[Occupymendocino] Ellen Brown's article-The Confiscation scheme planned for US and UK depositors

Fri Jun 14 20:16:01 PDT 2013

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March 28, 2013
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It Can Happen Here
The Confiscation Scheme Planned for US and UK Depositors
by ELLEN BROWN

Confiscating the customer deposits in Cyprus banks, it seems, was not a
one-off, desperate idea of a few Eurozone “troika” officials scrambling to
salvage their balance sheets. A joint paper by the US Federal Deposit
Insurance Corporation and the Bank of England dated December 10, 2012,
shows that these plans have been long in the making; that they originated
with the G20 Financial Stability Board in Basel, Switzerland (discussed
earlier here); and that the result will be to deliver clear title to the
banks of depositor funds.

New Zealand has a similar directive, discussed in my last article here,
indicating that this isn’t just an emergency measure for troubled Eurozone
countries. New Zealand’s Voxy reported on March 19th:

    The National Government [is] pushing a Cyprus-style solution to bank
failure in New Zealand which will see small depositors lose some of
their savings to fund big bank bailouts . . . .

    Open Bank Resolution (OBR) is Finance Minister Bill English’s favoured
option dealing with a major bank failure. If a bank fails under OBR,
all depositors will have their savings reduced overnight to fund the
bank’s bail out.

Can They Do That?

Although few depositors realize it, legally the bank owns the depositor’s
funds as soon as they are put in the bank. Our money becomes the bank’s,
and we become unsecured creditors holding IOUs or promises to pay. (See
here and here.) But until now the bank has been obligated to pay the money
back on demand in the form of cash. Under the FDIC-BOE plan, our IOUs will
be converted into “bank equity.”  The bank will get the money and we will
get stock in the bank. With any luck we may be able to sell the stock to
someone else, but when and at what price? Most people keep a deposit
account so they can have ready cash to pay the bills.

The 15-page FDIC-BOE document is called “Resolving Globally Active,
Systemically Important, Financial Institutions.”  It begins by explaining
that the 2008 banking crisis has made it clear that some other way besides
taxpayer bailouts is needed to maintain “financial stability.” Evidently
anticipating that the next financial collapse will be on a grander scale
than either the taxpayers or Congress is willing to underwrite, the
authors state:

    An efficient path for returning the sound operations of the G-SIFI to
the private sector would be provided by exchanging or converting a
sufficient amount of the unsecured debt from the original creditors of
the failed company [meaning the depositors] into equity [or stock]. In
the U.S., the new equity would become capital in one or more newly
formed operating entities. In the U.K., the same approach could be
used, or the equity could be used to recapitalize the failing
financial company itself—thus, the highest layer of surviving
bailed-in creditors would become the owners of the resolved firm. In
either country, the new equity holders would take on the corresponding
risk of being shareholders in a financial institution.

No exception is indicated for “insured deposits” in the U.S., meaning
those under $250,000, the deposits we thought were protected by FDIC
insurance. This can hardly be an oversight, since it is the FDIC that is
issuing the directive. The FDIC is an insurance company funded by premiums
paid by private banks.  The directive is called a “resolution process,”
defined elsewhere as a plan that “would be triggered in the event of the
failure of an insurer . . . .” The only  mention of “insured deposits” is
in connection with existing UK legislation, which the FDIC-BOE directive
goes on to say is inadequate, implying that it needs to be modified or
overridden.

An Imminent Risk

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
Launch 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 each than 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 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.