April 29, 2013 | “[W]ith Cyprus . . . the game itself changed. By raiding the depositors’ accounts, a major central bank has gone where they would not previously have dared. The Rubicon has been crossed.”
—Eric Sprott, Shree Kargutkar, “ Caveat Depositor”
The crossing of the Rubicon into the confiscation of depositor funds was not a one-off emergency measure limited to Cyprus. Similar “bail-in” policies are now appearing in multiple countries. (See my earlier articles here.) What triggered the new rules may have been a series of game-changing events including the refusal of Iceland to bail out its banks and their depositors; Bank of America’s commingling of its ominously risky derivatives arm with its depository arm over the objections of the FDIC; and the fact that most EU banks are now insolvent. A crisis in a major nation such as Spain or Italy could lead to a chain of defaults beyond anyone’s control, and beyond the ability of federal deposit insurance schemes to reimburse depositors.
The new rules for keeping the too-big-to-fail banks alive: use creditor funds, including uninsured deposits, to recapitalize failing banks.
But isn’t that theft?
Perhaps, but it’s legal theft. By law, when you put your money into a deposit account, your money becomes the property of the bank. You become an unsecured creditor with a claim against the bank. Before the Federal Deposit Insurance Corporation (FDIC) was instituted in 1934, U.S. depositors routinely lost their money when banks went bankrupt.
Your deposits are protected only up to the $250,000 insurance limit, and only to the extent that the FDIC has the money to cover deposit claims or can come up with it.
The question then is, how secure is the FDIC?
Can the FDIC Go Bankrupt?
In 2009, when the FDIC fund went $8.2 billion in the hole, Chairwoman Sheila Bair assured depositors that their money was protected by a hefty credit line with the Treasury. But the FDIC is funded with premiums from its member banks, which had to replenish the fund. The special assessment required to do it was crippling for the smaller banks, and that was just to recover $8.2 billion. What happens when Bank of America or JPMorganChase, which have commingled their massive derivatives casinos with their depository arms, is propelled into bankruptcy by a major derivatives fiasco?
These two banks both have deposits exceeding $1 trillion, and they both have derivatives books with notional values exceeding the GDP of the world. [Do you realize how frickin’ much that is?! — DC Ed.]
Bank of America Corporation moved its trillions in derivatives (mostly credit default swaps) from its Merrill Lynch unit to its banking subsidiary in 2011. It did not get regulatory approval but just acted at the request of frightened counterparties, following a downgrade by Moody’s. The FDIC opposed the move, reportedly protesting that the FDIC would be subjected to the risk of becoming insolvent if BofA were to file for bankruptcy. But the Federal Reserve favored the move, in order to give relief to the bank holding company. (Proof positive, says former regulator Bill Black, that the Fed is working for the banks and not for us. “Any competent regulator would have said: ‘No, Hell NO!’”)
The reason this risky move would subject the FDIC to insolvency, as explained in my earlier article here, is that under the Bankruptcy Reform Act of 2005, derivatives counter-parties are given preference over all other creditors and customers of the bankrupt financial institution, including FDIC insured depositors. Normally, the FDIC would have the powers as trustee in receivership to protect the failed bank’s collateral for payments made to depositors. But the FDIC’s powers are overridden by the special status of derivatives. (Remember MF Global? The reason its customers lost their segregated customer funds to the derivatives claimants was that derivatives have super-priority in bankruptcy.) [That means you get nothing as a depositor before the derivatives are paid… Got it?! — DC Ed.]
The FDIC has only about $25 billion in its deposit insurance fund, which is mandated by law to keep a balance equivalent to only 1.15 percent of insured deposits. And the Dodd-Frank Act (Section 716) now bans taxpayer bailouts of most speculative derivatives activities. Drawing on the FDIC’s credit line with the Treasury to cover a BofA or JPMorgan derivatives bust would be the equivalent of a taxpayer bailout, at least if the money were not paid back; and imposing that burden on the FDIC’s member banks is something they can ill afford.
BofA is not the only bank threatening to wipe out the federal deposit insurance funds that most countries have. According to Willem Buiter, chief economist at Citigroup, most EU banks are zombies. And that explains the impetus for the new “bail in” policies, which put the burden instead on the unsecured creditors, including the depositors. Below is some additional corroborating research on these new, game-changing bail-in schemes.
An interesting series of commentaries starts with one on the website of Sprott Asset Management Inc. titled “ Caveat Depositor,” in which Eric Sprott and Shree Kargutkar note that the US, UK, EU, and Canada have all built the new “bail in” template to avoid imposing risk on their governments and taxpayers. They write:
[M]ost depositors naively assume that their deposits are 100% safe in their banks and trust them to safeguard their savings. Under the new “template” all lenders (including depositors) to the bank can be forced to “bail in” their respective banks.
If the Wall Street banksters can get away with stealing your homes, destroying your retirement and pension funds, take your savings and equity – don’t think for one moment that they are beyond taking your cash from the bank so that they can continue to eat caviar.
“As far back as I can remember, I always wanted to be a gangster. To me, being a gangster was better than being President of the United States… To me, it meant being somebody in a neighborhood that was full of nobodies. They weren’t like anybody else… I was the luckiest kid in the world. I could go anywhere. I could do anything. I knew everybody and everybody knew me… I was part of something. And I belonged. I was treated like a grown-up. Every day, I was learning to score. A dollar here. A dollar there. I was living a fantasy.” (From Henry Hill’s rap at the beginning of Goodfellas; also found in the Introduction of Paul Anka’s new autobiography “My Way.”)
And guess what – it appears they got what they wanted and landed on Wall Street.
Remember: “First come, first served”
Like the Billionaires dumping stocks – get it out of the banks now and invest in something tangible. Plant a garden, put solar on your roof – you may not want to leave those 401ks and mutual funds just sitting there because they may not be there when you need them most.
Whether or not you are represented by an attorney understanding the legal system is an asset. The more you learn, the less likely you are to be taken advantage of or scammed. Knowledge is power!