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.

April 2, 2013

Conservatives’ Misplaced Idea of Immorality

Democrats cast the majority of votes for both chambers in Congress last year and for the United States president, yet the first three months of this year have shown the conservatives pushing even harder to ban abortions, reduce access to contraception, close down women’s clinics including Planned Parenthood, and stop marriage equality. With loss of money from  sequester devastating programs across the country, Rep. Randy Hultgren (R-IL) wants one-half billion dollars to teach teenagers that that they shouldn’t get pregnant despite studies that show comprehensive sex education decreases the rates of teen pregnancy and STDs.

For the first time in his 18 years of teaching, Tim McDaniel received a complaint about using the word “vagina” in his tenth-grade biology classes during his lesson on the human reproductive system.

These ongoing actions by conservatives supposedly come from their sense of morality, to control people in their private lives and force them to live the way that conservatives think they should. At the same time, the conservatives’ outrage at immorality doesn’t extend to the real problem in the United States, the “crisis of public morality,” as Robert Reich describes the way that this nation is suffering from the worst economic inequality in almost a century.

The percentage of income in the hands of the top 10 percent remained fairly static for the first three decades after World War II, but President Reagan’s policies started the meteoric rise obvious in this chart during the past 30+ years. The percentage moved down during President Clinton’s second term, but another GOP president started another increase so that the top 10 percent holds 50 percent more of the nation’s income than they did over a half century ago.

top 10%

Immoral behavior that conservatives ignore is billionaires buying democracy and bankers controlling the nation’s economy. The far-right group Citizens United convinced a majority of the Supreme Court justices that corporations are really “people,” and much of the $12-billion expenditures for the 2012 election campaigns came from corporations and the uber-wealthy like Koch brothers and Sheldon Adelson who want conservatives who will provide lower taxes, weaker trade unions, and no regulations.

Corporations and banks are using the money that they get interest-free from the government to make their money through proprietary trading, derivative securities, and other areas that most people don’t, because they don’t have enough money to invest. Banks aren’t making loans because interest is too low; they prefer to gamble in other areas instead. So the government gives them money at nothing—that’s federal funds effect rate—to lend to people, which they don’t do. If they lose their money, they can always get subsidies from the taxpayers who can’t get mortgages and other loans.

There is no outrage from the supposedly moral conservatives about the revelation that JPMorganChase, the nation’s biggest bank and “too large to fail” and probably “too large to jail,” lied to shareholders and the public about its $6 billion gambling losses in 2012. This is the corporation who, along with many others, paid big bucks to get rid of the Dodd-Frank Act, succeeded in watering it down, and kept it from having a director for years.

Corporations showed their success last month with a bipartisan vote in the House Agriculture Committee to further weaken Dodd-Frank. The bill to move onto the House floor extends exemptions and lets banks (including, of course, JPMorganChase), that do their derivative trading outside the U.S. to just ignore the laws intended to protect the public. The only greater success would be the total repeal of the Dodd-Frank Act, which is what the conservatives are aiming toward.

Despite their immoral behavior, no major Wall Street executives have yet been held accountable for the wild gambling that led to the near meltdown in 2008. The people who did not prosecute any of them are now profiting from their actions. There is no “morality brigade” to fight the dishonest actions that destroyed savings, retirement accounts, jobs, and salaries.

United States’ banks get help from other countries to bilk the public. The fraud discovered in London with fraudulently-reported interest rates for London Interbank Offered Rate (LIBOR) for more than two decades bled over to U.S. banks that use LIBOR in their derivatives market, causing massive losses.

When 22 plaintiffs, including the City of Baltimore, sued 16 banks for rigging global benchmark interest rates affecting over $550 trillion, they lost. Judge Naomi Reice Buchwald (U.S. District Court in Manhattan) dismissed a “substantial portion” including federal antitrust claims, racketeering, and state-law claims as well as partially dismissing commodities manipulation claims.

One senator with a sense of morals might make a difference. When Massachusetts voters had their choice between Cosmopolitan model Scott Brown and Elizabeth Warren, they picked the person who could help the country, despite Brown’s personal attacks against her. Now Sen. Warren is working to make the banks just a little more honest.

About one of these, HSBC, which recently settled money laundering charges by paying $1.9 billion, Warren said:

“If you’re caught with an ounce of cocaine, the chances are good you’re gonna go to jail. If it happens repeatedly, you may go to jail for the rest of your life. But evidently if you launder nearly a billion dollars for drug cartels and violate our international sanctions, your company pays a fine and you go home and sleep in your bed at night.”

Warren also went after Federal Reserve Chairman Ben Bernanke concerning a Bloomberg report showing that big banks average an $83 billion subsidy from the government to guard them from insolvency. Once again, “too big to fail.”  Her next target was Attorney General Eric Holder after he admitted his hesitancy in prosecuting these same banks.

She has help from Sen. Bernie Sanders (I-VT). Sanders wrote:

“The 10 largest banks in the United States are bigger today than they were before a taxpayer bailout following the 2008 financial crisis. U.S. banks have become so big that the six largest financial institutions in this country (J.P. Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley) today have assets of nearly $9.6 trillion, a figure equal to about two-thirds of the nation’s gross domestic product. These six financial institutions issue more than two-thirds of all credit cards, over half of all mortgages, control 95 percent of all derivatives held in financial institutions, and hold more than 40 percent of all bank deposits in the United States.”

Sanders plans to introduce tough new legislation intended to break up the country’s “too-big-to-fail” banks. It would give Treasury Secretary Jacob Lew 90 days to make a list of financial institutions–banks, hedge funds and insurance companies–that he believes are “too big to fail” and one year to break up all of the financial institutions on the list.

His proposed legislation has a few supporters from the banking world: Dallas Federal Reserve Bank President Richard Fisher, Federal Reserve Bank of St. Louis President James Bullard, and Former Kansas City Federal Reserve President Thomas Hoenig.

If you also find the banking situation immoral, you can sign a petition to the Treasury secretary. And ask a Republican why they won’t fight immorality on Wall Street.


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