Respectfully submitted by Lawrence E. Rafferty- Guest Blogger
The recent news about Cyprus banks confiscating depositor’s funds sent chills throughout the financial world here and abroad. I couldn’t believe that the plan in Cyprus hinged on the idea that the bank could just steal customer’s funds to balance the bank’s books. I muttered to myself when I read the story that something as crazy as that couldn’t possible happen here in the United States. Unfortunately, I learned that the plan to pull a Cyprus type grab here was already in the works.
“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. ” NationofChange
The above article explains that most of us do not realize that when you deposit money in a bank, that it becomes the property of the bank and we become unsecured creditors of the bank! “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?” NationofChange
If I deposit $1,000 dollars in my local bank, I trust that the funds are safe and protected by FDIC insurance and that even if the bank fails, I will get my money back. Under the plan listed above, we may not even be able to fall back on the FDIC insurance coverage. The FDIC-Bank of England plan would supersede our FDIC coverage and we would be relegated to become a “shareholder” in the failing bank or its successor entity. Let me see if I understand this scheme. The bank who is failing due to mismanagement or due to risky investments could steal my funds and force me to accept stock in a company led by poor businessmen with an even poorer business record! If you are brave enough, check out the full FDIC-Bank of England plan here.
Cyprus wasn’t the only place where a bankster grab of deposits was put into place or is being discussed. It is being discussed in New Zealand as well. “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.” NationofChange
To be clear, this joint FDIC-BOE plan would need enabling legislation to be passed before it could become the law of the land. However, the bankruptcy laws have put unsecured creditors, which depositors would be labeled under the plan, lower in seniority to the claims of derivative counterparties which would mean that the very parties who are causing the bank to fail, could collect before the innocent depositors.
“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.” NationofChange
This so-called plan has been labeled a wealth tax in Cyprus, but the United States banks hold the deposits of the poor and middle class and those deposits would be at risk if this type of plan is actually activated. If this type of plan was ever activated or authorized by Congress, why would anyone ever deposit their funds in one of the major banks that could be at risk of failing due to risky derivative investments when those very deposits could be at risk? If the bank files for bankruptcy after depositors funds are confiscated, would depositors be left out in the cold entirely?
This type of bank bail out is an end run on depositors and on the American public. I can only guess why the corporate owned mass media has not been carrying this story. I do not think that I would every put any money in any of the big multi-state banks in light of this potential nightmare of a bailout. I would love to see the Senate hold a hearing to question FDIC officials on this joint plan. While the wealthy use the banks, a good portion of their wealth is in other investment vehicles and therefore the brunt of the bailout could be borne by you and me. Of course the banks will claim that we would receive stock in lieu of the confiscated funds, but can you pay your mortgage bill with stock from a failing bank?
What would you do if your bank confiscated your hard earned deposits to pay their bills? What happened to taking personal responsibility for their mistakes? Too big to fail, too big to jail and now, too big to cover their own losses! Is it any wonder that the banks want no part of Dodd-Frank and the Consumer Protection Agency?
Rafflaw, late to the party, but congratulations, Nice springboard for the interview, and then included in it as well. very nice.
Sure hope Varney is right and can’t happen here (though think he is wrong too.)
Woah, congrats Raf, not only did Kelly ‘mention’ you, she made the article the springboard- the hook- for the segment. Well done.
Varney is a trusting soul is he not?
rafflaw 1, April 1, 2013 at 8:32 pm
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Dredd,
I think the banks will argue that it is not a taking because they are “compensating” with bank stock under the scenario painted in the article.
Anonymously Yours 1, April 1, 2013 at 9:41 pm
Anonymously Yours 1, April 1, 2013 at 9:41 pm
Dredd,
To be a taking under the constitution it has to be some government action…. Period….. Not to say that it’s not a breach of contract between you and the bank….. But good luck in that too the sct has made class actions almost impossible….
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Sounds like no wiggle room at all.
