S Will The Banks Game FSB And Investors With Voodoo TLAC Assurances?

The Financial Stability Board (FSB), which once voided mark to market so that banks would not have to devalue frozen assets, is back with more voodoo.

FSB wants the biggest 30 banks in the world to increase assets available for a bail in to levels near 20 percent, which hopefully will relieve taxpayers from actually bailing out too big to fail banks, effectively ending the concept of too big to fail. 

FSB created massive moral hazard in allowing frozen assets to be frozen as to price. It made the banks feel invincible. Yes, banks not selling assets could ride them out without downgrading the value of those assets. But certainly, investors suffered in attempting to value the big banks.

Other Investors who invest in senior bank bonds were unscathed in the credit crisis of the last decade. They were simply not touched as the powers that be decided that taxpayers were somehow more worthy of bailing the banks out than the senior bond holders. 

But banks need a lot of assets made available for bailins. I guess the financial powers that be don't want to destroy the governments that feed them. So, they are going for bailins next time. Most banks don't even come close to satisfying the Total Loss-Absorbing Capacity or TLAC.

So banks are being permitted, in most nations, to use senior bonds as TLAC assets. This means that banks will have to raise a lot less money. This is the voodoo aspect to all this. 

Banks are trying to convince investors that interest on the senior bonds should not have to go up that much. Investors are likely to swallow this argument. You have to wonder why, since this is the front line now for bailins. FT says the plan won't work if senior bonds are not included in the loss-absorbing assets. 

The FT article goes on to make a distinction between the senior bond plan calling it the German approach and distinguishing it from the Spanish plan, a method of creating tier 3 assets available for loss-absorption. 

There are some dangers in all these plans:

First, if you are not insured, your money is fair game for the bailins. 

Second, the senior bonds are more risky and we should see banks paying a lot more interest on them and should be concerned if they get away with not paying a lot more interest. That smacks of the old AAA rated trashy MBSs of the past. 

There are two other risks with this plan. 

First, smarter people than I will have to figure out if these bailins will provide enough buffer in a major derivatives meltdown. 

Second, Fed governor Daniel K. Turullo said that many firms are systemic as to risk. Why stop this bailin potential at the 30 biggest world institutions? Won't governments be on the hook for systemically risky hedge funds and other counterparties even if too big to fail is implemented for select banks?  

Wouldn't it be better to unwind the derivatives business now with the reestablishment of Glass-Steagall? 

One thing we do know from the voodoo of old, if a bank can sell an investor something risky while making that investor think it is safe, the bank has fraudulently won and the investor has naively lost. 

I can't imagine that would stop anytime soon without the threat of jail time or lashings. If FSB is trying to increase trust between the public and banks and investors and banks and governments and banks, I can't see that these little steps will do much.


Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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