the banks and the rich.


if we follow your logic




did the "TAXPAYERS" have to bailout the free shit army of "TRIBAL BANKERS" ?????


talk about getting "FREE SHIT"




teslaberry's picture

the world is the way it is not the way you want it to be. 


unless you are willing to start killing people and start the revolution, the idea of your 'peaceful' free shit army getting what it wants is a hialrious joke played upon you by the powers that be. to keep you peaceful and restive while they make plans for dealing with you when you inevitably respond to their predating upon you ---with your own violence. 


you have numbers, they have the technology. you have been schooled. so shut the fuck up. take of your 'it's not fair cap' or the "jews steal everythign cap' or whatever other cap and see the wrold for what it is , not what you'd like it to be. 

hedgiex's picture

YES. The Banksters not folding because there are still the lush pensions and 401K in mutual funds to predate.

Yen Cross's picture

 I junked EKM   (for the first time)   " all knowing" - "bone throwing" - "no chart showing"- to a Trade off!

Rockfish's picture

If you think your headed for a currency war. What's wrong with a little debt?  

Seasmoke's picture

If you can kick the can long enough, those who you cheat,  lie to, and steal from will die. 

Radical Marijuana's picture

Silent Weapons for Quiet Wars

"Energy is recognized as the key to all activity on earth. Natural science is the study of the sources and control of natural energy, and social science, theoretically expressed as economics, is the study of the sources and control of social energy. Both are bookkeeping systems: mathematics. Therefore, mathematics is the primary energy science. And the bookkeeper can be king if the public can be kept ignorant of the methodology of the bookkeeping. ... In this structure, credit, presented as a pure element called "currency," has the appearance of capital, but is in effect negative capital. Hence, it has the appearance of service, but is in fact, indebtedness or debt. ... if balanced in no other way, will be balanced by the negation of population (war, genocide)... They must eventually resort to war to balance the account, because war ultimately is merely the act of destroying the creditor ... War is therefore the balancing of the system by killing the true creditors (the public ...)"



Oldwood's picture

The silent weapon is our complicity. Heads down and full speed Forward

GrinandBearit's picture

And the whole financial system stays intact.




Rakshas's picture

because we let it..... 

eddiebe's picture

How: Every time a crack appears in the dam, the Ppt. steps in with unlimited amounts of digits and papers it over. 

Why: To grab whatever resources and power that is left to grab.

Dead Man Walking's picture

The shit may not hit the fan, it might just explode

or go down the crapper


MKD's picture

just kick the can further down the road

cpnscarlet's picture

No problems. Olies have it all under control - gold under $1300. All is well. Nothing can go wrong and everyone is happy with the new normal.

Pretty soon, a silver quarter won't be worth 2 bits.

ThroxxOfVron's picture

"Of course, one has to be an idiot at this point and observe that the "risk buffer" would have to come from retained earnings, not from more debt, the source of the risk in the first place."


I guess now we know why GS and Morgan Stanely management have been handing out raises: get rid of the cash before they are told to sequester it.  

Pay yourself today and sell bonds for your mismanaged and financially impaired institution tomorrow if the .GOV teat is pulled outta your mouth...

kchrisc's picture

If the movie Wall Street had been made about the banksters it would have been called "Bank Street," and the memorable quote would have been "Fraud is good!"

An American, not US subject.

q99x2's picture

Financial terrorism. They are moving the wealth into their pockets and going to collapse the system. They are banksters. That's what banksters do.

Good article.

ebworthen's picture

Oh sure, more debt, more leverage, and 'ere long more bailouts for the fucks on Wall Street while Main Street is put in the stocks and ass raped.

Fuck you fucking bankers and your government lackey's to Hell and back on a rail, tar-and-feathered, then drawn-and-quartered on the public square.

You dumbshits are forging your own doom, along with that of a lot of decent innocent people.

Joebloinvestor's picture

When I saw "BAIL -IN" I assumed they would issue bonds based on deposits which could be seized at any time and "bailed-in".


Penniless Spectator's picture

Times to walk deep into woods and never look back.

Notsobadwlad's picture

I have often wondered if, when loan principal is paid back, banks actually return the fiat to the ether from whence it came or do they simply keep in play most likely embezzling it as freshly laundering fiat.

Can anyone tell me for certain?

Catullus's picture

In a commercial loan, the credit expansion naturally contracts as the loans are repaid.

When the fed purchases a bond, the same is true. The dollars, which are liabilities to the fed, come back to them in the form of stub payments. The money supply contracts. Unless of course the fed turns a "profit" on their money printing and will remit that money back to the US Treasury. For UST, the government pays interest on its bonds only to have the money paid to the fed for UST it owns come right back to them. It's a gigantic circle jerk.

The problem of course is when the bonds mature. But that was the whole point of QE2. The fed swapped out its shorter time duration bonds and bought longer term bonds. "Twisting" the yield curve by selling 2-3 yr bonds and buying 7-30 years.

Tinky's picture

That's an articulate explanation. Please do contribute more along those lines when possible!

Yen Cross's picture

 Charts? I like charts!

 Yes Tyler, I see the equity/ bond convergence. I'm not retarded.

Yen Cross's picture

 Equities are linear? Alan Keynes (ghoast) wrote this< I can feel his tug<

Yen Cross's picture

 I hope these kids learn how to understand " Fractional Lending" Yes I own a couple Ferrari's ass clown children.

   If I could say anything! TORT REFORM!

  Pathetic scumbag lawyers are draining the liquidity of this country!

Yen Cross's picture

 I most certainly didn't earn those assets without the help of "well provided" for management!

hedgiex's picture

G 20 party cocktail (GLAC)  probably concocted in Davos for implementation by the real G Zero regulators.

Catullus's picture

Our conclusion is that fractional reserve banking doesn't have enough reserves to pay back deposit holders. So we've come up with a deus ex machina solution: get more money to pay depositors. This reserve is like a like buffer to "loses".

Just make checking accounts 100% backed by reserves. Like "don't loan out the transactional accounts". Everyone and everything else is on their own.

Yen Cross's picture

 Here's some icing on the cake. I'm renting an airplane to finish my multi engine and instrument ratings, when I fly to Oceania next week to check on my property.

  You children, haven't the slightest incling of what it takes to manage a business... You see the cars and jets, but don't understand. it's NOT a game. People are having "face to face" meetings that effect massive swaths of trade.