Posted by nesaraaustralia ⋅ May 4, 2013 ⋅
APRIL 30, 2013
by ELLEN BROWN
“[W]ith Cyprus . . . the game itself changed. By raiding the
depositors’ accounts, a major central bank has gone where they would not
previously have dared. The Rubicon has been crossed.”
—Eric Sprott, Shree Kargutkar, “Caveat Depositor”
The crossing of the Rubicon into the confiscation of depositor funds
was not a one-off emergency measure limited to Cyprus. Similar
“bail-in” policies are now appearing in multiple countries. (See my
earlier articleshere.) What triggered the new rules may have been a
series of game-changing events including the refusal of Iceland to bail
out its banks and their depositors; Bank of America’s commingling of its
ominously risky derivatives arm with its depository arm over the
objections of the FDIC; and the fact that most EU banks are now
insolvent. A crisis in a major nation such as Spain or Italy could lead
to a chain of defaults beyond anyone’s control, and beyond the ability
of federal deposit insurance schemes to reimburse depositors.
The new rules for keeping the too-big-to-fail banks alive: use
creditor funds, including uninsured deposits, to recapitalize failing
But isn’t that theft?
Perhaps, but it’s legal theft. By law, when you put your money into a
deposit account, your money becomes the property of the bank. You
become an unsecured creditor with a claim against the bank. Before the
Federal Deposit Insurance Corporation (FDIC) was instituted in 1934,
U.S. depositors routinely lost their money when banks went bankrupt.
Your deposits are protected only up to the $250,000 insurance limit, and
only to the extent that the FDIC has the money to cover deposit claims
or can come up with it.
The question then is, how secure is the FDIC?
Can the FDIC Go Bankrupt?
In 2009, when the FDIC fund went $8.2 billion in the hole,
ChairwomanSheila Bair assured depositors that their money was protected
by a hefty credit line with the Treasury. But the FDIC is funded with
premiums from its member banks, which had to replenish the fund. The
special assessment required to do it was crippling for the smaller
banks, and that was just to recover $8.2 billion. What happens when
Bank of America or JPMorganChase, which have commingled their massive
derivatives casinos with their depositary arms, is propelled into
bankruptcy by a major derivatives fiasco? These two banks both have
deposits exceeding $1 trillion, and they both have derivatives books
with notional values exceeding the GDP of the world.
Bank of America Corporation moved its trillions in derivatives
(mostly credit default swaps) from its Merrill Lynch unit to its banking
subsidiary in 2011. It did not get regulatory approval but just acted
at the request of frightened counterparties, following a downgrade by
Moody’s. The FDIC opposed the move, reportedly protesting that the FDIC
would be subjected to the risk of becoming insolvent if BofA were to
file for bankruptcy. But the Federal Reserve favored the move, in order
to give relief to the bank holding company. (Proof positive, says former
regulator Bill Black, that the Fed is working for the banks and not for
us. “Any competent regulator would have said: ‘No, Hell NO!’”)
The reason this risky move would subject the FDIC to insolvency, as
explained in my earlier article here, is that under the Bankruptcy
Reform Act of 2005, derivatives counter-parties are given preference
over all other creditors and customers of the bankrupt financial
institution, including FDIC insured depositors. Normally, the FDIC would
have the powers as trustee in receivership to protect the failed bank’s
collateral for payments made to depositors. But the FDIC’s powers are
overridden by the special status of derivatives. (Remember MF Global?
The reason its customers lost their segregated customer funds to the
derivatives claimants was that derivatives have super-priority in
The FDIC has only about $25 billion in its deposit insurance fund,
which is mandated by law to keep a balance equivalent to only 1.15
percent of insured deposits. And the Dodd-Frank Act (Section 716) now
bans taxpayer bailouts of most speculative derivatives activities.
Drawing on the FDIC’s credit line with the Treasury to cover a BofA or
JPMorgan derivatives bust would be the equivalent of a taxpayer bailout,
at least if the money were not paid back; and imposing that burden on
the FDIC’s member banks is something they can ill afford.
BofA is not the only bank threatening to wipe out the federal deposit
insurance funds that most countries have. According to Willem Buiter,
chief economist at Citigroup, most EU banks are zombies. And that
explains the impetus for the new “bail in” policies, which put the
burden instead on the unsecured creditors, including the depositors.
Below is some additional corroborating research on these new,
game-changing bail-in schemes.
An interesting series of commentaries starts with one on the website
of Sprott Asset Management Inc. titled “Caveat Depositor,” in which Eric
Sprott and Shree Kargutkar note that the US, UK, EU, and Canada have
all built the new “bail in” template to avoid imposing risk on their
governments and taxpayers. They write:
[M]ost depositors naively assume that their deposits are 100% safe in
their banks and trust them to safeguard their savings. Under the new
“template” all lenders (including depositors) to the bank can be forced
to “bail in” their respective banks.
