It’s Official: The Worldwide Bail-ins Are Coming

From Mark Nestmann, Nestmann.com

In case you missed the announcement, Cyprus-style bail-ins are coming to a bank near you.

On November 16, leaders of the G20 Group of Nations – the 20 largest economies – made an important decision. The world’s megabanks now have official permission to pledge depositor accounts as collateral to make leveraged derivative bets. And if they lose a bet, the counterparty to the contract has first dibs on your money.

The governments of these 20 countries are now supposed to put these arrangements into law. Most, including the US, have already done so.

You could be forgiven for not paying much attention to the G20 meeting, because it was mostly “more of the same” – the latest plan to have central banks inject trillions more dollars into the global economy.

But the G20 also endorsed a proposal with a mind-numbingly tedious title: Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution. Not exactly a page-turner. Your average American is more likely to watch Chicago Fire than to delve into the minutiae of the global financial system.

But this proposal profoundly changes the rules for banking globally, and not in a good way. Deposits in banks that are “too big to fail” will be “promptly recapitalized” with their “unsecured debt.” This avoids those nasty taxpayer-funded bailouts that proved so politically unpopular during the 2008-2009 financial crisis.

And the largest chunk of unsecured debt is your bank deposits. Insolvent banks will recapitalize themselves by converting your deposits – checking accounts, but also money market accounts and CDs – into stock.

Thus, when you deposit money in a bank, you’re taking the same risk as someone buying a stock. Or, for that matter, betting on a horse named “Falling Star” at the local racetrack. Because, in effect, that’s what banks are doing with your money.

The G20 has also officially declared that derivatives – the toxic contracts Warren Buffett calls “financial weapons of mass destruction” – are secured debts. Since your bank deposits are now only unsecured debt that the bank has pledged to a secured creditor, guess who gets your money if the bet goes the wrong way for the bank? Answer: It’s not you.

Heads, the bank wins. Tails, you lose.

Fortunately, “insured deposits” won’t be subject to this treatment. In the US, 100% of deposits in insured banks are protected up to $250,000 per depositor, courtesy of federal deposit insurance. But it’s hardly reassuring that this fund has a reserve ratio under 1%. For every $100 on deposit, the FDIC has less than one dollar to back it with.

This is still a lot of money – $54 billion at the end of September. But it’s dwarfed by $6 trillion in insured deposits, not to mention derivatives contracts with a total value of nearly $300 trillion. Indeed, the failure of just a single major Wall Street bank could exhaust the fund.

Federal law authorizes borrowing from the US Treasury to make up the shortfall, but when a banking crisis hits, it’s not likely to occur in a vacuum, as I described in this essay. Lots of other people will be demanding a handout, many of them with stronger political connections than you or I could ever hope to muster.

How bad could it get? Well, under the scenario the G20 just blessed, uninsured bank depositors would be even worse off than account-holders in the government-owned banks in Cyprus that became insolvent in 2013. Their claims were considered superior to those of derivative counterparties. Some uninsured depositors got almost half of their money back (although at one government-owned bank, they got nothing).

A more apt example would be Lehman Brothers. When it declared bankruptcy in 2008, unsecured creditors got about 21 cents on the dollar.

You might be wondering why the G20 made this decision. The obvious incentive is to avoid politically unpopular bailouts of megabanks that are “too big to fail.”

But there’s a less obvious reason as well. The G20 hopes that you’ll invest in government bonds backed by the “full faith and credit” of its member governments. That will have the effect of keeping down interest rates on the alarmingly high debt carried by almost every G20 member.

How can you protect yourself?

The most important precaution is to minimize your exposure to the banking system. Keep bank deposits well below the deposit insurance maximums. Accumulate physical currency, precious metals, and other “real assets.”

Diversifying your investments internationally also makes sense, but because bail-ins have now gone global, it’s no longer as simple as just opening an account outside the US or whatever other country you live in. Use only strong, well-capitalized banks to hold the funds you keep in the banking system. Look for banks with as high a level of “Tier 1” liquidity as possible – 25% at the minimum. (By comparison, the minimum required in the US is only 6% to be classified as “Well-Capitalized.”) If you have at least $500,000 or so to spare, open an account with an offshore private bank that has no commercial lending or derivatives exposure.

I don’t know when the next global financial crisis will hit. But when it does, I do know who will pay for it. And it won’t be the bankers or the financial geniuses who designed the “financial weapons of mass destruction” that led to their downfall.

Get your assets out of the “too big to fail” banks – now. It’s only a matter of time before the SHTF.

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Bea Lever
Bea Lever

Between my corporation, my LLC and my personal tax returns, I lost count how many checks I’ve signed in the last few days. THERE IS NOTHING LEFT to bail into. Good luck you fucking banksters, you can’t squeeze blood out of a turnip!!!!!!!!!!! Blow me.

Victor
Victor

The Court has already determined that what you think of as your own money in your bank account is not, in fact, your own money. It belongs to the bank, you loaned it to them when you deposited it and you are now in the status of a creditor to that bank.

If a bank goes belly up or reorganizes under one of the bankruptcy laws, you occupy the same status as any other creditor such as the janitorial company that is owed for services and your place in the payment line is that of an unsecured creditor the same as that janitorial company. You will receive a percentage of what is owed you from what remains of their liquidated assets after their secured debt is paid off ahead of you.

FDIC insurance notwithstanding, the bank itself has no outright obligation to protect or secure your deposits or to return them to you unless it chooses to. In effect it is their money, not yours. If you have any claim, it is against FDIC insurance not the bank.

