New G20 Rules: Cyprus-style Bail-ins to Hit Depositors AND Pensioners

On the weekend of November 16th, the G20 leaders whisked into Brisbane, posed for their photo ops, approved some proposals, made a show of roundly disapproving of Russian President Vladimir Putin, and whisked out again. It was all so fast, they may not have known what they were endorsing when they rubber-stamped the Financial Stability Board’s “Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution,” which completely changes the rules of banking.

Russell Napier, writing in ZeroHedge, called it “the day money died.” In any case, it may have been the day deposits died as money. Unlike coins and paper bills, which cannot be written down or given a “haircut,” says Napier, deposits are now “just part of commercial banks’ capital structure.” That means they can be “bailed in” or confiscated to save the megabanks from derivative bets gone wrong.

Rather than reining in the massive and risky derivatives casino, the new rules prioritize the payment of banks’ derivatives obligations to each other, ahead of everyone else. That includes not only depositors, public and private, but the pension funds that are the target market for the latest bail-in play, called “bail-inable” bonds.

“Bail in” has been sold as avoiding future government bailouts and eliminating too big to fail (TBTF). But it actually institutionalizes TBTF, since the big banks are kept in business by expropriating the funds of their creditors.

It is a neat solution for bankers and politicians, who don’t want to have to deal with another messy banking crisis and are happy to see it disposed of by statute. But a bail-in could have worse consequences than a bailout for the public. If your taxes go up, you will probably still be able to pay the bills. If your bank account or pension gets wiped out, you could wind up in the street or sharing food with your pets.

In theory, US deposits under $250,000 are protected by federal deposit insurance; but deposit insurance funds in both the US and Europe are woefully underfunded, particularly when derivative claims are factored in. The problem is graphically illustrated in this chart from a March 2013 ZeroHedge post:


Deposits vs Reserves vs Derivs_0 #2

More on that after a look at the new bail-in provisions and the powershift they represent.

Bail-in in Plain English

The Financial Stability Board (FSB) that now regulates banking globally began as a group of G7 finance ministers and central bank governors organized in a merely advisory capacity after the Asian crisis of the late 1990s. Although not official, its mandates effectively acquired the force of law after the 2008 crisis, when the G20 leaders were brought together to endorse its rules. This ritual now happens annually, with the G20 leaders rubberstamping rules aimed at maintaining the stability of the private banking system, usually at public expense.

According to an International Monetary Fund paper titled “From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions”:

[B]ail-in . . . is a statutory power of a resolution authority (as opposed to contractual arrangements, such as contingent capital requirements) to restructure the liabilities of a distressed financial institution by writing down its unsecured debt and/or converting it to equity. The statutory bail-in power is intended to achieve a prompt recapitalization and restructuring of the distressed institution.

The language is a bit obscure, but here are some points to note:

  • What was formerly called a “bankruptcy” is now a “resolution proceeding.” The bank’s insolvency is “resolved” by the neat trick of turning its liabilities into capital. Insolvent TBTF banks are to be “promptly recapitalized” with their “unsecured debt” so that they can go on with business as usual.
  • “Unsecured debt” includes deposits, the largest class of unsecured debt of any bank. The insolvent bank is to be made solvent by turning our money into their equity – bank stock that could become worthless on the market or be tied up for years in resolution proceedings.
  • The power is statutory. Cyprus-style confiscations are to become the law.
  • Rather than having their assets sold off and closing their doors, as happens to lesser bankrupt businesses in a capitalist economy, “zombie” banks are to be kept alive and open for business at all costs – and the costs are again to be to borne by us.

The Latest Twist: Putting Pensions at Risk with “Bail-Inable” Bonds

First they came for our tax dollars. When governments declared “no more bailouts,” they came for our deposits. When there was a public outcry against that, the FSB came up with a “buffer” of securities to be sacrificed before deposits in a bankruptcy. In the latest rendition of its bail-in scheme, TBTF banks are required to keep a buffer equal to 16-20% of their risk-weighted assets in the form of equity or bonds convertible to equity in the event of insolvency.

Called “contingent capital bonds”, “bail-inable bonds” or “bail-in bonds,” these securities say in the fine print that the bondholders agree contractually (rather than being forced statutorily) that if certain conditions occur (notably the bank’s insolvency), the lender’s money will be turned into bank capital.

