WASHINGTON – Banks “too big to fail,” or TBTFs, already have authority in the United States to impose an unlimited Cyprus-style “bail-in” that confiscates the savings of depositors, stockholders and shareholders in lieu of a federal taxpayer bailout.
The Cyprus-style bail-in for banks occurred last year when the Cypriot government decided to take all uninsured deposits above 100,000 euros to apply to recapitalizing the island’s failing banks. WND recently detailed the initial impact that such action caused depositors on that island country.
Such a bail-in is considered to be the “new collapse template for the Western banking system,” according to financial expert James Sinclair.
This template now is being applied in the United States on bank depositors’ savings accounts and on shareholders and stockholders, especially of banks said to be too big to fail.
These TBTSs inclue Citigroup, Bank of America and JP Morgan Chase.
“It’s now legal for a big bank to confiscate your money without warning and at their discretion,” Sinclair said.
Similar action is being undertaken in Europe following the example of Cyprus. As WND recently pointed out, finance ministers of the 27-member European Union in June had approved forcing bondholders, shareholders and large depositors with more than 100,000 euros in their accounts to make the financial sacrifice before turning to the government for help with taxpayer funds.
That authority derives from a little-noticed 15-page December 10, 2012, joint resolution paper from the Federal Deposit Insurance Corporation, or FDIC, and the Bank of England, or BOE.
FDIC and BOE decided to issue this joint authority to make sure that financial institutions operating in their respective countries will operate “unaffected, thereby minimizing risks to cross-border implementation.”
“The FDIC and the Bank of England have developed resolution strategies that take control of the failed company at the top of the group, impose losses on shareholders and unsecured creditors – not on taxpayers – and remove top management and hold them accountable for their actions,” the FDIC/BOE paper said.
The FDIC/BOE paper points out that its authority to act in such a way is buried in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 which was passed in response to the 2009 financial crisis.
Their purpose is to “ensure continuity of all critical services performed by the operating firm(s), thereby reducing risks to financial stability.
“The financial crisis that began in 2007 has driven home the importance of an orderly resolution process for globally active systemically important financial institutions,” the joint paper said.
The paper said that losses would be assigned to shareholders and unsecured creditors of the holding company, and “transfer sound operating subsidiaries to a new solvent entity or entities.”
“The unsecured debt holders can expect that their claims would be written down to reflect any losses that shareholders cannot cover, with some converted partly into equity in order to provide sufficient capital to return the sound businesses of the G-SIFI (globally active, systemically important, financial institutions) to private sector operation,” the joint document said..
“Sound subsidiaries (domestic and foreign) would be kept open and operating, thereby limiting contagion effects and cross-border complications,” it said.
The joint resolution said that large financial institutions can resolve their recapitalization needs through depositor wealth confiscation that can be pursued in the case of a systemically important institution such as the Bank of America, JP Morgan and Goldman Sachs, to name a few.
The irony is that the FDIC is not sufficiently capitalized to sustain FDIC-insured deposits for any major bail-in, Sinclair said.
“FDIC will not pay in cash, but will rather pay in special issue U.S. Treasury instruments that will be salable only over a five-year period,” he said.
Sinclair said that the risk of implementing bail-ins will be much higher in 2013 and 2014 than it was at the height of the 2009 financial crisis.
He said that bail-ins don’t even require a crisis to occur and can surface one bank at a time and spread out over years.
As a consequence, Sinclair said that “too big to fail is no longer valid at all.”
He said that the major concern is over deposits above insurance levels in banks too big to fail.
“Those deposits are directly in harm’s way,” Sinclair said. “The next situation is your retirement account as targets for the IMF and governments to secure as fonts of capital into which to place sovereign paper.”
FDIC insures deposits up to $250,000, but Sinclair said that the FDIC is not capitalized to insure this amount of deposit, especially with many depositors.
In addition, it may be questionable whether the insured can collect on multiple FDIC insured accounts of $250,000.
“The idea that you can have multiple FDIC insured account at $250,000 and collect on all of them is a pure gamble on the goodness of the government’s interpretation,” Sinclair said.
“The idea that the FDIC or SIPC (Securities Investor Protection Corporation) will pay in cash is total madness in a systemic crisis,” he said. “They will pay in special issue U.S. Treasury instruments that will be salable only over a specific amount of years, more than likely five years.”