… The recent news about Cyprus banks confiscating depositor’s funds sent chills throughout the financial world here and abroad. I couldn’t believe that the plan in Cyprus hinged on the idea that the bank could just steal customer’s funds to balance the bank’s books. I muttered to myself when I read the story that something as crazy as that couldn’t possible happen here in the United States. Unfortunately, I learned that the plan to pull a Cyprus type grab here was already in the works.
“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. ”
The above article explains that most of us do not realize that when you deposit money in a bank, that it becomes the property of the bank and we become unsecured creditors of the bank! “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?”
If I deposit $1,000 dollars in my local bank, I trust that the funds are safe and protected by FDIC insurance and that even if the bank fails, I will get my money back. Under the plan listed above, we may not even be able to fall back on the FDIC insurance coverage. The FDIC-Bank of England plan would supersede our FDIC coverage and we would be relegated to become a “shareholder” in the failing bank or its successor entity. Let me see if I understand this scheme. The bank who is failing due to mismanagement or due to risky investments could steal my funds and force me to accept stock in a company led by poor businessmen with an even poorer business record! If you are brave enough, check out the full FDIC-Bank of England plan here.
Cyprus wasn’t the only place where a bankster grab of deposits was put into place or is being discussed. It is being discussed in New Zealand as well. “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.” NationofChange
To be clear, this joint FDIC-BOE plan would need enabling legislation to be passed before it could become the law of the land. However, the bankruptcy laws have put unsecured creditors, which depositors would be labeled under the plan, lower in seniority to the claims of derivative counterparties which would mean that the very parties who are causing the bank to fail, could collect before the innocent depositors.
“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.” – NationofChange
I’m sticking with my US bank for now. Hopefully there will be signs and time enough if the government is going to raid US bank accounts. Seems very unlikely.