Could the
FDIC Seize Bank Deposits During a Crisis? by Phoenix Capital...8/18/15
As we noted last week, one of the
biggest problems for the Central Banks is actual physical cash.
The financial system is
predominantly comprised of digital money. Actual physical Dollars bills and
coins only amount to $1.36 trillion. This is only a little over 10% of the $10
trillion sitting in bank accounts. And it’s a tiny fraction of the $20 trillion
in stocks, $38 trillion in bonds and $58 trillion in credit instruments
floating around the system.
Suffice to say, if a
significant percentage of people ever actually moved their money into physical
cash, it could very quickly become a systemic problem.
Indeed, this is
precisely what caused the 2008 meltdown, when nearly 24% of the assets in Money
Market funds were liquidated in the course of four weeks. The ensuing liquidity
crush nearly imploded the system.
Because of this, Central Banks
and the regulators have declared a War on Cash in an effort to stop people
trying to get their money out of the system.
One policy they are
considering is to put a carry tax on physical cash meaning that your Dollar
bills would gradually depreciate once they were taken out of the bank. Another
idea is to do away with actual physical cash completely.
Perhaps the most concerning is
the fact that should a “systemically important” financial entity go bust, any
deposits above $250,000 located therein could be converted to equity at which
point if the company’s shares, your wealth evaporates.
Indeed, the FDIC
published a paper proposing precisely this back in December
2012. Below are some excerpts worth your attention.
This paper focuses on the
application of “top-down” resolution strategies that involve a single
resolution authority applying its powers to the top of a financial group, that
is, at the parent company level. The paper discusses how such a top-down strategy
could be implemented for a
U.S. or a U.K. financial group in a cross-border context…
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…
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 into equity. In the U.S., the new equity would become capital in one or more
newly formed operating entities.
Insured
depositors themselves would remain unaffected. Uninsured deposits would be
treated in line with other similarly ranked liabilities in the resolution process,
with the expectation that they might be written down.
In other words, any
liability at the bank is in danger of being written-down should the bank fail. And guess what? Deposits
are considered liabilities according to US Banking Law. In this legal
framework, depositors are creditors.
So… if a large bank
fails in the US, your deposits at this bank would either be “written-down”
(read: disappear) or converted into equity or stock shares in the
company. And once they are converted to equity you are
a shareholder not a depositor… so you are no longer insured
by the FDIC. So if the bank then
fails (meaning its shares fall), so does your deposit.
Let’s run through this. Let’s
say ABC bank fails in the US. ABC bank is too big for the FDIC to make hold.
So…
1) The FDIC
takes over the bank.
2) The
bank’s managers are forced out.
3) The bank’s
debts and liabilities are converted into equity or the bank’s stock. And yes,
your deposits are considered a “liability” for the bank.
4) Whatever
happens to the bank’s stock, affects your wealth. If the bank’s stock falls at
this point because everyone has figured out the bank is in major trouble, your
wealth falls too.
This is precisely what has happened in Spain during the
2012 banking crisis over there. Since then it’s also happened in Cyprus,
Greece…and it is now perfectly legal
in the US courtesy of a clause in the Dodd-Frank bill.
This is just the start
of a much larger strategy of declaring War on Cash. The goal is to stop
people from being able to move their money into physical cash and to keep their
wealth in the financial system at all cost.
This is just the start
of a much larger strategy of declaring War on Cash. The goal is to stop
people from being able to move their money into physical cash and to keep their
wealth in the financial system at all costs. Indeed, we've uncovered a secret document outlining how the Fed
plans to incinerate savings to force investors away from cash and into riskier
assets.
Comments
We need
to demand that big bank losses remain the big bank problems. We should restore Glass-Steagall to allow
small banks to grow and protect our money. If international banks want to
engage in high risk investing, they should not be bailed out by anybody.
Norb
Leahy, Dunwoody GA Tea Party Leader
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