Bail-out Is Out, Bail-in Is In: Time for Some Publicly-Owned Banks

“[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 depositary 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.

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.)

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.

Depositors Beware

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. 

Dave of Denver then followed up on the Sprott commentary in an April 3 entry on his blog The Golden Truth, in which he pointed out that the new template has long been agreed to by the G20 countries:

Because the use of taxpayer-funded bailouts would likely no longer be tolerated by the public, a new bank rescue plan was needed.  As it turns out, this new “bail-in” model is based on an agreement that was the result of a bank bail-out model that was drafted by a sub-committee of the BIS (Bank for International Settlement) and endorsed at a G20 summit in 2011. For those of you who don’t know, the BIS is the global “Central Bank” of Central Banks. As such it is the world’s most powerful financial institution.

The links are in Dave’s April 1 article, which states:

The new approach has been agreed at the highest levels . . . It has been a topic under consideration since the publication by the Financial Stability Board (a BIS committee) of a paper, Key Attributes of Effective Resolution Regimes for Financial Institutions in October 2011, which was endorsed at the Cannes G20 summit the following month. This was followed by a consultative document in November 2012, Recovery and Resolution Planning: Making the Key Attributes Requirements Operational.

Dave goes on:

[W]hat is commonly referred to as a “bail-in” in Cyprus is actually a global bank rescue model that was derived and ratified nearly two years ago. . . . [B]ank deposits in excess of Government insured amount in any bank in any country will be treated like unsecured debt if the bank goes belly-up and is restructured in some form.

Jesse at Jesse’s Café Americain then picked up the thread and pointed out that it is not just direct deposits that are at risk. The too-big-to-fail banks have commingled accounts in a web of debt that spreads globally. Stock brokerages keep their money market funds in overnight sweeps in TBTF banks, and many credit unions do their banking at large TBTF correspondent banks:

You say you have money in a pension fund and an IRA at XYZ bank?  Oops, it is really on deposit in you-know-who’s bank.  You say you have money in a brokerage account?  Oops, it is really being held overnight in their TBTF bank.  Remember MF Global?  Who can say how far the entanglements go?  The current financial system and market structure is crazy with hidden risk, insider dealings, control frauds, and subtle dangers.

Also at Risk: Pension Funds and Public Revenues 

William Buiter, writing in the UK Financial Times in March 2009, defended the bail-in approach as better than the alternative.  But he acknowledged that the “unsecured creditors” who would take the hit were chiefly “pensioners drawing their pensions from pension funds heavily invested in unsecured bank debt and owners of insurance policies with insurance companies holding unsecured bank debt,” and that these unsecured creditors “would suffer a large decline in financial wealth and disposable income that would cause them to cut back sharply on consumption.”

The deposits of U.S. pension funds are well over the insured limit of $250,000.  They will get raided just as the pension funds did in Cyprus, and so will the insurance companies.  Who else?

Most state and local governments also keep far more on deposit than $250,000, and they keep these revenues largely in TBTF banks.  Community banks are not large enough to service the complicated banking needs of governments, and they are unwilling or unable to come up with the collateral that is required to secure public funds over the $250,000 FDIC limit.

The question is, how secure are the public funds in the TBTF banks?  Like the depositors who think FDIC insurance protects them, public officials assume their funds are protected by the collateral posted by their depository banks.  But the collateral is liable to be long gone in a major derivatives bust, since derivatives claimants have super-priority in bankruptcy over every other claim, secured or unsecured, including those of state and local governments.

The Cyprus Wakeup Call

Robert Teitelbaum wrote in a May 2011 article titled “The Case Against Favored Treatment of Derivatives”:

. . . Dodd-Frank did not touch favored status [of derivatives] and despite all the sound and fury, . . . there are very few signs from either party that anyone with any clout is suddenly about to revisit that decision and simplify bankruptcy treatment. Why? Because for all its relative straightforwardness compared to more difficult fixes, derivatives remains a mysterious black box to most Americans . . . .  [A]s the sense of urgency to reform passes . . . we return to a situation of technical interest to only a few, most of whom have their own particular self-interest in mind.

But that was in 2011, before the Cyprus alarm bells went off.  It is time to pry open the black box, get educated, and get organized.  Here are three things that need to be done for starters:

  • Protect depositor funds from derivative raids by repealing the super-priority status of derivatives.
  • Separate depository banking from investment banking by repealing the Commodity Futures Modernization Act of 2000 and reinstating the Glass-Steagall Act.
  • Protect both public and private revenues by establishing a network of publicly-owned banks, on the model of the Bank of North Dakota.

For more information on the public bank option, see here. Learn more at the Public Banking Institute conference June 2-4 in San Rafael, California, featuring Matt Taibbi, Birgitta Jonsdottir, Gar Alperovitz and others.  

 

 

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.

84 Responses

  1. I certainly took heed of the warnings and moved my savings such as they are into Canada savings bonds….if the country goes belly up we’re all going to be scrambling to feed ourselves and it will be back to ripping up the lawn to grow veggies just as my grandparents/parents did in the 1930’s.

  2. […] Ellen Brown Web of Debt […]

  3. […] Ellen Brown Writer, Dandelion Salad webofdebt.com April 9, […]

  4. What is needed is government to end debt currency and the fractional reserve banking.

    Here are three videos that will show the only thing private banking systems do is bankrupt nations and cause speculation and inflations for the most part.

    At one time in history one society went so far as to execute speculators.

    The history of debt based economies from 300 bc to today in a nine minute video.

    David Graeber’s
    new book Debt: The First 5000 Years

    http://www.amazon.com/gp/produ

    This last video will end any question of whom the Federal
    Reserve serves; and it’s not the nation of the USA or it’s taxpayers.