However, even 20% of risk-weighted assets may not be enough to prop up a megabank in a major derivatives collapse. And we the people are still the target market for these bonds, this time through our pension funds.

In a policy brief from the Peterson Institute for International Economics titled “Why Bail-In Securities Are Fool’s Gold”, Avinash Persaud warns, “A key danger is that taxpayers would be saved by pushing pensioners under the bus.”

It wouldn’t be the first time. As Matt Taibbi noted in a September 2013  article titled “Looting the Pension Funds,” “public pension funds were some of the most frequently targeted suckers upon whom Wall Street dumped its fraud-riddled mortgage-backed securities in the pre-crash years.”

Wall Street-based pension fund managers, although losing enormous sums in the last crisis, will not necessarily act more prudently going into the next one. All the pension funds are struggling with commitments made when returns were good, and getting those high returns now generally means taking on risk.

Other than the pension funds and insurance companies that are long-term bondholders, it is not clear what market there will be for bail-in bonds. Currently, most holders of contingent capital bonds are investors focused on short-term gains, who are liable to bolt at the first sign of a crisis. Investors who held similar bonds in 2008 took heavy losses. In a Reuters sampling of potential investors, many said they would not take that risk again. And banks and “shadow” banks are specifically excluded as buyers of bail-in bonds, due to the “fear of contagion”: if they hold each other’s bonds, they could all go down together.

Whether the pension funds go down is apparently not of concern.

Propping Up the Derivatives Casino: Don’t Count on the FDIC

Kept inviolate and untouched in all this are the banks’ liabilities on their derivative bets, which represent by far the largest exposure of TBTF banks. According to the New York Times:

American banks have nearly $280 trillion of derivatives on their books, and they earn some of their biggest profits from trading in them.

These biggest of profits could turn into their biggest losses when the derivatives bubble collapses.

Both the Bankruptcy Reform Act of 2005 and the Dodd Frank Act provide special protections for derivative counterparties, giving them the legal right to demand collateral to cover losses in the event of insolvency. They get first dibs, even before the secured deposits of state and local governments; and that first bite could consume the whole apple, as illustrated in the above chart.

The chart also illustrates the inadequacy of the FDIC insurance fund to protect depositors. In a May 2013 article in USA Today titled “Can FDIC Handle the Failure of a Megabank?”, Darrell Delamaide wrote:

[T]he biggest failure the FDIC has handled was Washington Mutual in 2008. And while that was plenty big with $307 billion in assets, it was a small fry compared with the $2.5 trillion in assets today at JPMorgan Chase, the $2.2 trillion at Bank of America or the $1.9 trillion at Citigroup.

. . . There was no possibility that the FDIC could take on the rescue of a Citigroup or Bank of America when the full-fledged financial crisis broke in the fall of that year and threatened the solvency of even the biggest banks.

That was, in fact, the reason the US Treasury and the Federal Reserve had to step in to bail out the banks: the FDIC wasn’t up to the task. The 2010 Dodd-Frank Act was supposed to ensure that this never happened again. But as Delamaide writes, there are “numerous skeptics that the FDIC or any regulator can actually manage this, especially in the heat of a crisis when many banks are threatened at once.”

All this fancy footwork is to prevent a run on the TBTF banks, in order to keep their derivatives casino going with our money. Warren Buffett called derivatives “weapons of financial mass destruction,” and many commentators warn that they are a time bomb waiting to explode. When that happens, our deposits, our pensions, and our public investment funds will all be subject to confiscation in a “bail in.” Perhaps it is time to pull our money out of Wall Street and set up our own banks – banks that will serve the people because they are owned by the people.

__________________

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her 200+ blog articles are at EllenBrown.com.

129 Responses

  1. […] new bail-in rules were discussed in my last post here. They are edicts of the Financial Stability Board (FSB), an unelected body of central bankers and […]

  2. The world is run by the rich. It is the rich who take money from the poor. Americans wake up! You have not and will not have a true choice when you vote. SO DO NOT VOTE!!!!!