I have to withdraw the hypothesis as having been falsified.
Dave:
Maybe, but banks are notorious for fudging their books making diligence difficult if not impossible. Along with the FDIC comes (should come) independent oversight and regulation. What you call the “nanny state,” I call protecting the general welfare of depositors from greed, corruption, and stupidity.
Thank You Mr Rafflaw i havent been paying as much attention to this part of the elites plan for humanities enslavement as i should have but i definitely will now
Sadly Canadian Government, where I hail from has the same brilliant idea. Under the guise of an economic action plan, it also purports to be able to do this. Part of the reason we have these so called TBTF banks is deposit insurance. This vile creation gives people false security that their deposits are safe when in fact they simply allow banks to draw more capital than they normally could. In actuality the FDIC could only cover 2% of so called insured deposits in the US, which is hardly adequate if there was a failure. The moral hazard these programs create cause people not to be diligent with which institutions they bank, believing the nanny state will protect them. Cyprus had deposit insurance, it was of little consequence. As with all so called government protection’s, there simply is none when the chips are down. The idea we need programs like these simply allows further instability in the banking system. So either we only have deposit insurance for banks that are not allowed to speculate, or we don’t have it at all. I would prefer the latter, but most statist’s believe this is a “right” so it would be hard to completely rid us of it.
Blouise 1, April 2, 2013 at 11:39 am
“Varney is wrong.” (Nal)
Agree. Kelly didn’t seem to be buying his explanation either.
BTW … nice find
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Ditto.
“Varney is wrong.” (Nal)
Agree. Kelly didn’t seem to be buying his explanation either.
BTW … nice find
rafflaw,
I found the following article, which was written in 2009:
Are Uninsured Bank Depositors in Danger?
Posted on February 13, 2009
by Felix Salmon
http://www.felixsalmon.com/2009/02/are-uninsured-bank-depositors-in-danger/
Excerpt:
It’s worth remembering that depositors are unsecured creditors of any bank; usually, indeed, they’re by far the largest class of unsecured creditors. Paul seems to think that they are, or should be, senior to bondholders: that might be true de facto, but it’s certainly not true de jure. *
It’s this very fact which led to the implementation of deposit insurance in most major banking systems; at this point we’re up to $250,000 in the US, which is a lot of money. If a bank fails, the FDIC will ensure that its depositors are paid out in full up to $250,000 each. But this is an insurance policy: it’s not a declaration that deposits are in any way senior to bonds. And if bondholders are forced to take a haircut, then by the principle of pari passu there’s a strong case to be made that depositors should take a haircut too.
In practice, this will apply only to uninsured depositors, of course. I’ve got a call in to the FDIC to find out what the total amount of uninsured deposits in the US banking system is, but given that total deposits as of June last year totaled over $7 trillion, it’s bound to be a large number.
(Update: Found it, at the top of page 17 of this pdf. Total domestic deposits at FDIC-insured institutions are $7.23 trillion, and total insured deposits are $4.54 trillion. Which means that total uninsured deposits are $2.68 trillion. That’s huge.)
The Washington Mutual precedent is interesting: the bank’s uninsured depositors remained whole even as its bondholders were largely wiped out. For the time being, I suspect that the FDIC will continue to try to make the distinction, and will put much more effort into protecting depositors than protecting bondholders. But as we’ve learned many times in recent history, it’s very dangerous to rely on precedent in such situations. And so there’s a good chance that at some point, a US bank failure is indeed going to result in losses for uninsured depositors. After all, that’s what always used to happen.
*Update 2: John Hempton calls to inform me that depositors actually are legally senior to unsecured bondholders, although they’re junior to secured bondholders.
Resolving Globally Active, Systemically Important, Financial Institutions
Title II [of the Dodd-Frank Act] requires that the losses of any financial company placed into receivership will not be borne by taxpayers, but by common and preferred stockholders, debt holders, and other unsecured creditors, …
The “unsecured creditors,” that is, depositors, in Lehman Brothers got 8 cents on the dollar.
