While the
mainstream media focus on ISIS extremists, a threat that has gone virtually
unreported is that your life savings could be wiped out in a massive
derivatives collapse. Bank bail-ins have begun in Europe, and the
infrastructure is in place in the US. Poverty also kills.
Global Research: At the end of November, an Italian pensioner hanged himself after his entire €100,000 savings were confiscated in
a bank “rescue” scheme. He left a suicide note blaming the bank, where he had
been a customer for 50 years and had invested in bank-issued bonds. But he
might better have blamed the EU and the G20’s Financial Stability Board, which have
imposed an “Orderly Resolution” regime that keeps insolvent banks afloat by
confiscating the savings of investors and depositors. Some 130,000 shareholders
and junior bond holders suffered losses in the “rescue.”
The pensioner’s bank was one of four
small regional banks that had been put under special administration over the
past two years. The €3.6 billion ($3.83 billion) rescue plan launched by
the Italian government uses a newly-formed National Resolution Fund, which
is fed by the country’s healthy banks. But before the fund can be tapped,
losses must be imposed on investors; and in January, EU rules will require that
they also be imposed on depositors. According to a December 10th article on BBC.com:
The rescue was a “bail-in” – meaning bondholders suffered losses –
unlike the hugely unpopular bank bailouts during the 2008 financial crisis,
which cost ordinary EU taxpayers tens of billions of euros.
Correspondents
say [Italian Prime Minister] Renzi acted quickly because in January, the EU is
tightening the rules on bank rescues – they will force losses on
depositors holding more than €100,000, as well as bank shareholders and
bondholders.
Letting
the four banks fail under those new EU rules next year would have meant
“sacrificing the money of one million savers and the jobs of nearly 6,000
people”. That is
what is predicted for 2016: massive sacrifice of savings and jobs to prop up a
“systemically risky” global banking scheme. Bail-in Under Dodd-Frank That is all happening in the EU. Is there reason for concern in the US?
According to former hedge fund
manager Shah Gilani, writing for Money
Morning, there is. In a November 30th article titled “Why I’m Closing My Bank Accounts While I
Still Can,” he writes: It is entirely possible in the next
banking crisis that depositors in giant too-big-to-fail failing banks could
have their money confiscated and turned into equity shares. . . .
If your
too-big-to-fail (TBTF) bank is failing because they can’t pay off derivative
bets they made, and the government refuses to bail them out, under a mandate
titled “Adequacy of Loss-Absorbing Capacity of Global Systemically Important
Banks in Resolution,” 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 failing.
Once your money is deposited in the
bank, it legally becomes the property of the bank. Gilani explains: Your deposited cash is an unsecured debt obligation of your bank. It
owes you that money back.
If you
bank with one of the country’s biggest banks, who collectively have trillions
of dollars of derivatives they hold “off balance sheet” (meaning those debts
aren’t recorded on banks’ GAAP balance sheets), those debt bets have a superior
legal standing to your deposits and get paid back before you get any of your
cash.
Big banks got that language inserted into the 2010 Dodd-Frank law meant
to rein in dangerous bank behavior. The banks inserted the language and
the legislators signed it, without necessarily understanding it or even reading
it. At over 2,300 pages and still growing, the Dodd Frank Act is currently the
longest and most complicated bill ever passed by the US legislature.
Propping Up the Derivatives Scheme: Dodd-Frank states in its preamble that it will “protect
the American taxpayer by ending bailouts.” But it does this under Title II by
imposing the losses of insolvent financial companies on their common and
preferred stockholders, debtholders, and other unsecured creditors. That
includes depositors, the largest class of unsecured creditor of any bank.
Title II is aimed at “ensuring that payout
to claimants is at least as much as the
claimants would have received under bankruptcy liquidation.” But here’s the catch: under both the
Dodd Frank Act and the 2005 Bankruptcy Act, derivative claims have super-priority over all other claims, secured and unsecured, insured and uninsured.
The over-the-counter (OTC) derivative
market (the largest market for
derivatives) is made up of banks and other highly sophisticated players such as
hedge funds. OTC derivatives are the bets of these financial players against
each other. Derivative claims are considered “secured” because collateral is
posted by the parties.
For some inexplicable reason, the
hard-earned money you deposit in the bank is not considered “security” or
“collateral.” It is just a loan to the bank, and you must stand in line along
with the other creditors in hopes of getting it back. State and local
governments must also stand in line, although their deposits are considered
“secured,” since they remain junior to the derivative claims with
“super-priority.”
