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 |
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[…] Ellen Brown: “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.” Link. […]
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[…] for the US, UK, EU, Canada, New Zealand, and Australia, as detailed in my earlier articles here and here. “Too big to fail” now trumps all. Rather than banks being put into bankruptcy to salvage […]
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A good article… except for the large elephant in the corner.
Which elephant? Ummm… The Federal Reserve?
From: “What is the purpose of the Federal Reserve System?” located here: http://www.federalreserve.gov/faqs/about_12594.htm
“…the Federal Reserve’s responsibilities fall into four general areas: […] Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets. […]”
The Federal Reserve was the lender of last resort in the 2008 banking crisis, whereas TARP made available a paltry $700 billion, the Federal Reserve made available some $16 trillion (including $2.5 trillion to Citi bank) through various programs and conduits. Thanks to Ron Paul’s “audit the fed” act and the resulting GAO document published July 2011 titled “FEDERAL RESERVE SYSTEM: Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance”, we can see the entities and amounts receiving emergency assistance on page 144. A copy of the GAO report resides here: http://www.scribd.com/doc/60553686/GAO-Fed-Investigation#outer_page_144
Suffice to say that the Federal Reserve stepped in to prevent further bank failures, and would likely do so again in the a derivative market “blow up”. I wouldn’t hesitate to speculate that the Federal Reserve would get involved prior to asking depositors for any bail ins.
The ECB has a similar purpose and jurisdiction, but the Europeans to date have held back from using reserve bank currency creation/issue (“firing up the printing presses”) to solve bank solvency problems, instead relying on large loans made from solvent countries, austerity measures, and now bail ins. The question is why? Fear of inflation?
Cyprus seems to be a special case in that I suspect the feeling in Germany and elsewhere in the EU is that Cyprus was a haven for criminal monies, laundered funds and tax dodgers. Apparently not a group that illicited sufficient sympathy to warrant a bail out or even ECB reserve involvement.
The biggest losers seem to be Cyprus citizens: trusting, with nowhere to run.
I think you have misspell the elephant in the corner. I thought you meant to say Feudal Reserve System. That would explain what is going on, wouldn’t it?
The conservative Farm Community, with its story of conspiratorial organizations like the Bilderberg and Trilateral Commissions have more understanding of the Federal Reserve than meets the eye, the Fed is the second most powerful branch of the government in Domestic affairs after Congress the executive and the Supremes a pour fourth. It is true that this crisis did not lead to a crisis in the U.S. on the scale of the First Great Depression largely because of handouts to the wealthy bankers. That being said the corrupt aftermath as a result of lack of damage to the large financial interest will haunt American Democracy going forward. Obama had the possibility of being a junior Roosevelt, despite his facile verbal intelligence he is looking more like an inferior George Bush Sr.
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[…] for the US, UK, EU, Canada, New Zealand, and Australia, as detailed in my earlier articles here and here. “Too big to fail” now trumps all. Rather than banks being put into bankruptcy to salvage the […]
[…] for the US, UK, EU, Canada, New Zealand, and Australia, as detailed in my earlier articles here and here. “Too big to fail” now trumps all. Rather than banks being put into bankruptcy to salvage the […]
[…] for the US, UK, EU, Canada, New Zealand, and Australia, as detailed in my earlier articles here and here. “Too big to fail” now trumps all. Rather than banks being put into bankruptcy to salvage the […]
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[…] It Can Happen Here: The Confiscation Scheme Planned for US and UK Depositors | WEB OF DEBT BLOG […]
This article was troubling so I took the trouble to see what the FDIC’s official response to the content of this article was. They state they are required to pay Depositors in Cash up to the Amount of their Insurance and Unsecured Depositors are second in line by Law. They have cited Federal Statute so this is an obligation. What happens to this obligation in the vent of trillions of dollars of Deposit Liability. (The FDIC has some billions of dollars in reserve) is anyone’s guess. They could get loans in secret out of the Federal Reserve which is what happened to the banks last time. In fact, in actuality all bets are off if their is a crisis of this magnitude.
April 12, 2013
Ref. No: SCC2013W-002537-0
Dear Mr. Cohen:
Thank you for contacting the FDIC. In your recent e-mail you asked the following questions:
“Your Web Site Says the Following
Payment to Depositors
How does the FDIC resolve a closed bank?
In the unlikely event of a bank failure, the FDIC acts quickly to protect insured depositors by arranging a sale to a healthy bank, or by paying depositors directly for their deposit accounts to the insured limit.
Purchase and Assumption Transaction. This is the preferred and most common method, under which a healthy bank assumes the insured deposits of the failed bank. Insured depositors of the failed bank immediately become depositors of the assuming bank and have access to their insured funds. The assuming bank may also purchase loans and other assets of the failed bank.
Deposit Payoff. When there is no open bank acquirer for the deposits, the FDIC will pay the depositor directly by check up to the insured balance in each account. Such payments usually begin within a few days after the bank closing.
