http://www.truth-out.org/news/item/15401-it-can-happen-here-the-confiscation-scheme-planned-for-us-and-uk-depositors
It Can Happen Here: The Confiscation Scheme Planned for US and UK Depositors
Friday, 29 March 2013 09:04
By Ellen Brown, Web of Debt | News Analysis
[links in on-line article]
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.
====================================
So, if you have a bit of money, where can you keep it so that it is safe
and available when you need it (e.g., when YOUR bank is closed for 2
weeks without notice for 'restructuring')? Note in the article that
anything held in a safe deposit box is also subject to seizure.
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