Nel's New Day

April 10, 2013

Stop U.S. Bank ‘Bank Ins’

Economics are one of my weak points. I know just a tiny bit more about this field than sports, about which I know nothing. But with the stock market shooting up like a meteor, the GOP budget plan shooting the majority of individual income in the United States down into the center of the world, I decided to pay attention to this article, “The Wall Street Ticking Time Bomb That Could Blow Up Your Bank Account,” by Ellen Brown.

She definitely got my attention with the describing the “bail in” which took place in the two bankrupt Cyprus banks, especially because all the big monitory control groups okayed this. “Bail out,” much resented by people across the United States, means that the government uses taxpayer money to give all those “too big to fail” banks that gamble away their own capital. “Bail in” means that banks “recapitalize” themselves by taking their creditors’ funds deposited in their banks. It just skips the middle process of getting people’s money from the government. This policy is already in the works for the United Kingdom, Canada, New Zealand, Australia,–and the United States.

Why are banks in trouble? It has to do with derivatives, a word that always confuses me. From what I can understand, the problem with derivatives is that they can change in value from one moment to the next because they are a contract based on assets that change—commodities, bonds, interest rates, etc.

Because derivatives can shift in value from one instant to the next, the Glass-Steagall Act of 1933 tried to prevent another Great Depression by stopping banks from gambling with depositor funds. In 1999 Congress removed that barrier, meaning that banks could take money from savings accounts and gamble them away in the derivative market. The loss of the derivatives goes to the bank; the owner of the contract takes the collateral—i.e., your savings or retirement account.

In 2008, to save the banks—and all the personal accounts in them—the government “loaned” them $700 billion in taxpayer funds. Think what it would take to save the banks now. The FDIC insurance fund, which covers all those bank deposits under $200,000 has only $25 billion. Two banks, JPMorgan and Bank of America, each have over $1 trillion in deposits, and total deposits covered by FDIC insurance are about $9 trillion. Bloomberg stated in November 2011 that Bank of America’s holding company had almost $75 trillion in derivatives, and 71% were held in its depository arm; while J.P. Morgan had $79 trillion in derivatives, and 99% were in its depository arm. The cash calculated to be at risk from derivatives from all sources is at least $12 trillion.

When the FDIC (Federal Deposit Insurance Corporation) runs out of money, Section 716 of the Dodd Frank Act prevents more taxpayer funds bailing out a bank because of a bad derivatives gamble. That means no more $700 billion taxpayer bail outs, moving the banks on to bail ins.

Legally a bank owns our money the second we put in into their bank. We become “unsecured creditors” holding IOUs, promises to pay. Until recently, the bank was obligated to pay our money back on demand.  Four months ago, the FDIC and the Bank of England (BOE) put out a document, “Resolving Globally Active, Systemically Important, Financial Institutions.” Under the FDIC-BOE plan, our IOUs are converted into “bank equity.”  The bank gets the money, and we get stock in the bank. When our IOUs are converted to bank stock, they are no longer subject to insurance protection. Instead, the deposits will be “at risk” and vulnerable to being wiped out. As “unsecured creditors,” depositors are put below interbank claims. The function of the FDIC may have been changed to confiscate deposits to save the big banks.

The only mention of “depositors” in the FDIC-BOE directive as it pertains to U.S. policy is in paragraph 47: “The authorities recognize the need for effective communication to depositors, making it clear that their deposits will be protected.” There is no indication of how the depositors will be protected if the assets are gone. The derivatives claimants are first in line, before the depositors. There is no rescue from taxpayers because Congress stopped that alternative. The FDIC has only $25 billion.

“Secured creditors,” including state and local governments, are also in trouble because many of them keep revenues in Wall Street banks with smaller local banks lacking the capacity to handle such complex business. Although U.S. banks are required to pledge collateral for any deposits of public funds, the derivative claims have super-priority over other claimants, including other secured creditors.