    The Fed Grants $7.77 Trillion in Secret Bank Loan

    Some may enjoy the 12 minute video titled “Looting of America” in spite of having some reputable guest its format reminds one of talking heads.

    http://www.nakedcapitalism.com/2013/04/your-humble-blogger-appears-on-rts-truthseeker.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

    Louis D. Brandeis is an author of “Other peoples money and how bankers use it) who influenced presidents from TR to FDR on regulations that were put in place.

    http://www.amazon.com/Other-peoples-money-how-bankers/dp/1578987385/ref=sr_1_3?s=books&ie=UTF8&qid=1326549996&sr=1-3

  5. The very nature of money as we know it means that it can be taken from its owner against the will of that owner. This is inherent in any money which either is a physical object (such as currency, specie, salt, …) or represents a physical object (such as in computer bank accounts). Therefore, no matter what the law or custom or promises or contracts or anything else, so long as the money we use is a physical object money it can be taken from us against our will.

    The conclusion is that the recommendations given (to repeal super-priority status of derivatives, to reinstate Glass-Steagall, or to establish a network of publicly owned banks simply cannot address the basic problem. Fraud and theft have been common in every nation since nations first existed. Banks are merely another way to get money from other people.

  6. What’s interesting (and amusing!) is that Ms Brown is now taking exactly the opposite line on the Cyprus bailout to the one she took in her earlier articles! She started out waxing indignant at the idea of taxing the rich and pretending not to notice that that idea originated in Iceland. Now, she has backed off from Thatcher-like indignation at the dastardly socialism of the EU and sees it all as perfectly normal and natural. A Rubicon has indeed been crossed!

  7. […] This piece first appeared at Web of Debt. […]

  8. A scenario-nightmare for the future of Europe

    http://failedevolution.blogspot.gr/2013/04/a-scenario-nightmare-for-future-of.html

  9. […] They’ve already shown that they can steal your house; now they can take your money as well. Ellen Brown, J.D., who wrote The Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free, has a good post: […]

  10. […] Bail-out Is Out, Bail-in Is In:  Time for Some Publicly-Owned Banks […]

  11. […] Bail-out Is Out, Bail-in Is In:  Time for Some Publicly-Owned Banks […]

  12. […] Click: (Here) […]

  13. Two comments: Noticed my bank pays me like .01 one penny of interest on my checking account balances at the end of each month. This means I am loaning the bank money and if they can’t or don’t pay what they owe the bank can default on my loan to them and steal my checking account balances. This angers me bcuz the bank did not get my approval of my loaning money to them. What % interest is the bank paying me? Don’t know but it has got to be a close to zero as imaginable. Second comment. please listen to this interview with Karen Hudes, World Bank legal council turned whistle-blower. Can’t think of an interview that is more important than hers. Karen’s mother fears for Karen’s life and so do I. would not surprise me one bit if Karen gets suicided. http://bullmarketthinking.com/wp-content/uploads/2013/05/552013hudes.mp3

  14. “Legal theft” is good Ellen. I enjoyed your thoughts & something needs to be done by individual acts on our parts.

    I met 2 veterans who are walking across America, carry the U.S. flag in “Support of the U.S. Constitution” & our freedoms.

    They just need support so check them out. ( WalkDaddyWalk.us ). One of them is a 65 yr. old combat Vietnam veteran who is walking!

  15. The question I have is what does a retiree do with her/his $ given the above set of facts? Where can one park funds? Should one buy gold coins, should one buy foreign currencies? Should one put $ under one’s mattress? Just asking.

  16. […] « Bail-out Is Out, Bail-in Is In: Time for Some Publicly-Owned Banks […]

  17. I read that they are also going to steal money from unsecured deposits with a bank account balance below €100,000 too. Given the Bank of England and the FDIC stated that depositors insurance was inadequate this would then mean all bank accounts, can you confirm this?

  18. […] Bail-out Is Out, Bail-in Is In: Time for Some Publicly-Owned Banks […]

  19. […] as big banks engage in high-risk derivative trading at high volumes and expect to be able to bail themselves out by seizing deposits, as happened in […]

  20. […] as big banks engage in high-risk derivative trading at high volumes and expect to be able to bail themselves out by seizing deposits, as happened in […]

  21. […] Sustainable Abundance: Permaculture Principles For Monetary Systems | PopularResistance.Org on Bail-out Is Out, Bail-in Is In: Time for Some Publicly-Owned Banks […]

  22. […] Detroit bankruptcy is looking suspiciously like the bail-in template originated by the G20’s Financial Stability Board in 2011, which exploded on the scene in Cyprus in 2013 and is now becoming the model globally. In […]

  23. […] Detroit bankruptcy is looking suspiciously like the bail-in template originated by the G20’s Financial Stability Board in 2011, which exploded on the scene in Cyprus in 2013 and is now becoming the model globally. In […]

  24. […] Detroit bankruptcy is looking suspiciously like the bail-in template originated by the G20’s Financial Stability Board in 2011, which exploded on the scene in Cyprus in 2013 and is now becoming the model globally. In […]

  25. […] Detroit bankruptcy is looking suspiciously like the bail-in template originated by the G20’s Financial Stability Board in 2011, which exploded on the scene in Cyprus in 2013 and is now becoming the model globally. In […]

  26. […] Detroit bankruptcy is looking suspiciously like the bail-in template originated by the G20’s Financial Stability Board in 2011, which exploded on the scene in Cyprus in 2013 and is now becoming the model globally. In […]

  27. […] Detroit bankruptcy is looking suspiciously like the bail-in template originated by the G20’s Financial Stability Board in 2011, which exploded on the scene in Cyprus in 2013 and is now becoming the model globally. In […]

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