By Ellen
Brown
Global Research, December 29, 2015
Theme: Global Economy
Image: Ellen Brown
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. Listen to “It’s Our Money with Ellen Brown” on PRN.FM.
The original source of this article is Global Research
Copyright © Ellen
Brown, Global Research,
2015
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