It Can Happen Here: The Confiscation Scheme Planned for US and UK Depositors

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, chairman of the Public Banking Institute, and the author of eleven books, including Web of Debt: The Shocking Truth About Our Money System and How We Can Break Free. Her websites are webofdebt.com and ellenbrown.com. For details of the June 2013 Public Banking Institute conference in San Rafael, California, see here

20 comments on “It Can Happen Here: The Confiscation Scheme Planned for US and UK Depositors
  1. Kim Briggs says:

    I read the CSS specification from W3C, because I am just that much of a geek. Go to my ‘Contact’ link if you want me to look at your style thingy. Pretty sweet without the ads tho…

  2. Jayme says:

    The state banks are a good idea. I’d like to see more movement in that direction.

  3. Robespierre says:

    And naturally all the big fortunes will have already fled just before the confiscation happens like in Cyprus. By the way Max and Stacey I find that the media is about as silent as a tomb about what is going on presently in Spain, Italy, Portugal and Ireland. Have the stupid inhabitants of these countries undestood finally that they should not keep their money at the bank or they are that stupid ? :)

  4. Robespierre says:

    Official media blackout about Spain, Italy, Portugal and Ireland. No domino effect going on ?

  5. ???? says:

    I simply refuse to go on banking holiday with Jamie Dimon or Lloyd Blankfein, as I am kind of use to having a little bit of money. All the cash is invested in precious metals, and if confiscation is announced by the government, my goodies are going to stashed away in a safe location – and the GPS location will be written somewhere.

    If you choose to have your money in BitCoin, make sure you open an account in another part of the world, such as Singapore or Hong Kong. I could imagine a scenario, when money is returned from BitCoin, it could be taxed as soon as the money is deposited in your account. For example the bank I use, the data is stored for several years.

  6. chiller says:

    Makes it kind of obvious why our guberment is preparing for civil war here. It usually angers people when they are robbed by the traitors who swore to protect them.

  7. febo says:

    The slog says “In the last 24 hours I have spoken with twenty or more opinion leaders in investment, banking and currency controls. There was a unanimity among those people that the entire eurozone will have blanket currency controls within two months at the latest…”
    The latest article says there may be capital controls this weekend.
    “All computer & program updates are cancelled this weekend as they are semi-anticipating mayhem next week in the markets and cannot risk having any maintenance work running over.”
    http://hat4uk.wordpress.com/

  8. Max Power says:

    Interest.co.nz does have a few words on this :

    Labour’s David Parker says if it’s good enough for big investors to have security for covered bonds, then ordinary depositors also deserve a guarantee

    http://www.interest.co.nz/personal-finance/63672/labours-david-parker-says-if-its-good-enough-big-investors-have-security-cove

    If “the big end of town” has protection for money it lends to banks through covered bonds, then ordinary depositors also ought to have some protection, Labour Party Finance spokesman David Parker says.

    Parker yesterday said a Labour-led Government would ensure the first NZ$30,000 of all bank deposits would be protected, and not subject to a haircut in the event of a bank failure.

    According to Reserve Bank figures, there was a little under NZ$110 billion sitting in term deposits as of January. And as of the end of 2012, New Zealanders had total deposits with banks of just under NZ$115.2 billion.

    Asked by interest.co.nz how Labour came up with the NZ$30,000 figure, Parker acknowledged it was arbitrary, as any figure would be.

    “You want to be protecting your most vulnerable who are your least wealthy people and the higher the figure the less the case for complete protection,” Parker said.

    He also said that with Parliament now legislating for covered bonds via the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill, institutional investors holding covered bonds issued by banks would have their rights to carve off a section of a bank issuer’s assets, in the event of a default, enshrined in law.

    The Bill just has a third reading in Parliament to go and Parker confirmed Labour would support it, albeit reluctantly.

    [...]

    Labour leaps on bank deposit protection bandwagon, calls for 1st NZ$30k of deposits to be protected in event of a bank failure

    http://www.interest.co.nz/personal-finance/63660/labour-leaps-bank-deposit-protection-bandwagon-calls-1st-nz30k-deposits-be-pr

    Labour’s Finance spokesperson David Parker says a Labour-led Government would ensure the first NZ$30,000 of all bank deposits would be protected, and not subject to a haircut in the event of a bank failure.

    Parker’s comments come after Green Party co-leader Russel Norman yesterday said the National Party-led government ought to force the Reserve Bank to abandon its “Cyprus-style solution” to bank failures in favour of an Australian style deposit guarantee scheme.

