In our last story, we noted how government backed loans in the housing market encourages rising home and rent prices throughout the nation, a transfer of wealth from almost every single American to various establishment organizations. Now we have another example of banks transferring risk to the taxpayer.
The term “Too Big To Fail” should have the addendum NEVER EVER added to it, because, as we have seen with Cyprus, the establishment will do anything to ensure the banks do not fail and prevent the world from plunging into some kind of Mad Max hellscape. To this end, we know the government has claimed the authority to seize bank accounts, and indeed all other forms of private property should it be deemed necessary by whoever, but now we’re getting some specifics thanks to a recent FDIC report called “Resolving Globally Active, Systemically Important, Financial Institutions.”
In this report, they lay out plans to seize private bank accounts (including insured deposits under $250,000) Cyprus style in the event the bank is about to go under and previous methods of bailing them out are unpalatable by congress weary to approve TARP II: Revenge of the Banksters.
The FDIC report released just four months ago reads:
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.
You would become that new equity holder, subject to the risk of loss just as if you were a stockholder. Of course, this won’t come with an appropriate increase in your interest rate. Yves Smith of Naked Capitalism points out that taxpayers, and now bank accounts, can be seized by the banks in the event of a derivatives meltdown scenario. She writes:
When the [Lehman Brothers] 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.
Unsecured lenders? Yeah, that’s you. Also, see our report from October 11, 2011: “Bank of America Preps for Bankruptcy By Shifting Derivative Exposure to Taxpayers” Normally in a capital structure, bond holders are supposed to be wiped out before deposits are touched. In the case of Cyprus, Germany and the ECB made depositors inferior to other bank holdings. This is illegal. You cannot simply take money from one hand to pay another at a less protected level in the capital structure, but the courts have and will continue to let them get away with this. This plan worked so well in Cyprus that it is now spreading around the world.
The repeal of Glass-Steagal made it legal for banks to use depositors money to bet on derivatives and other “shitty deals,” but those deposits were assumed to still be insured in the event of a meltdown. Not anymore. Now deposits (including those of pension funds, payroll accounts, CDs, savings accounts, etc) will be subject to haircuts or outright confiscation. Naked Capitalism is more conservative, simply stating that the US congress wouldn’t need to bailout the banks, but instead they would have to bail out US bank deposits, money the banks had just seized. No politician would ever vote against that! The banks have created a scenario in which you are the one who is subject to the bailout. Amazing in its evil simplicity is it not?
Canada has stated they are planning a similar “bail-in” program. The Canadian government recently released this document titled the Economic Action Plan 2013 which says:
The Government proposes to implement a “bail-in” regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers.
Under these “bail-in” options, the governments have reordered exposure, making derivatives and other high risk ventures more highly protected than bank deposits. This might be OK if depositors were paid an appropriate yield matching their risk. Alas, money is free in this mad, mad, mad world, hence negative interest rates now enjoyed by the majority of savers.
And to top it off, nothing could be more cynical than the statement that this will protect taxpayers. Congress would have to allocate additional funds to cover any funds seized during a major banking crisis. It will be depositors begging congress for a bailout of their deposits. FDIC insurance (or the foreign equivalent) will not be enough to cover the massive losses and doesn’t cover deposits over $250,000 at all. The FDIC nearly failed to cover the losses incurred under the relatively minor Savings and Loan crisis in the late 1980s. So what’s a congress to do? Bail out the depositors, or let thousands of small businesses across the nation suddenly go bankrupt when they can’t make payroll?
Congress will have no choice but to bail out the depositors. Congress would never approve another bank bailout after the fiasco that was TARP, but they wouldn’t dare let middle America lose their entire life savings. The regulatory agencies have shifted risk from the banks to the people directly. This is merely a bailout by another name. Old wine in new bottles.