However the document
http://www.fdic.gov/about/srac/2012/gsifi.pdf which is a joint BOE –FDIC document says that ‘unsecured creditors’ which normally by law includes creditors will be paid off by shares created in a Bank which will be the holding company for the resolved assets. What in fact is the law? I do know what you say on your site.
A reference to a Federal Statute which says that by Law the FDIC is required to pay in cash the insured mount to a qualifying depositor. In this case, the FDIC and Federal Law is making additional stipulations common to U.S. law but not what is commonly supposed as I understand.”
The “Resolving Globally Active, Systemically Important, Financial Institutions” joint paper by the FDIC and the Bank of England was a result of the financial crisis that began in 2007 and drove home the importance of an orderly resolution process for globally active, systemically important, financial institutions (G-SIFIs). Given that challenge, the authorities in the United States (U.S.) and the United Kingdom (U.K.) have been working together to develop resolution strategies that could be applied to their largest financial institutions. These strategies have been designed to enable large and complex cross-border firms to be resolved without threatening financial stability and without putting public funds at risk. Please note that the references to unsecured creditors DO NOT apply to depositors of a failed US bank.
Payment of insured deposits and its resolution are described under the Federal Deposit Insurance Act Section 11(f) [Codified to 12 U.S.C. 1821(f)]
(f) PAYMENT OF INSURED DEPOSITS.-
(1) IN GENERAL.–In case of the liquidation of, or other closing or winding up of the affairs of, any insured depository institution, payment of the insured deposits in such institution shall be made by the Corporation as soon as possible, subject to the provisions of subsection (g), either by cash or by making available to each depositor a transferred deposit in a new insured depository institution in the same community or in another insured depository institution in an amount equal to the insured deposit of such depositor.
By law, after insured depositors are paid, uninsured depositors are paid next, followed by general creditors and then stockholders. In most cases, general creditors and stockholders realize little or no recovery.
FDIC deposit insurance covers depositors’ accounts dollar-for-dollar, including principal and any accrued interest through the date of the insured bank’s closing, up to $250,000 per depositor, per insured bank, for each account ownership category.
Throughout its history, the FDIC has provided bank customers with prompt access to their insured deposits whenever an FDIC-insured bank or savings association has failed.
No depositor has ever lost a penny of insured deposits since the FDIC was created in 1933.
If you wish to learn more about the FDIC deposit insurance coverage and helpful information about when banks fail; these deposit insurance resources can be found on our website at: http://www.fdic.gov/deposit/deposits/index.html
I hope this information is helpful. If you have any additional questions, please feel free to write back or contact us at 877-275-3342.
Sincerely,
Federal Deposit Insurance Corporation
Division of Depositor and Consumer Protection
550 17th Street, N.W.
Washington, DC 20429
Nice work getting this official response, but…
Why doesn’t this make me feel better? Maybe because banks have a habit of making govt change laws/policies as they break them?
Yep. I wanted to see the FDIC legal obligations which are to pay off depositors. Its Federal Law but I doubt they get 99 year jail sentences for breaking it although one could probably sue the treasury and clean up if they fail to honor their obligations. The next obvious question is how they are going to pay off the depositors if say Citibank or JPM Chase goes belly up. The next question is why aren’t they charge very large premiums b/c they are risky institutions. and how they are going to bail out institutions with balance sheets orders of magnitude larger than the FDIC. Let see what they way, I asked both. I will learn something in any event. The answer of course is corruption, their careers depend on running a risky enterprise on a poor insurance model. However, I am unlikely to get that as an answer. Let’s see.
[…] the US, UK, EU, Canada, New Zealand, and Australia, as detailed in my earlier articles here and here. “Too big to fail” now trumps all. Rather than banks being put into bankruptcy to salvage […]
[…] for the US, UK, EU, Canada, New Zealand, and Australia, as detailed in my earlier articles here and here. “Too big to fail” now trumps all. Rather than banks being put into bankruptcy to salvage […]
[…] By Ellen Brown. Originally published at Web of Debt. […]
[…] Ellen Brown: “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.” Link. […]
[…] Ellen Brown Web of Debt […]
I believe it’s too early too call this a “confiscation scheme”
[…] Web of Debt […]
You really do learn something new everyday, we have been in the safety deposit box game for years and I never knew that “legally the bank owns the depositor’s funds as soon as they are put in the bank”.
That is astounding, unsecured creditors would surely have put off 50% of those people using that service.
I’m sure you know that here in the UK the banks are now turning people away!
[…] Which leads to the next obvious question: What about contagion crossing the Atlantic to the US? As Ellen Brown and others have recently pointed out, it appears that US and UK officials have been considering the same direct focus on potentially taxing/expropriating depositors in the US and UK in the event of a future further banking crisis emerging (see Ellen Brown, “It Could Happen Here: The Confiscation Scheme Planned for US and UK Depositors”, March 27 2013). https://webofdebt.wordpress.com/2013/03/28/it-can-happen-here-the-confiscation-scheme-planned-for-us-… […]