Harvard Law Professor Mark Row maintains that the super-priority status of derivatives needs to be repealed. He writes:

“. . . [D]erivatives counterparties, . . . unlike most other secured creditors, can seize and immediately liquidate collateral, readily net out gains and losses in their dealings with the bankrupt, terminate their contracts with the bankrupt, and keep both preferential eve-of-bankruptcy payments and fraudulent conveyances they obtained from the debtor, all in ways that favor them over the bankrupt’s other creditors.

“. . . [W]hen we subsidize derivatives and similar financial activity via bankruptcy benefits unavailable to other creditors, we get more of the activity than we otherwise would. Repeal would induce these burgeoning financial markets to better recognize the risks of counterparty financial failure, which in turn should dampen the possibility of another AIG-, Bear Stearns-, or Lehman Brothers-style financial meltdown, thereby helping to maintain systemic financial stability.”

In The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences, David Skeel calls the Dodd-Frank policy approach “corporatism”–a partnership between government and corporations. Congress has made no attempt in the legislation to reduce the size of the big banks or to undermine the implicit subsidy provided by the knowledge that they will be bailed out in the event of trouble.

Skeel also blames the Lehman bankruptcy of 2008 on the bankruptcy exemption for derivatives. When the bank seemed to be in trouble, the derivatives owners all made their claims, causing a run on the collateral before it ran out. According to Skeel, the problem could be resolved by eliminating the derivatives exemption from the stay of proceedings that a bankruptcy court applies to other contracts to prevent this sort of run.

Other ways to block the Wall Street asset grab:

  • Restore the Glass-Steagall Act separating depository banking from investment banking. (H.R. 129)
  • Break up the giant derivatives banks.  (Bernie Sanders’ “too big to jail” legislation)
  • Nationalize the “too big too fail” banks as recommended in the New York Times. (Gar Alperovitz)
  • Make derivatives illegal, as they were between 1936 and 1982 under the Commodities Exchange Act. They can be unwound by simply netting them out, declaring them null and void.  As noted by Paul Craig Roberts, “the only major effect of closing out or netting all the swaps (mostly over-the-counter contracts between counter-parties) would be to take $230 trillion of leveraged risk out of the financial system.”
  • Support the Harkin-Whitehouse bill to impose a financial transactions tax on Wall Street trading.  Among other uses, a tax on all trades might supplement the FDIC insurance fund to cover another derivatives disaster.
  • Establish postal savings banks as government-guaranteed depositories for individual savings. Many countries have public savings banks, which became particularly popular after savings in private banks were wiped out in the banking crisis of the late 1990s.
  • Establish publicly-owned banks to be depositories of public monies, following the lead of North Dakota, the only state to completely escape the 2008 banking crisis. North Dakota does not keep its revenues in Wall Street banks but deposits them, by law, in the state-owned Bank of North Dakota.  The bank has a mandate to serve the public, and it does not gamble in derivatives.

The Volcker Rule, part of the Dodd Frank Act that keeps banks from making some speculative investments, doesn’t go into effect for over a year. U.S. banks are fighting it, lobbyists are trying to postpone the date, and there may not be enough money to monitor it.

If you think that banks are responsible entities, think about the way that Jamie Dimon misled investors and regulators to lose over $6 billion for JP Morgan Chase. According to Sen. Carl Levin (D-MI) regarding the Senate investigation into Dimon, JP Morgan had “a trading operation that piled on risk, ignored limits on risk taking, hid losses, dodged oversight and misinformed the public.”

Google the subject of “bail-in,” and you’ll find a pile of articles that indicate there is no problem about people in the United States losing their bank deposits. That’s what the banks said during the Great Depression right before they permanently closed their doors.

This morning my partner and I talked about when the next Wall Street financial disaster would occur. I’m guessing that it will be in a little over a year—just in time for the GOP to blame the Democrats on Wall Street problems in order to get votes. Now might be the time to stop worrying about the national budget and think about what happens if we lose their bank deposits.

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