Dave of Denver then followed up on the Sprott commentary in an April 3
entry on his blog The Golden Truth, in which he pointed out that the
new template has long been agreed to by the G20 countries:
Because the use of taxpayer-funded bailouts would likely no longer be
tolerated by the public, a new bank rescue plan was needed. As it
turns out, this new “bail-in” model is based on an agreement that was
the result of a bank bail-out model that was drafted by a sub-committee
of the BIS (Bank for International Settlement) and endorsed at a G20
summit in 2011. For those of you who don’t know, the BIS is the global
“Central Bank” of Central Banks. As such it is the world’s most powerful
The links are in Dave’s April 1 article, which states:
The new approach has been agreed at the highest levels . . . It has
been a topic under consideration since the publication by the Financial
Stability Board (a BIS committee) of a paper, Key Attributes of
Effective Resolution Regimes for Financial Institutions in October 2011,
which was endorsed at the Cannes G20 summit the following month. This
was followed by a consultative document in November 2012, Recovery and
Resolution Planning: Making the Key Attributes Requirements Operational.
Dave goes on:
[W]hat is commonly referred to as a “bail-in” in Cyprus is actually a
global bank rescue model that was derived and ratified nearly two years
ago. . . . [B]ank deposits in excess of Government insured amount in
any bank in any country will be treated like unsecured debt if the bank
goes belly-up and is restructured in some form.
Jesse at Jesse’s Café Americain then picked up the thread and pointed
out that it is not just direct deposits that are at risk. The
too-big-to-fail banks have commingled accounts in a web of debt that
spreads globally. Stock brokerages keep their money market funds in
overnight sweeps in TBTF banks, and many credit unions do their banking
at large TBTF correspondent banks:
You say you have money in a pension fund and an IRA at XYZ bank?
Oops, it is really on deposit in you-know-who’s bank. You say you have
money in a brokerage account? Oops, it is really being held overnight in
their TBTF bank. Remember MF Global? Who can say how far the
entanglements go? The current financial system and market structure is
crazy with hidden risk, insider dealings, control frauds, and subtle
Also at Risk: Pension Funds and Public Revenues
William Buiter, writing in the UK Financial Times in March 2009,
defended the bail-in approach as better than the alternative. But he
acknowledged that the “unsecured creditors” who would take the hit were
chiefly “pensioners drawing their pensions from pension funds heavily
invested in unsecured bank debt and owners of insurance policies with
insurance companies holding unsecured bank debt,” and that these
unsecured creditors “would suffer a large decline in financial wealth
and disposable income that would cause them to cut back sharply on
The deposits of U.S. pension funds are well over the insured limit of
$250,000. They will get raided just as the pension funds did in
Cyprus, and so will the insurance companies. Who else?
Most state and local governments also keep far more on deposit than
$250,000, and they keep these revenues largely in TBTF banks. Community
banks are not large enough to service the complicated banking needs of
governments, and they are unwilling or unable to come up with the
collateral that is required to secure public funds over the $250,000
The question is, how secure are the public funds in the TBTF banks?
Like the depositors who think FDIC insurance protects them, public
officials assume their funds are protected by the collateral posted by
their depository banks. But the collateral is liable to be long gone in a
major derivatives bust, since derivatives claimants have super-priority
in bankruptcy over every other claim, secured or unsecured, including
those of state and local governments.
The Cyprus Wakeup Call
Robert Teitelbaum wrote in a May 2011 article titled “The Case Against Favored Treatment of Derivatives”:
. . . Dodd-Frank did not touch favored status [of derivatives] and
despite all the sound and fury, . . . there are very few signs from
either party that anyone with any clout is suddenly about to revisit
that decision and simplify bankruptcy treatment. Why? Because for all
its relative straightforwardness compared to more difficult fixes,
derivatives remains a mysterious black box to most Americans . . . .
[A]s the sense of urgency to reform passes . . . we return to a
situation of technical interest to only a few, most of whom have their
own particular self-interest in mind.
But that was in 2011, before the Cyprus alarm bells went off. It is
time to pry open the black box, get educated, and get organized. Here
are three things that need to be done for starters:
* Protect depositor funds from derivative raids by repealing the super-priority status of derivatives.
* Separate depository banking from investment banking by repealing the
Commodity Futures Modernization Act of 2000 and reinstating the
* Protect both public and private revenues by establishing a network of
publicly-owned banks, on the model of the Bank of North Dakota.
For more information on the public bank option, see here. Learn more
at the Public Banking Institute conference June 2-4 in San Rafael,
California, featuring Matt Taibbi, Birgitta Jonsdottir, Gar Alperovitz
ELLEN BROWN is an attorney and president of the Public Banking
Institute. In Web of Debt, her latest of eleven books, she shows how a
private banking oligarchy has usurped the power to create money from the
people themselves, and how we the people can get it back. Her websites
are http://WebofDebt.com, http://EllenBrown.com, and http://PublicBankingInstitute.org.
Thanks to: http://nesaraaustralia.com