Economy
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March 28, 2013 |
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.
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 equitywould 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.
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.
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.
. . . 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.
By at least one estimate, in 2010 there was a total of $12 trillion in cash tied up (at risk) in derivatives . . . .
.
. . 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.
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.
It’s worth remembering that depositors are unsecured creditors of any bank; usually, indeed, they’re by far the largest class of unsecured creditors.
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.
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