A Crisis Worse Than Islamic State? Bank ‘Bail-Ins’ Begin
http://www.truthdig.com/report/item/a_crisis_worse_than_isis_bail-ins_begin_20151229/
Posted on Dec 29, 2015
By Ellen Brown / Web of Debt
Ashley Van Haeften / CC BY 2.0
This piece first appeared at Web of Debt.
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. Listen to “It’s Our
Money with Ellen Brown” on PRN.FM.
http://www.truthdig.com/ http://www.truthdig.com/
A Crisis Worse Than Islamic State? Bank ‘Bail-Ins’ Begin
http://www.truthdig.com/report/item/a_crisis_worse_than_isis_bail-ins_begin_20151229/
Posted on Dec 29, 2015
By Ellen Brown / Web of Debt
Ashley Van Haeften / CC BY 2.0
This piece first appeared at Web of Debt.
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. Listen to “It’s Our
Money with Ellen Brown” on PRN.FM.
http://www.truthdig.com/eartotheground/item/donald_trump_flip-flops_after_sanders_wage_criticism_20151230/
http://www.truthdig.com/eartotheground/item/donald_trump_flip-flops_after_sanders_wage_criticism_20151230/
http://www.truthdig.com/eartotheground/item/donald_trump_flip-flops_after_sanders_wage_criticism_20151230/
http://www.truthdig.com/report/item/forests_of_southwest_us_face_massive_die-off_by_2100_20151230/
http://www.truthdig.com/report/item/forests_of_southwest_us_face_massive_die-off_by_2100_20151230/
http://www.truthdig.com/report/item/forests_of_southwest_us_face_massive_die-off_by_2100_20151230/
http://www.truthdig.com/report/item/2015_the_year_police_killings_in_america_were_counted_20151230/
http://www.truthdig.com/report/item/2015_the_year_police_killings_in_america_were_counted_20151230/
http://www.truthdig.com/report/item/2015_the_year_police_killings_in_america_were_counted_20151230/
http://www.truthdig.com/report/item/top_5_things_for_which_we_should_be_grateful_to_arabic_writing_20151230/
http://www.truthdig.com/report/item/top_5_things_for_which_we_should_be_grateful_to_arabic_writing_20151230/
http://www.truthdig.com/report/item/top_5_things_for_which_we_should_be_grateful_to_arabic_writing_20151230/
http://www.truthdig.com/ http://www.truthdig.com/
http://www.truthdig.com/about/http://www.truthdig.com/contact/http://www.truthdig.com/about/advertising/http://www.truthdig.com/user_agreement/http://www.truthdig.com/privacy_policy/http://www.truthdig.com/about/comment_policy/
© 2015 Truthdig, LLC. All rights reserved.
http://www.hopstudios.com/
http://support.truthdig.com/signup_page/subscribe
http://support.truthdig.com/signup_page/subscribe
http://www.facebook.com/truthdig
http://www.facebook.com/truthdighttp://twitter.com/intent/follow?source=followbutton&variant=1.0&screen_name=truthdig
http://twitter.com/intent/follow?source=followbutton&variant=1.0&screen_name=truthdighttps://plus.google.com/+truthdighttps://plus.google.com/+truthdighttp://www.linkedin.com/company/truthdighttp://www.linkedin.com/company/truthdighttp://truthdig.tumblr.com/http://truthdig.tumblr.com/http://www.truthdig.com/connecthttp://www.truthdig.com/connect
