Confiscating the customer deposits in Cyprus banks, it seems, was not a one-off, desperate idea of a few Eurozone “troika” officials scrambling to salvage their balance sheets. A joint paper by the US Federal Deposit Insurance Corporation and the Bank of England dated December 10, 2012, shows that these plans have been long in the making; that they originated with the G20 Financial Stability Board in Basel, Switzerland (discussed earlier here); and that the result will be to deliver clear title to the banks of depositor funds.
New Zealand has a similar directive, discussed in my last article here, indicating that this isn’t just an emergency measure for troubled Eurozone countries. New Zealand’s Voxy reported on March 19th:
The National Government [is] pushing a Cyprus-style solution to bank failure in New Zealand which will see small depositors lose some of their savings to fund big bank bailouts . . . .
Open Bank Resolution (OBR) is Finance Minister Bill English’s favoured option dealing with a major bank failure. If a bank fails under OBR, all depositors will have their savings reduced overnight to fund the bank’s bail out.
Can They Do That?
Although few depositors realize it, legally the bank owns the depositor’s funds as soon as they are put in the bank. Our money becomes the bank’s, and we become unsecured creditors holding IOUs or promises to pay. (See here and here.) But until now the bank has been obligated to pay the money back on demand in the form of cash. Under the FDIC-BOE plan, our IOUs will be converted into “bank equity.” The bank will get the money and we will get stock in the bank. With any luck we may be able to sell the stock to someone else, but when and at what price? Most people keep a deposit account so they can have ready cash to pay the bills.
The 15-page FDIC-BOE document is called “Resolving Globally Active, Systemically Important, Financial Institutions.” It begins by explaining that the 2008 banking crisis has made it clear that some other way besides taxpayer bailouts is needed to maintain “financial stability.” Evidently anticipating that the next financial collapse will be on a grander scale than either the taxpayers or Congress is willing to underwrite, the authors state:
An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company [meaning the depositors] into equity [or stock]. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailed-in creditors would become the owners of the resolved firm. In either country, the new equity holders would take on the corresponding risk of being shareholders in a financial institution.
No exception is indicated for “insured deposits” in the U.S., meaning those under $250,000, the deposits we thought were protected by FDIC insurance. This can hardly be an oversight, since it is the FDIC that is issuing the directive. The FDIC is an insurance company funded by premiums paid by private banks. The directive is called a “resolution process,” defined elsewhere as a plan that “would be triggered in the event of the failure of an insurer . . . .” The only mention of “insured deposits” is in connection with existing UK legislation, which the FDIC-BOE directive goes on to say is inadequate, implying that it needs to be modified or overridden.
An Imminent Risk
If our IOUs are converted to bank stock, they will no longer be subject to insurance protection but will be “at risk” and vulnerable to being wiped out, just as the Lehman Brothers shareholders were in 2008. That this dire scenario could actually materialize was underscored by Yves Smith in a March 19th post titled When You Weren’t Looking, Democrat Bank Stooges Launch Bills to Permit Bailouts, Deregulate Derivatives. She writes:
In the US, depositors have actually been put in a worse position than Cyprus deposit-holders, at least if they are at the big banks that play in the derivatives casino. The regulators have turned a blind eye as banks use their depositaries to fund derivatives exposures. And as bad as that is, the depositors, unlike their Cypriot confreres, aren’t even senior creditors. Remember Lehman? When the investment bank failed, unsecured creditors (and remember, depositors are unsecured creditors) got eight cents on the dollar. One big reason was that derivatives counterparties require collateral for any exposures, meaning they are secured creditors. The 2005 bankruptcy reforms made derivatives counterparties senior to unsecured lenders.
One might wonder why the posting of collateral by a derivative counterparty, at some percentage of full exposure, makes the creditor “secured,” while the depositor who puts up 100 cents on the dollar is “unsecured.” But moving on – Smith writes:
Lehman had only two itty bitty banking subsidiaries, and to my knowledge, was not gathering retail deposits. But as readers may recall, Bank of America moved most of its derivatives from its Merrill Lynch operation [to] its depositary in late 2011.
Its “depositary” is the arm of the bank that takes deposits; and at B of A, that means lots and lots of deposits. The deposits are now subject to being wiped out by a major derivatives loss. How bad could that be? Smith quotes Bloomberg:
. . . Bank of America’s holding company . . . held almost $75 trillion of derivatives at the end of June . . . .
That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.
