DHS Has Reportedly Told Banks that It Has Authority To Seize The Contents Of Safety Deposit Boxes Without A Warrant When Its A Matter Of “National Security”, Which A Major Bank Crisis No Doubt Will Be.
Sunday, March 31, 2013 10:33
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 Launched 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.
One might wonder why the posting of collateral by a
derivative counterparty, at some percentage of full exposure, makes the
creditor “secured,” while the depositor who puts up 100 cents on the
dollar is “unsecured.” But moving on – Smith writes:
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.
Its “depositary” is the arm of the bank that takes
deposits; and at B of A, that means lots and lots of deposits. The
deposits are now subject to being wiped out by a major derivatives loss.
How bad could that be? Smith quotes Bloomberg:
. . . 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.
$75 trillion and $79 trillion in derivatives! These two mega-banks alone hold more in notional derivatives eachthan
the entire global GDP (at $70 trillion). The “notional value” of
derivatives is not the same as cash at risk, but according to a cross-post on Smith’s site:
By at least one estimate, in 2010 there was a total of $12 trillion in cash tied up (at risk) in derivatives . . . .
$12 trillion is close to the US GDP. Smith goes on:
. . . 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.
Perhaps, but Congress has already been burned and is
liable to balk a second time. Section 716 of the Dodd-Frank Act
specifically prohibits public support for speculative derivatives
activities. And in the Eurozone, while the European Stability Mechanism
committed Eurozone countries to bail out failed banks, they are
apparently having second thoughts there as well. On March 25th,
Dutch Finance Minister Jeroen Dijsselbloem, who played a leading role
in imposing the deposit confiscation plan on Cyprus, told reporters that
it would be the template for any future bank bailouts, and that “the aim is for the ESM never to have to be used.”
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.
On whether depositors could indeed be forced to become equity holders, Salmon commented:
It’s worth remembering that depositors are unsecured creditors of any bank; usually, indeed, they’re by far the largest class of unsecured creditors.
President Obama acknowledged that bank nationalization
had worked in Sweden, and that the course pursued by the US Fed had not
worked in Japan, which wound up instead in a “lost decade.” But Obama
opted for the Japanese approach because, according to Ed Harrison, “Americans will not tolerate nationalization.”
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.
Ellen Brown is an attorney, chairman of the Public Banking Institute, and the author of eleven books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Her websites are webofdebt.com and ellenbrown.com. For details of the June 2013 Public Banking Institute conference in San Rafael, California, see here.
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