  3. […] And also, why's this measure being taken shortly after the G20 meeting of economic nations where a resolution was passed instructing all countries to pass legislation allowing for the confiscation of customer accounts […]

  4. […] in Denmark in 2014. This will therefore be another major test of the structure and legality of BAIL-IN under the new EU […]

  5. What about the Bank of North Dakota? Does this apply to them as well?

    • NO

  6. […] have already had examples of bank bail-ins.  We have had not just the United States, but all members of the G20 enact a resolution mandating legislation to allow for bank bail-ins, and the confiscation of customer deposits.  We […]

  7. Not sure whether to laugh or cry! I could laugh because there is now incontrovertible proof to show what happening/going to happen. It is thoroughly depressing though…

    • This alone would be bad enough but entirely too many signs of collapse are converging at once. In the US they are preparing for the coming hunger. The events of the early nineteen thirties will not be allowed to happen again. For a lesson in what happened try this.

  8. […] 28,000 International Companies above US law WTO rules against Country of Origin Labeling law (COOL) G20 Rules: Cyprus Style Bail-ins to hit depositors China regulates its citizens’ behavior on the internet Man sent to jail because Gmail sent an […]

  9. […] "Adequacy of Loss-Absorbing Capacity Global Systemically Important Banks in Resolution." According to author Ellen Brown and several others, what has been enacted with the plan of the FSB (which is […]

  10. […] article has more in-depth information about this.  It is very worthwhile reading.  We need to educate […]

  11. […] Bail Ins: Deposits and Pensions https://ellenbrown.com/2014/12/01/new-rules-cyprus-style-bail-ins-to-hit-deposits-and-pensions/ […]

  12. […] are responsible for 1/3 of the bubble, trade most of your $, & hold the rest as collateral) may take your $ since the FDIC holds <1% of “insured” deposits. While withdrawing your money, […]

  13. […] are responsible for 1/3 of the bubble, trade most of your $, & hold the rest as collateral) may take your $ since the FDIC holds <1% of “insured” deposits. While withdrawing your money, […]

  14. […] are responsible for 1/3 of the bubble, trade most of your $, & hold the rest as collateral) may take your $ since the FDIC holds <1% of “insured” deposits. While withdrawing your money, […]

  15. […] interventions.[xv] In this new regime, financial derivatives have super-superiority status over all other creditor claims, including common stocks, because they are key mechanisms of coercion for predatory financial […]

  16. […] doctrine is from the U.S. legislated Dodd-Frank banking reform act, and a G20 joint resolution passed back in January.  Thus seizure of your assets to bail out the banks is not only on the […]

  17. […] Ellen Brown elucidates: […]

  18. […] stocks, commodities and currencies. Financial derivatives will have super-superiority status over all other creditor claims, including common stocks, because they are key mechanisms of coercion for predatory financial […]

  19. […] approved on Nov. 16, 2014, by the G20’s Financial Stability Board, they can take your deposited money and turn it into shares of equity capital to try and keep your TBTF bank from […]

  20. […] something like that could never happen here, the G20’s November 2014, Brisbane Summit makes bail-ins in America a likely eventuality. Of course, just as has always been the case, once you put money in the bank, […]

  21. […] The Web of Deceit Blog […]

  22. […] have money in a bank…it's not yours… http://www.zerohedge.com/news/2014-1…day-money-dies https://ellenbrown.com/2014/12/01/new…-and-pensions/ Shocking Declaration By Obama And World Leaders: Your Bank Account Isn't Yours These are all hard […]

  23. […] Corbett's 2014 Story: Treaties, Trade Deals Quietly Transform Our World Behind The Scenes TPP Talks Get Back Underway In Washington Eli Lilly Trying To Create 'Supranational Court' With Lawsuit Against Canada, Feds Say Vattenfall Sues Germany Over Phase-Out Policy G-20 Agrees On Automatic Tax Data Sharing: OECD New G20 Rules: Cyprus-style Bail-ins to Hit Depositors AND Pensioners […]

  24. […] New G20 Rules: Cyprus-style Bail-ins to Hit Depositors AND Pensioners […]

  25. […] You can’t make this up — this is the actual text from the budget. It clearly states that every major country is in line with our masters’ agenda. By the way, if you want to understand what “bail-in” means, look at what happened in Cyprus in 2013. This was a dress rehearsal for this new bankster scheme officially adopted as the G20 Summit of November 2014. […]

  26. […] all of the laws and infrastructure already in place to do so in America and this stark reminder, bail-ins have already begun in Europe as shared in more detail in the 1st video from […]

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