$75 trillion and $79 trillion in derivatives! These two mega-banks alone hold more in notional derivatives each than the entire global GDP (at $70 trillion). The “notional value” of derivatives is not the same as cash at risk, but according to a cross-post on Smith’s site:
By at least one estimate, in 2010 there was a total of $12 trillion in cash tied up (at risk) in derivatives . . . .
$12 trillion is close to the US GDP. Smith goes on:
. . . Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. . . . Lehman failed over a weekend after JP Morgan grabbed collateral.
But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors.
Perhaps, but Congress has already been burned and is liable to balk a second time. Section 716 of the Dodd-Frank Act specifically prohibits public support for speculative derivatives activities. And in the Eurozone, while the European Stability Mechanism committed Eurozone countries to bail out failed banks, they are apparently having second thoughts there as well. On March 25th, Dutch Finance Minister Jeroen Dijsselbloem, who played a leading role in imposing the deposit confiscation plan on Cyprus, told reporters that it would be the template for any future bank bailouts, and that “the aim is for the ESM never to have to be used.”
That explains the need for the FDIC-BOE resolution. If the anticipated enabling legislation is passed, the FDIC will no longer need to protect depositor funds; it can just confiscate them.
Worse Than a Tax
An FDIC confiscation of deposits to recapitalize the banks is far different from a simple tax on taxpayers to pay government expenses. The government’s debt is at least arguably the people’s debt, since the government is there to provide services for the people. But when the banks get into trouble with their derivative schemes, they are not serving depositors, who are not getting a cut of the profits. Taking depositor funds is simply theft.
What should be done is to raise FDIC insurance premiums and make the banks pay to keep their depositors whole, but premiums are already high; and the FDIC, like other government regulatory agencies, is subject to regulatory capture. Deposit insurance has failed, and so has the private banking system that has depended on it for the trust that makes banking work.
The Cyprus haircut on depositors was called a “wealth tax” and was written off by commentators as “deserved,” because much of the money in Cypriot accounts belongs to foreign oligarchs, tax dodgers and money launderers. But if that template is applied in the US, it will be a tax on the poor and middle class. Wealthy Americans don’t keep most of their money in bank accounts. They keep it in the stock market, in real estate, in over-the-counter derivatives, in gold and silver, and so forth.
Are you safe, then, if your money is in gold and silver? Apparently not – if it’s stored in a safety deposit box in the bank. Homeland Security has reportedly told banks that it has authority to seize the contents of safety deposit boxes without a warrant when it’s a matter of “national security,” which a major bank crisis no doubt will be.
The Swedish Alternative: Nationalize the Banks
Another alternative was considered but rejected by President Obama in 2009: nationalize mega-banks that fail. In a February 2009 article titled “Are Uninsured Bank Depositors in Danger?“, Felix Salmon discussed a newsletter by Asia-based investment strategist Christopher Wood, in which Wood wrote:
It is . . . amazing that Obama does not understand the political appeal of the nationalization option. . . . [D]espite this latest setback nationalization of the banks is coming sooner or later because the realities of the situation will demand it. The result will be shareholders wiped out and bondholders forced to take debt-for-equity swaps, if not hopefully depositors.
On whether depositors could indeed be forced to become equity holders, Salmon commented:
It’s worth remembering that depositors are unsecured creditors of any bank; usually, indeed, they’re by far the largest class of unsecured creditors.
President Obama acknowledged that bank nationalization had worked in Sweden, and that the course pursued by the US Fed had not worked in Japan, which wound up instead in a “lost decade.” But Obama opted for the Japanese approach because, according to Ed Harrison, “Americans will not tolerate nationalization.”
But that was four years ago. When Americans realize that the alternative is to have their ready cash transformed into “bank stock” of questionable marketability, moving failed mega-banks into the public sector may start to have more appeal.
____________
Ellen Brown is an attorney, chairman of the Public Banking Institute, and the author of eleven books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Her websites are webofdebt.com and ellenbrown.com. For details of the June 2013 Public Banking Institute conference in San Rafael, California, see here.
Filed under: Ellen Brown Articles/Commentary |
WEB OF DEBT BLOG 
Ellen, does this make the Bank of North Dakota even safer, because it is NOT part of the FDIC system?
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The derivative issue is a hot potato and nobody wants to be left holding the bag. I spoke with a state legislature he knew nothing of the global financial meltdown and nothing of state owned banks. Wow, when elected officials are not in the game, they obviously must be out of mind.
Will credit union members deposits also be swept up in this grand larceny?