Blouise:
Varney is wrong. It’s already happened here. It happened with the TARP bailout. Only then it was the taxpayers, not the depositors, who got the bill. Will politicians stick the taxpayers with the bill the next time?
Bombshell: Senator Sherrod Brown Questions Obama Nominee on Too-Big-to-Jail Banks
When it comes to big banks, shareholders are protected; taxpayers screwed.
By Pam Martens
http://www.alternet.org/economy/bombshell-senator-sherrod-brown-questions-obama-nominee-too-big-jail-banks
Excerpt:
March 15, 2013
Americans learned for the first time on March 6 of this year that the highest law enforcement agent in our country, Attorney General Eric Holder, weighs economic interests when deciding whether to enforce our Nation’s laws against criminal wrongdoers like the too-big-to-fail banks.
The spectacle of warped law enforcement grew worse today during the Senate Banking confirmation hearing of Mary Jo White to head the Securities and Exchange Commission. Under questioning by Senator Sherrod Brown (D-Ohio), White admitted that even the economy of a foreign country – like Japan – is taken into consideration before bringing a criminal indictment in the U.S. Even worse, White was forced to admit that while working for the U.S. Department of Justice as the U.S. Attorney for the Southern District of New York (from 1993 to 2002), she considered it appropriate to speak with Larry Summers (a Treasury Secretary in the Clinton administration) to weigh the economic impact of bringing an indictment.
Wall Street Banksters now Too-Big-To-Jail
Monday, April 1, 2013
Posted by Jim Hightower
http://www.jimhightower.com/node/7995#.UVrl3VfAGSo
Some consider it un-American to like anything about those “namby-pamby” European nations, but still: Let’s hear it for the Swiss!
In a March referendum, the mild-mannered, pacifist-minded Swiss people rose up and hammered their bank executives who’ve been grabbing rip-off pay packages. Two-thirds of voters emphatically shouted “yes” to a maverick proposal requiring that shareholders be given the binding say on executive pay. Violators of the new rules would sacrifice up to six years of salary and face three years in jail. That’s hardly namby-pamby.
Indeed, it’s America’s lawmakers and regulators who’ve been squishy-soft on banksterism. None of the Wall Street titans who enriched themselves with rip-off pay packages while running financial scams that wrecked our economy have even been pursued by the law, much less put in jail. It’s no surprise, then, that they’ve gone right back to scamming and grabbing rip-off pay. Hardly a week goes by without another revelation of big-bank fraud, yet the banks just pay an inconsequential fine and the culprits skate free.
Forget too-big-to-fail, banks have become “too big to jail.” Our nation’s top prosecutor, Attorney General Eric Holder, recently conceded that finagling financial giants are being given a pass: “It does become difficult for us to prosecute them,” he testified, “when we are hit with indications that… if we do bring a criminal charge – it will have a negative impact on the national economy.”
Meanwhile, just four giants – Bank of America, Goldman Sachs, Morgan Stanley, and Wells Fargo – put nearly $20 million into last year’s elections, mostly to back Republicans promising to weaken the few feeble restraints we now have on banker thievery. Our lawmakers and regulators want to coddle the big bankers – with such keystone kops overseeing them, why would any Wall Streeter even think of going straight?
Gene H.
Thanks. I wondered…
ap,
I hope I’m not telling tales out of school, but they did ask him. We GBs are just as proud of raff as we could be.
I’ll pile on here… Congratulations. (Next thing we know, you’ll be a guest…)
Congratulations, Larry.
A star is born in the media universe. 😀
Wow, raff,
If you get banned from Vegas let me know…..
raf,
Atta boy! You got the message out and the discussion going! And all Stuart Varney could say was,”It can’t/won’t happen here … ”
Why? Well because we have legislators who will stop it. Kelly didn’t buy into that stance and neither should anyone else.
Well done, raf, well done.