    “The cost of that guarantee must be borne by the banking system, meaning it would be a cost paid by banks that did not fail,” Parker said. “This is the system used in Australia and it should also apply here. Why have a different system in New Zealand than in Australia? It creates yet another reason to move to, or invest in, Australia rather than here.”

    Parker said the Reserve Bank’s proposed Open-Bank Resolution (OBR) Policy means all unsecured Kiwi depositors in a failed bank will lose money through no fault of their own.

    “Yet under current National policy, some overseas lenders to banks have recently been protected through covered bonds, which increase the risk to ordinary depositors. That’s not a fair system,” Parker said.

    “This means that Kiwi households will be forced to help bail out banks while overseas lenders have their money protected.”

    According to Reserve Bank figures, there was a fraction under NZ$110 billion sitting in term deposits as of January. And as of the end of 2012, New Zealanders had total deposits with banks of just under NZ$115.2 billion.

    Norman yesterday questioned why the Reserve Bank was introducing OBR when the majority of other Organisation for Economic Co-operation and Development countries use deposit insurance schemes instead.

    Term deposits
    In Australia bank deposits are protected up to A$250,000 per person per institution. The Aussie scheme evolved out of the country’s retail deposit guarantee scheme, which was introduced at the height of the global financial crisis in October 2008.

    Aussie depositors also benefit from the preferred status granted to Australian depositors over other unsecured creditors in the event of the insolvency of an Australian authorised deposit taking institutions. This legislative provision is referred to as depositor preference.

    New Zealand’s own Crown retail deposit guarantee scheme ran for 38 months from October 2008 until the end of 2011 and cost taxpayers’ around NZ$1 billion largely due to the demise of South Canterbury Finance.

    [...]

  9. john says:

    This might be another reason that gun control measures are being pushed by The United States government. I know they say it is a reaction to Sandy Hook and other atrocities, but I’m sure that they expect violent reaction to the confiscation of people’s life savings. I wouldn’t be surprised to awaken one morning and see troops stationed on the streets. The recent exercises under the guise of preparing soldiers for urban combat have been taking place in some American cities. And, as always, the print and electronic media are silent.

  10. aleksy says:

    Is there any safe place to store at least $$ to pay bills other than using WU and Money Orders?

    I like BTC but can’t use it for bill paying unless you sell and move funds to a bank which defeats the purpose of the BTC.

    anyone?

  11. OutrageFromItaly says:

    Information: In other news the Slog revealed that Santander just mailed all it’s customers a change in the T&Cs. Of particular interest was this change for buiness customers with turnover up to £250,000:
    “’1 b) Your Money, Any money, held for you in an account with Santander UK plc will be held in its capacity as a bank and not as a trustee. In accordance with FSA requirements we are obliged to notify you that the client money rules on money do not apply to a Banking Consolidation Directive (BCD) in relation to deposits within the meaning of the BCD held by that institution. As a result, the money will not be held within the client money rules of the FSA.’”
    So you can kiss your 85K guarantee goodbye if you’re an SME and come under the ‘smaller companies’ cover of the FCS.
    By the way, for those of whom consider “Those Stupid People From Spain, Italy etc…” The main media has a blackout in force! No Cyprus news on TV, Radio, Newspapers etc, They have simply stated that Cyprus is a “One off” situation & that their money is totally safe!

  12. Ade says:

    You can buy bitcoins locally from people near you.
    http://www.google.co.uk/search?client=opera&rls=en&q=bitcoinnearme&sourceid=

    Or start up such a service yourself.

  13. Robespierre says:

    @OutRageFromItaly.
    But do those these ”stupid” people believe in what their corrupt journalists are telling them ? You did not anwer my question. I perfectly know that there is a total blackout. Same fuckin thing WASP NAZI CANADA. The Nazis bastards running Canada even introduced in the 2013 budget a law authorizing our bank accounts to be stolen and NOT ONE mf journailist said one thing about it ! I know but I was wondering it the internet and place like MaxKeiser or Alex Jones or Zero Hedge are statting to make a difference ? If not we are screwed.

  14. Robespierre says:

    @OutOfRageItaly
    But are the people still believing in what they are saying ? That was my question. I know there is total desinformation. It was a rhetorical question. I know the answer. I just was wondering if the internet is enough powerful to make a difference and warn the people that these criminal bastards are about to steal their life savings. So is it the case in Italy ? Yes or No ?

  15. Spaniard says:

    @Robespierre. They are really that innocent (stupid is too accurate for my liking).