Credit union savings accounts are usually in Money Market shares, meaning that such accounts can be frozen overnight if a similar situation to 2008 comes up. While Money Markets are loathe to “break the buck”, or pay less than one dollar per share, it has happened, and certainly could happen again. The credit union may not be the cause of it, but the underlying Money Markets could pull the rug out from under them…
David C, thank you for some sort of reply to this question. If I read you correctly, the answer to my question is that no government chartered financial institution is safe from bankster plundering?
[…] This article first appeared at Web of Debt. […]
I agree if the worst happens lawyers will find a way to legally access USA bank accounts despite Federal Insurance & guarantees
See the MF Global collapse. They already have. Ann Barnhardt was screaming from teh rafters about it when it happened.
[…] They are taking money out of peoples’ bank accounts in Europe and this is just the beginning. https://webofdebt.wordpress.com/2013/03/28/it-can-happen-here-the-confiscation-scheme-planned-for-us-… Learn more: […]
Ms Brown always seems to be Johnny-come-lately! Just when everybody else has given up claiming that depositors’ money was “confiscated” in Cyprus, she starts to talk about it! What was done in Cyprus was to impose a wealth tax on bank deposits over a certain amount. Of course, some people on the right of the political spectrum consider wealth taxes in general to be “confiscation”, but such taxes have existed in many European countries and many leftwing political parties in Europe call for their introduction. There are currently five European countries which have a wealth tax (Wikipedia!) and one of those, Iceland (poster boy of the anti-euro faction!), is using it as a means getting money to re-launch its failed banking system. That’s probably where Cyprus got the idea. In Cyprus, and, indeed, all over Europe, the idea of a wealth tax which essentailly hits Russian oligarchs seems to be very fair. For once, the rich are being made to pay for their sins! And the present temporary inconveniences are probably going to be worth it. If nothing else, the frantic horror with which Ms Brown envisages the possibility of a similar wealth tax in the US gives us an unmistakable indication of what side of the political spectrum she stands on are seriously undermines her credentials as a “leftist”!
Take this with a pinch of salt. Big depositors got out of Cypriot banks via banks’ London and Athens branches. Oligarchs are in the clear. Cypriots are in the vise.
To call Ellen Brown a leftist or a rightest misses the entire point. Governments are by nature thugs which is why the American Founding Fathers understood that the least government is the best government. Your simplistic view that government confiscation is good fails to realize that the Russian oligarchs are in their position of wealth BECAUSE of government not in spite of it. Ellen Brown wants to return banking to the people and out of the hands of the rich and powerful who are in bed with government and in fact in the U.S. are shaping a mix of the two ideologies we supposedly fought WWII and the Cold war to eliminate. We have met the enemy and he is us (and you) my friend. By the Way. Ellen is scheduled to be on my radio show next week, Turning Hard Times into Good Times. Hope you will take the time to listen.
By the way, I don’t know that you could or should characterize Ms. Brown as either on the left or the right and you (and I too) no doubt do a disservice to her and others if we try to label people. She is an American who believes in property rights. That doesn’t put her on the left or right. It puts her smack dab in the middle. If you believe in government confiscating wealth you are a communist or socialist. If you believe in government and corporations going to bed together to benefit themselves at your expense and mine (which is what we have now from both Republicans and Democrats) you are a fascist.
Jay: I respectfully disagree about government by nature being thuggish. Good government is a very good thing. Nor do I agree that minimal government is a good idea (the government that government that governs least governs best canard). We need the right amount of government to do the job. The happiest people with the best economies have been in countries with large government sectors–the Scandinavian countries.
Yea well, all of history disagrees with you.
No it doesn’t. Read James Galbraith’s The Predator State, Ha Joong Chang’s Bad Samaritans and 23 Things. The Scandinavian model I mentioned stands as evidence: large government sector, good results–the best results.
I don’t think history is going to guide us very well in this time of unprecedented Global Corpocracy. What’s unique is that a highly centralized, global, system of monetary control has control of the last remaining global military super-power with a multi-national coalition of lesser powers to lend it a facade of political legitimacy. The only power that can trump this system/culture is the tenuous jurisdiction of the U S Constitution. We are in desperate need of an Emergency Constitutional Amendment to criminalize corporate interference in the affairs of US government and return sovereignty to The People (who really have no interest in a Global Empire – financial or otherwise). Without the support of US military force, the financial Empire is dead in its tracks.