Turning Bankruptcy on Its Head: Under the old liquidation rules, an
insolvent bank was actually “liquidated” – its assets were sold off to repay
depositors and creditors. Under an “orderly resolution,” the accounts of
depositors and creditors are emptied to keep the insolvent bank in business.
The point of an “orderly resolution” is not to make depositors and creditors
whole but to prevent another system-wide “disorderly resolution” of the sort that
followed the collapse of Lehman Brothers in 2008. The concern is that pulling a
few of the dominoes from the fragile edifice that is our derivatives-laden
global banking system will collapse the entire scheme. The sufferings of
depositors and investors are just the sacrifices to be borne to maintain this
highly lucrative edifice.
In a May 2013 article in Forbes
titled “The Cyprus Bank ‘Bail-In’ Is Another Crony
Bankster Scam,” Nathan Lewis explained the scheme
like this: At first glance, the
“bail-in” resembles the normal capitalist process of liabilities restructuring
that should occur when a bank becomes insolvent. . . .
The difference with the “bail-in” is that the order of creditor
seniority is changed. In the
end, it amounts to the cronies (other banks and government) and non-cronies.
The cronies get 100% or more; the non-cronies, including non-interest-bearing
depositors who should be super-senior, get a kick in the guts instead. . . .
In
principle, depositors are the most senior creditors in a bank. However, that
was changed in the 2005 bankruptcy law, which made derivatives liabilities most
senior.
Considering
the extreme levels of derivatives liabilities that many large banks have, and
the opportunity to stuff any bank with derivatives liabilities in the last
moment, other creditors could easily find there is nothing left for them at
all.
As of
September 2014, US derivatives had a notional value
of nearly $280 trillion. A study involving the cost to
taxpayers of the Dodd-Frank rollback slipped by Citibank into the “cromnibus”
spending bill last December found that the rule reversal allowed banks to keep $10
trillion in swaps trades on their
books. This is money that taxpayers
could be on the hook for in another bailout; and since Dodd-Frank
replaces bailouts with bail-ins, it is money that creditors and depositors
could now be on the hook for. Citibank is particularly vulnerable to swaps on the price of oil. Brent crude dropped from a high of $114 per barrel in June 2014 to a low
of $36 in December 2015.
What about FDIC insurance? It covers deposits up to $250,000, but the FDIC fund had
only $67.6 billion in
it as of June 30, 2015, insuring about $6.35 trillion in deposits. The FDIC has
a credit line with the Treasury, but even that only goes to $500 billion; and
who would pay that massive loan back? The FDIC fund, too, must stand in line
behind the bottomless black hole of derivatives liabilities. As Yves Smith
observed in a
March 2013 post:
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
depositors to fund derivatives exposures. The deposits are now subject to being
wiped out by a major derivatives loss.
Even in
the worst of the Great Depression bank bankruptcies, noted Nathan Lewis, creditors eventually recovered nearly
all of their money. He concluded: When
super-senior depositors have huge losses of 50% or more, after a “bail-in”
restructuring, you know that a crime was committed.
Exiting
While We Can: How can you avoid this criminal theft and keep your money safe? It
may be too late to pull your savings out
of the bank and stuff them under a mattress, as Shah Gilani found when
he tried to withdraw a few thousand dollars from his bank. Large withdrawals are now criminally suspect.
You can move your money into one of the credit unions with their own deposit
insurance protection; but credit unions and their insurance plans are also
under attack. So writes Frances Coppola in a December 18th article
titled “Co-operative Banking Under Attack in Europe,” discussing an insolvent Spanish credit union that was the
subject of a bail-in in July 2015. When the member-investors were subsequently
made whole by the credit union’s private insurance group, there were complaints
that the rescue “undermined the principle of creditor bail-in” – this although
the insurance fund was privately financed. Critics argued that “this still
looks like a circuitous way to do what was initially planned, i.e. to avoid
placing losses on private creditors.”
In short, the goal of the bail-in scheme is to place losses on private
creditors. Alternatives that allow them to escape could soon be blocked.
We need to
lean on our legislators to change the rules before it is too late. The Dodd
Frank Act and the Bankruptcy Reform Act both need a radical overhaul, and the
Glass-Steagall Act (which put a fire wall between risky investments and bank
deposits) needs to be reinstated.
Meanwhile, local legislators would
do well to set up some publicly-owned
banks on the model of the state-owned Bank of North Dakota – banks that
do not gamble in derivatives and are safe places to store our public and
private funds.
About the author: 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 300+
blog articles are at EllenBrown.com. Listen to “It’s Our Money with Ellen Brown” on PRN.FM.
Wow. That's messed up.
ReplyDelete