Think your federally insured bank deposits are safe? Think again.
The geniuses that are supposed to be protecting your money have dreamed up a scary idea to use your money to help fund the next bailout.
This is not some paranoid conspiracy theory.
In December, the U.S. Federal Deposit Insurance Corp. (which is supposed to insure your money in the bank) and the Bank of England proposed using your bank deposits to defray the costs of rescuing a too big to fail bank when it gets in trouble. Wall Street hates the term “bailout,” so they’ve came up with a more innocuous term: “resolution.” The report, “Resolving Globally Active, Systematically Important Financial Institutions,” is linked here.
“In all likelihood [in a bank collapse],” the report’s authors write, “shareholders would lose all value and unsecured creditors [including depositors] should thus expect that their claims would be written down to reflect any losses that shareholders did not cover.”
People who trusted the bank and put their money there would not get their money back under this proposal. Instead their deposits would be turned into shares in the newly resuscitated bank.
A version of this already happened as a result of the Cyprus financial crisis. Now FDIC/BOE have proposed a similar approach for the U.S. and England the next time the big bankers fail.
Inside the Washington-Wall Street bubble, that’s not an “if.” It’s a “when.”
This latest proposal is what passes for smart thinking inside the bubble, untroubled by the bad banker behavior it enables or any concern for the public outrage simmering outside.
The proposal stems from a fact that surprised me when I learned it: when you put your money in the bank, you no longer own it; the bank does. It becomes the banks’ asset, which it promises to give you back under certain conditions. In legal terms, the depositor becomes an “unsecured creditor” of the bank. Under the terms of the FDIC/BOE joint December 2012 proposal, the unsecured creditors’ money could be used to offset the costs of resuscitating a bank that the geniuses in Washington and Wall Street determine is too big to fail.
The bankers and their faux regulators are in the hunt for new source of bailout fund because, under Section 716 of the Dodd-Frank law passed in the aftermath of the 2008 meltdown, they can’t use taxpayer funds the next time the $230 trillion derivatives market tanks.
Derivatives, you will recall, are those pieces of paper, unconnected to any physical assets, that created the house of cards that collapsed back in 2008 because nobody could figure out what the derivatives were worth.
Why not just let banks that engage in derivatives speculations and lose fold? The firms’ executives, bondholders and investors would get hurt. And we can’t let that happen, of course.
So they want to “resolve” a bank’s excessive risk-taking with our money.
In Cyprus, only the wealthiest’s deposits were seized. The FDIC is supposed to insure individual depositors’ account up to $250,000 per depositor per account. But under the FDIC/BOE proposal, even accounts of $250,000 or less could be seized by the failing bank and converted to stock as part of a bailout scheme.
Meanwhile, what about the purchasers of those risky derivatives, which the banks are still trafficking in more than ever? They would fare better than lowly depositors because they are treated as “secured creditors,” under a little-noticed provision that the bankers’ lobbyists had inserted into a 2005 rewrite of U.S. bankruptcy law.
I’ve been surprised by how little attention this proposal has gotten. It’s been covered mainly by Ellen Brown, a longtime critic of the banking sector and the government’s failure to regulate it. Certainly a major reason for the paucity of mainstream coverage is the lack of transparency around the regulation of banking institutions, and the media’s failure to push back against that. The big media, with few exceptions, has largely bought the narrative that the Obama administration has been selling, which is that the Dodd-Frank financial reform law successfully reined in banks and solved the TBTF issue, and that we have left the bad old days of financial collapses and bailouts behind us.
Nothing could be further from the reality, as the FDIC/BOE proposal makes clear. The banks continue to engage in risky derivatives gambling, resist any efforts to get them to stop, and enlist their allies at the Fed and other faux regulators to find someone else to absorb the costs of their own inevitable gambling losses.
Much of the regulations that would implement Dodd-Frank are being watered down behind closed doors, where the public is locked out and bank lobbyists have easy access to apply relentless pressure.
Even after multiple foreclosure fraud scandals, the LIBOR interest-rate fixing scandal, and the J.P. Morgan London Whale derivatives trade scandal, the media is more interested in touting the revival of the merger and acquisitions market than doing skeptical reporting on big banks and regulators.
Another reason that the reality gets lost is that it doesn’t fit neatly into the Republican-Democrat frame through which most of the media sees all policy. While Democrats at least rhetorically favor regulation and Republicans blame government for all the banks’ problems, beyond a little political stagecraft the two parties have collaborated smoothly to continue to bury the issue and let the bankers off the hook. This gives members of both parties a wide berth to keep raising campaign money from the bankers, and their congressional staffers a pathway unobstructed by any unpleasantness on their way to lucrative employment on Wall Street when they want to cash in.
This FDIC/BOE proposal is just the latest example of the government regulators protecting the bankers’ interests and throwing the rest of us to the wolves. That’s not what a majority of Americans want, obviously. According to this Rasmussen poll, 50 percent of all Americans favor breaking up the big banks so they don’t pose such a threat to our financial future, and can’t continue to dominate our political landscape. Only 23 percent oppose such a breakup.
Sen. Bernie Sanders, the independent socialist from Vermont, has introduced legislation to break up the banks. Rep. Brad Sherman, a Democratic legislator from Los Angeles, has said he will introduce companion legislation in the House.
Breaking up the banks is critical, but its only the first step. We need the re-imposition of a modern-day version of the Glass-Steagall Act, the Depression-era law that barred banks from mixing in other financial businesses that place depositors’ money at risk. Its repeal in 1999 led directly to the 2008 meltdown.
In the updated Glass-Steagall, federally insured banks should be barred from gambling in derivatives or other complicated investments.
Meanwhile, we need full public hearings on the FDIC/BOE proposal, and any other proposals regulators are considering about how to pay for future bailouts that involves taxpayers or consumers.
Contact your senator and representative and demand an end to big banks and publicly insured bank gambling. This FDIC/BOE proposal is a grim reminder of what we get when we’re left out of the political process, and we leave our financial system in the hands of the politicians, the experts and the bankers.