28th Amendment (The Constitutional Emergency Amendment)
Corporations are not persons and shall be granted only those rights and privileges that Congress deems necessary for the well-being of the People. Congress shall provide legislation defining the terms and conditions of corporate charters according to their purpose; which shall include, but are not limited to:
1, prohibitions against any corporation;
a, owning another corporation,
b, becoming economically indispensable or monopolistic, or
c, otherwise distorting the general economy;
2, prohibitions against any form of intervention in the affairs of government by means of;
a, congressional lobbying
b, electoral sponsorship or advocacy
c, educational sponsorship or publication
d, media news reporting
3, provisions for;
a, the auditing of standardized, current, and transparent account books
b, closing the FRB and the establishment of state-owned banks
c, civil and criminal penalties to be suffered by corporate executives et al for violation of the terms of a corporate charter.
The 16th Amendment to the United States Constitution is hereby repealed and Congress shall re-write the U.S. Code to reflect the changes embodied herein.
I agree that the US military is enforcing the global financial empire. But China and the BRICs nations are on the rise, moving to isolate the dollar, and are the other pole in what is now a multipolar world. Iran and Indonesia perhaps soon to join. The rotten financialized West is deteriorating apace as the East continues to rise. Would that a fallen dollar could no longer support the US military occupation of Europe, the Middle East, Japan and Korea, etc. Then sovereignty, freedom, and prosperity would be more free to flourish, and the West’s globalist enslavement project fail.
Yes. It’s the BRICS that make this a crisis. I fear the American people will hide their heads in the dirt until its too late to clean up their act. It’s good to see so many bloggers linking to Ellen’s posts. We might save it yet. The pen IS mightier ……………
This was really a practice run at a summary confiscation of the working classes wealth by the plutocrat owned banks. Period. If they could get away with forcing fraudulently created debts on the people in cyprus, they would feel confident iniatiating the same massive theft in larger financial venues — such as the USA.
A proper notion of a wealth tax would be the 1% wallstreet sales tax (tobin tax) advocted by Webster Tarpley http://tarpley.net/ and the United Front Against Austerity http://againstausterity.org/ . It has already been adopted and implemented in many european countries, albeit on a vastly miniscule rate less than 1%. This tax addresses the source of all the illegal plundering (currently tax exempt no less) and would generate trillions to fund necessary social and infrastructure programs. The best part is that the tax cannot be evaded by trading in different parts of the globe. The interassociated nature of specuation works against the financiers.
The problem with your argument that the “rich” will be getting their just due is quite wrong. Those wealthy Russian scoundrels you mention aren’t ever really going to be affected too greatly. They, like many other people of wealth who have far better resouces to foresee and manage their money saw it coming and were well out of the way.
http://www.guardian.co.uk/commentisfree/2013/mar/27/cyprus-wealthy-russians-new-york
Stories are now coming out of Cyprus about simple business owners who were using large bank accounts to make payroll and buy inventory have been wiped out because of some idiot’s idea of a “wealth tax.” Jobs and economic activity are now going to be destroyed all over Cyprus, perhaps permanently, because of this lunacy. Who get hurt now? The little guy, that’s who.
Oh, yeah, and in the good ole USA, anyone who holds an IRA or 401(k) will be declared “wealthy” and will have their retirement funds confiscated. Don’t believe me? Just sit still and watch. Those funds will be used to buy USTreasuries, with a maximum payout of about 2.5 percent for life… no principal payouts, just interest. Have a couple hundred thousand in a retirement account? Try living on $5000 a year. A million bucks? A $25,000 yearly payout.
Wealth tax? Right. Just continue to drink the Kool-Aid, my friend.
Derivatives are private gambling debts. They are illegal, unenforceable, and uninsurable contracts. They are absolutely not public obligations — to all but the mind-fried marks of the banking crime syndicates. Interest and taxes have always been tools of subhumans throughout history that have bled and destroyed nations and peoples. Debt-free, interest-free, and tax-free sovereign currency significantly aids in world liberation and prosperity. It is opposed by humanity’s enemies and their lackeys. We must fight for their arrest, prosecution, and severe punishment, including the total forfeiture of their assets acquired in their massive criminal monetary fraud.
Well said, Ernest!
I couldn’t agree more Ernest. As I’ve stated in other posts, why aren’t the Banks calling for equity raisings from shareholders to strengthen their ravaged Balance Sheets. The owners of these Banks should be required to bear the cost of possible failure, not the ‘plebs’. People around the World are governed by useless, gutless politicians with no morals or ethics.