Bea Lever
Bea Lever

Victor

That is the reason banks moved their depositors to interest paying accounts so legally you ARE their creditor and that is their money in your account. The $1.19 interest they pay you each month makes it all legal and ready for the bail-ins.

DC Sunsets

There are places (often suburban) where the only banks available are the TBTF variety.

Talk about bank deserts.

Short of sitting on a pile of gold coins (which will plunge in dollar value should the credit bubble truly burst because the $/oz price depends on the availability of $ to bid, which in a credit collapse will be absent) or a pile of Federal Reserve Notes (not my idea of fun, too much risk and money “smells” if you have a wad of it), one has to use a bank at least somewhat. Every brokerage, every IRA custodian and other financial firm uses one or more banks, usually one of the TBTF vampires.

My hope is that the TBTF banks will be the first to pull an MF Global. Hopefully the tallest pygmies in the tribe, the few “A” rated banks in the US, will hold on long enough for me to decide what to do with my meager, but important-to-me life’s savings.

TheStreet.com used to offer free access to what was once Weiss Ratings (of banks and credit unions.) I couldn’t find it the last time I looked, but that’s the data (stale, admittedly) I’m going from.

The war on cash seeks to keep everyone’s value captive in the system.

For the record, this is a version of what Argentina’s government did prior to seizing everyone’s bank accounts and retirement savings, only in that case the banks were paying astronomical interest returns on US$-denominated accounts. When the government acted, it prevented anyone from withdrawing their US$ and then converted those dollar accounts to peso accounts (at an exchange rate that robbed depositors blind.) Even after that, people were only allowed to withdraw minimal amounts from their own accounts for quite a long time, years if I recall correctly.

I’m not sure what will happen here, because if people can’t pay their loan payments, the collapse of the IOUs (debts, mortgages and bonds) will actually amplify the collapse in credit and destroy the money supply even faster.

No roads lead to success…all roads lead to one form of chaos or another.

DC Sunsets

I stand corrected. Weiss Ratings is still openly available at thestreet.com

http://www.thestreet.com/bank-safety/index.html

While a crisis may cause the gov’t to treat all banks the same (and ratings won’t matter), there’s also the chance that well-run and “better” capitalized banks may survive, or at least survive longer, giving you a choice of what to do.

No one knows the future, but I am trying to mostly deal with A-, A and A+ rated banks in my state.

At the very least, try to avoid any business with the Vampires. No sense adding any more than you have to to their bottom lines.

AC
AC

Next up: The FDIC reduces the insured deposit amount to $5000.00 and the banks begin to collapse like a line of standing dominoes?

Anonymous
Anonymous

dc.sunsets,

The credit bubble and the Federal Reserve Note are actually the same thing, however the “price” of gold and the value of gold are not.

If you’re into the paper money (credit FRN stuff) then an inflationary collapse of the dollar would mean more dollars to pay off debt which would remain numerically the same while a (deflationary) revaluation (say, a 2 to 1 reduction in the number of dollars available, you trade two old dollars for one new dollar) would do the opposite since the numerical obligation of your debt would remain the same. This has been done before in an inflationary cycle when we went from first gold and silver dollars to silver only dollars then later on from silver dollars to paper dollars.

If you are not in the debt/credit game, the value -purchasing power- of gold and other PM’s would remain roughly the same. Metals sometimes make short term gains or take short term losses but longer term the value of them remains fairly constant. An ounce of gold or silver remains an ounce of gold or silver, a Roman gold Denarius from 211 BC will buy about as much in comparable real goods or labor today as it did then.

The Weimar is a classic example of this process, but Argentina 1998 – 2002 and its aftermath is a more modern and probably more applicable one. You could also look at the Mexican Peso crisis of ’94 (FWIW, in 1937 a common Mexican 50 Peso coin contained 1.2 ounces of gold making it worth around 25 American dollars at the time, today it worth -if purchased as a gold bullion since it is no longer used as money- around 1,450 dollars).

Westcoaster
Westcoaster

Two words: “Credit Union”

Hollow man
Hollow man

Those fuckers

Rise Up
Rise Up

Good luck with FDIC insurance…if multiple banks fail, there isn’t enough to go around.

The insurance-to-deposit ratio is $25 billion:$9283 billion.

“The $25 billion in touted deposit insurance is supposed to preserve and protect (granted not in their entirety) some $9,283 billion in total US deposits.”

http://www.zerohedge.com/news/2013-03-19/us-deposits-perspective-25-billion-insurance-9283-billion-deposits-297514-billion-de

Stanley
Stanley

This is also worth noting too:

Bank Deposits No Longer Guaranteed By Austrian Government

09 April 2015

– Austria will remove state guarantee of bank deposits
– Austrian deposit plan given go ahead by the EU
– Banks to pay into a deposit insurance fund over 10 years
– Fund will then be valued at a grossly inadequate €1.5 billion
– New bail-in legislation agreed by EU two years ago
– Depositors need to realise increasing risks and act accordingly
– “Bail-ins are now the rule” and ‘Bail-in regime’ coming

Bank deposits in Austria will no longer enjoy state protection and a state guarantee in the event of bank runs and a bank collapse when legislation is enacted in July. The plan to ensure that the state is no longer responsible for insuring deposits has been readied by the Austrian government in conjunction with the EU two years ago according to Die Presse.

http://www.goldcore.com/us/gold-blog/bank-deposits-no-longer-guaranteed-by-austrian-government/

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