    A bunch of friends of mine have all their savings at ING. They have been thoroughly told about the underlying risks of their institution and currency of choice, but they disregarded such an advice all along, each time with an ever growing disdain for what they deemed a pessimistic and hysterical point of view. They received free caring advise delivered with understanding patience for eight years…

    But time passes, high risks materialize into gruesome events and their savings deposits do not look safe anymore. Most of them have children now, some have already lost their jobs, and all of them have a mortgage upon their shoulders- their currency, along with all their blind trust and poised confidence, is in the brink of vaporizing without ever having become money… but they still cling to their dying world view, that one in which they are the chosen recipient of all that is good in the Universe.

    Soon enough they will realize the goods have been stolen from them! They will start to wonder whether they may ever come back, and it will frighten them to death. They will be the last ones to do, for fear is already building up relentlessly and bursts of anger spring from nowhere, aisled and short at first, persistent and never-ending later on. Admitting the truth is not an option, so everybody turn to the government, demanding from it that their goodies are restored. And so their goodies are promised by the government…until they are not, and then, the anger will burn us all.

    Many depositors are arrogant urbanites with no skills besides spoiling the planet they feel entitled to. Although I love some of them, I will spend not a single minute more trying to take care of trouble makers- there are simply too many humans in the world for me to give a hoot about those suckers. Lets stick to the caring and imaginative ones and make sure those who are worthy have sufficient support and caring advise.

    I have had enough already. You are right, Marc, they are stupid.

  16. Agent P says:

    “The government’s debt is at least arguably the people’s debt, since the government is there to provide services for the people.”

    Although it could be argued quite easily that we live by a few shreds of the original intent and prescription of our Founding Documents, it should in any case be noted that the government is Not there to provide services for the people, save for what it is explicitly prescribed to perform. It is perhaps this oversight that has Americans today in the position of Donkey submission to what used to be Their ‘servant’…

  17. Madasabull says:

    Max, why cant people see that what is going on in Cyprus is for the sole purpose of helping the rich get richer. It is my view that the government has got the poor marching in the streets to protest having their saving turned into shares.

    They cant have the millions of the poor, all owning these shares, so they made them believe that the shares were a bad idea, which got the poor up in arms to save their savings. Now the government can move on to the next part of their wicked and ruthless plan.

    They have now they have said they will target the wealthy, which is what they wanted to do in the first place to keep the number of people owning shares low, and making the rich richer, and now they can tell the poor they wont be getting any shares, without upsetting them.

    Now the wealthy will be deducted a percentage of their savings, for super cheap shares. People with a large wedge will have a percentage converted to shares, and the super rich with a larger wedge of savings, will have a larger percentage converted to shares. Meanwhile the poor a loving it, believing that the rich are getting screwed, when in fact its the poor that are being screwed, yet again.

    Once the dust has settled, the shares will rocket in price, and the wealthy become wealthier. What an amazingly simple and brilliant idea.

  18. Blackhawk says:

    So after all value has been extracted from everything with the help of the banks, they will load people with worthless shares and bonds in insolvable banks and lock them into another illusion.
    How far it can go before the sheople wake up to realize that the whole system is designed to extract resources and energy and funnel them to the top of the pyramid while everybody else is left with the junk?
    It appears for me that it can go very far and too late for the majority, as people of Cyprus just experienced.
    If we ignore a problem that doesn’t mean it doesn’t exist or is not going to affect us.
    Sooner or later we all have the Cyprus experience if we still ignore the mass looting that is going on.

  19. aleksy says:

    imo, BAU et a; is gonna say, ‘look, the only way to contain/stop this run-on-the-banks contagion is to finally usher in the OWO and right alongside, the OWC. It is the perfect final leg of BAU’s plan to get total and tight control of the base. And of course, in the wings, there is the ongoing de-pop since they have admitted they need to (and thus will) reduce the world population for 7+ B to about 2B to facilitate thier control of peak oil and all other dwindling (and non-renewable ) resoucres.

  20. NICOLE VAN ELEWYCK says:

    I assume that my account with the London branch of a solid (I am a financial analyst from Wall St) Singapore
    Bank is well covered by the bank’s traditional activities in mortgages and lending to small businesses – no
    Casino, this one – and supervision by the Monetary Authority of Singapore whose administrators are well
    paid and competent vs the FED, THE FDIC & THE BOE…

    I have an account with an Australian bank whose credibility is in doubt, but I would be first served vs other creditors.

    I have just become aware of a national mint which stores numbered bars as well. A leading firm of lawyers
    tells me that this is safe, crucial news after rejecting ETF’s and a well known Australian vendor whose
    annual accounts are sketchy – and not audited by an external auditor. I wonder about ????’s solution…

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