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Doesn’t matter if FDIC runs out of money or not, Tsy is on the hook for all FDIC liabilities, that is for certain (and arguably for Fed obligations as well). So long as Tsy can mint trillion dollar coins as needed to pay the bills, this doesn’t really count as a problem.
The case law on Tsy’s obligation to pay FDIC’s debts is the Federal Circuit’s 2011 Slattery v. US en banc decision, best summed up in Judge Gajarsa’s blistering dissent…
“Because the majority rules that the FDIC is not a NAFI, the United States is now directly liable for the FDIC’s contractual commitments. Mr. Slattery and future plaintiffs like him can now sue the United States in the Court of Federal Claims and will receive money damages directly from the Judgment Fund… (“[O]ur judgments, when awarded against the United States, are normally payable not from appropriations to maintain the agency that incurred the liability, but from appropriations made for the purpose of paying Court of Claims and other court judgments, now normally standing appropriations.”). The FDIC, however, has no statutory obligation to reimburse the government for any damages paid out of the Judgment Fund. Accordingly, from this date forth, taxpayers, not the FDIC, shall bear the burden of the FDIC’s contractual commitments.”
http://scholar.google.com/scholar_case?case=8939039479071619662&hl=en&as_sdt=80005&sciodt=80003
It looks to me as if that case just goes to the question of jurisdiction, no? Here’s the holding:
On this en banc review, we hold that (1) when a government agency is asserted to have breached an express or implied contract that it entered on behalf of the United States, there is Tucker Act jurisdiction of the cause unless such jurisdiction was explicitly withheld or withdrawn by statute, and (2) the jurisdictional foundation of the Tucker Act is not limited by the appropriation status of the agency’s funds or the source of funds by which any judgment may be paid.
Thus jurisdiction of this claim was properly exercised by the Court of Federal Claims. The decision in Slattery II, reported at Slattery v. United States, 583 F.3d 800 (Fed.Cir.2009), is reinstated; Part I, the jurisdictional section of Slattery II, is modified to resolve conflicting precedent as set forth herein. We remand to the Court of Federal Claims for further proceedings as set forth therein.
JUDGMENT REINSTATED; CASE REMANDED
Well, Ellen, the latest Canadian budget allows “bail-ins” if any of the TBTF banks deplete their money. See: http://globaleconomicanalysis.blogspot.ca/2013/03/canada-discusses-forced-depositor-bail.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29
[…] Confiscating the customer deposits in Cyprus banks, it seems, was not a one-off, desperate idea of a few Eurozone “troika” officials scrambling to salvage their balance sheets. A joint paper by the US Federal Deposit Insurance Corporation and the Bank of England dated December 10, 2012, shows that these plans have been long in the making; that they originated with the G20 Financial Stability Board in Basel, Switzerland; and that the result will be to deliver clear title to the banks of depositor funds. Read more […]
[…] Ellen Brown Writer, Dandelion Salad webofdebt.com March 28, […]
[…] It Can Happen Here: The Confiscation Scheme Planned for US and UK Depositors (Web Of Debt, by Ellen Brown March 28, […]
You people are so stupid, Just don’t put money in the banks and they will fold. Don’t support what is not good. Stupid stupid stupid. you deserve what is coming to you!
Care to wipe that foam of your mouth, take a breath and then speak English so the rest of us can understand you.
[…] By Ellen Brown Global Research, March 29, 2013 Web of Debt […]
[…] Global Research, March 29, 2013 Web of Debt […]
[…] 28 March, 2013– webofdebt […]
[…] Note: And now, as depositors too. See “It Can Happen Here: The Confiscation Scheme Planned for US and UK Depositors” […]
[…] Reprinted from Web of Debt […]
[…] By Ellen Brown, Web of Debt […]
[…] It Can Happen Here: The Confiscation Scheme Planned for US and UK Depositors :A joint paper by the U… […]
[…] https://webofdebt.wordpress.com/2013/03/28/it-can-happen-here-the-confiscation-scheme-planned-for-us-… […]
So the question is where can a midle class person stash the cash?
IT sure explains that big rash of commercials for money cards we’ve been getting out here these days. “No bank account needed” indeed! But oh, the fees…. They start out low, but I seriously doubt if they will stay that way.
[…] fact, as an outstanding article by Ellen Brown recently detailed, the concept of a “bail-in” for “systemically important […]
What about share buttons? I’d like to share this article.
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