A Crisis Worse
than ISIS? Bail-Ins Begin
By Ellen Brown
December 30, 2015 "Information
Clearing House" -
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.
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.
. . .
[L]etting 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.
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.
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