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NEW YORK – Can the federal government confiscate all the deposits in an American citizen’s FDIC-insured bank account?
The answer is “Yes.”
As WND reported, the Dodd-Frank bill allows the federal government to confiscate bank deposits in an unlimited “bail-in” for banks “too big to fail,” provided the account holder gets equity in exchange for the deposits.
In March, Cyprus agreed to confiscate 10 percent of all deposits in Cypriot banks, calculated to result in a 10 billion euro “bail-in” as a condition of obtaining an emergency Eurozone bail-out of 10 billion euros.
The question increasingly getting asked in international banking circles is this: Was the “Cyprus Experiment” in which the government confiscated bank deposits a first step toward what may well become a global trend over the next few years?
EU proposes deposit grab
Anyone who thinks the scenario is merely academic must realize that the European Parliament already is in the process of passing new regulations adopting the recommendation of its Economic and Monetary Affairs Committee. The panel recommends that a deposit guarantee funds should not protect a deposit of funds in a “guaranteed account” can be siezed when financial difficulties call for rescuing a troubled financial institution.
The text of the EU’s Economic and Monetary Affairs Committee recommendation calls for ruling out using deposits below 100,000 euros and specifies that confiscating deposits above 100,000 euros should be a last resort.
A European Parliament press release dated May 21 specified the “bail-in” scheme proposed by the EU’s Economic and Monetary Affairs Committee should be up and running by January 2016.
With the EU moving to codify procedures for confiscating depositor funds in a bank “bail-in,” the confiscation of deposits last March in the Mediterranean island nation of Cyprus may have only been a dry run for future bank crises anticipated by EU financial experts.
Are private retirement assets safe?
WND reported Sept. 9 that Polish Prime Minister Donald Tusk announced a government decision in September to transfer to ZUS, the government pension system, all bond investments in privately held pension funds within the state-guaranteed system.
With the U.S. and the EU struggling with a debt crisis caused by slow economic growth and massive growth in social welfare programs, WND has previously reported that all private assets, including IRA and 401(k) retirement assets, may not be immune from one form or another of government takeover, even if new federal regulations that require a percentage of all private retirement assets in the U.S. be invested in federal government IOUs, including U.S. Treasury debt.
WND has reported government officials continue to eye the multi-trillion dollar private retirement savings market, including IRAs and 401(k) plans, seeing the opportunity to redistribute private retirement savings to less affluent Americans and to force the retirement savings out of the private market and into government-controlled programs investing in government-issued debt.
The ‘bail-in’ strategy
The possibility bank deposits could get confiscated by the federal government caused a firestorm of controversy following a WND story indicating Greece is considering confiscating corporate deposits to pay social security contribution shortfalls in the country.
“How is this possible?” many posting on Twitter and Facebook asked after the WND article was published.
The answer is provided in a little-noticed Dec. 10, 2012, memorandum published by the FDIC in the United States and the Bank of England in the United Kingdom titled “Resolving Globally Active, Systemically Important Financial Institutions.”
This paper redefines “too big to fail” companies as “Globally Active, Systemically Important, Financial Institutions,” or G-SIFIs, in the terminology of international banking.
The goal of the paper is to find a way to save big banks that are facing a financial crisis without having to utilize taxpayer funds to “bail out” the bank with what amounts to either a federal government loan or a federal government equity injection resulting in the government owning some percentage of the bailed-out bank.
The “bail-in” strategy under which some or all private bank deposits are confiscated to resolve a financial crisis was made possible because of powers granted the federal government in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
In banking terms, the strategy creates a single receivership at a top-tier holding company and assigns losses to shareholders and unsecured creditors of the holding company. The aim is to transfer the sound operating bank subsidiaries that emerge from the restructuring to a new solvent entity or entities.
Put simply, bank deposits are considered under Dodd-Frank to be “owned” not by the despositor but by the bank, such that the bank has a contingent liability to owner regarding the deposits.
But that contingent liability can either be honored by the bank giving the account holder back his deposits when requested or giving bank stock should the bank need to confiscate the deposits to make up for a deficiency in the legal reserves required to operate or in any other financial crisis the bank faces.
The stock the account holder receives might not be in the bank where the money was deposited. It could be in the new bank entity or subsidiary that emerges after the “bail-in” has been accomplished.
Under Dodd-Frank, depositors are an unsecured creditor to the bank. The federal government under “Orderly Liquidation Authority” outlined in the legislation can seize any financial firm, not simply the largest ones, if the Federal Reserve, the secretary of the Treasury and the FDIC determine a particular bank failure may cause instability in the U.S. financial system.
A creative alternative to giving account holders bank equity after confiscating their deposits to “bail-in” a troubled financial institution may be to offer a special-issue U.S. Treasury instrument that may only be sold over a five-year period.