A Crisis Worse than ISIS? Bail-Ins Begin

Posted on December 29, 2015 by Ellen Brown

While the mainstream media focus on ISIS extremists, a threat that has gone virtually unreported is that your life savings could be wiped out in a massive derivatives collapse. Bank bail-ins have begun in Europe, and the infrastructure is in place in the US.  Poverty also kills.
At the end of November, an Italian pensioner hanged himself after his entire €100,000 savings were confiscated in a bank “rescue” scheme. He left a suicide note blaming the bank, where he had been a customer for 50 years and had invested in bank-issued bonds. But he might better have blamed the EU and the G20’s Financial Stability Board, which have imposed an “Orderly Resolution” regime that keeps insolvent banks afloat by confiscating the savings of investors and depositors. Some 130,000 shareholders and junior bond holders suffered losses in the “rescue.”
The pensioner’s bank was one of four small regional banks that had been put under special administration over the past two years. The €3.6 billion ($3.83 billion) rescue plan launched by the Italian government uses a newly-formed National Resolution Fund, which is fed by the country’s healthy banks. But before the fund can be tapped, losses must be imposed on investors; and in January, EU rules will require that they also be imposed on depositors. According to a December 10th article on BBC.com:

The rescue was a “bail-in” – meaning bondholders suffered losses – unlike the hugely unpopular bank bailouts during the 2008 financial crisis, which cost ordinary EU taxpayers tens of billions of euros.
Correspondents say [Italian Prime Minister] Renzi acted quickly because in January, the EU is tightening the rules on bank rescues – they will force losses on depositors holding more than €100,000, as well as bank shareholders and bondholders.
. . . [L]etting the four banks fail under those new EU rules next year would have meant “sacrificing the money of one million savers and the jobs of nearly 6,000 people”.

That is what is predicted for 2016: massive sacrifice of savings and jobs to prop up a “systemically risky” global banking scheme.

Bail-in Under Dodd-Frank

That is all happening in the EU. Is there reason for concern in the US?
According to former hedge fund manager Shah Gilani, writing for Money Morning, there is. In a November 30^th article titled “Why I’m Closing My Bank Accounts While I Still Can,” he writes:

[It is] entirely possible in the next banking crisis that depositors in giant too-big-to-fail failing banks could have their money confiscated and turned into equity shares. . . .
If your too-big-to-fail (TBTF) bank is failing because they can’t pay off derivative bets they made, and the government refuses to bail them out, under a mandate titled “Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution,” approved on Nov. 16, 2014, by the G20’s Financial Stability Board, they can take your deposited money and turn it into shares of equity capital to try and keep your TBTF bank from failing.

Once your money is deposited in the bank, it legally becomes the property of the bank. Gilani explains:

Your deposited cash is an unsecured debt obligation of your bank. It owes you that money back.
If you bank with one of the country’s biggest banks, who collectively have trillions of dollars of derivatives they hold “off balance sheet” (meaning those debts aren’t recorded on banks’ GAAP balance sheets), those debt bets have a superior legal standing to your deposits and get paid back before you get any of your cash.
. . . Big banks got that language inserted into the 2010 Dodd-Frank law meant to rein in dangerous bank behavior.

The banks inserted the language and the legislators signed it, without necessarily understanding it or even reading it. At over 2,300 pages and still growing, the Dodd Frank Act is currently the longest and most complicated bill ever passed by the US legislature.

Propping Up the Derivatives Scheme

Dodd-Frank states in its preamble that it will “protect the American taxpayer by ending bailouts.” But it does this under Title II by imposing the losses of insolvent financial companies on their common and preferred stockholders, debtholders, and other unsecured creditors. That includes depositors, the largest class of unsecured creditor of any bank.
Title II is aimed at “ensuring that payout to claimants is at least as much as the claimants would have received under bankruptcy liquidation.” But here’s the catch: under both the Dodd Frank Act and the 2005 Bankruptcy Act, derivative claims have super-priority over all other claims, secured and unsecured, insured and uninsured.
The over-the-counter (OTC) derivative market (the largest market for derivatives) is made up of banks and other highly sophisticated players such as hedge funds. OTC derivatives are the bets of these financial players against each other. Derivative claims are considered “secured” because collateral is posted by the parties.
For some inexplicable reason, the hard-earned money you deposit in the bank is not considered “security” or “collateral.” It is just a loan to the bank, and you must stand in line along with the other creditors in hopes of getting it back. State and local governments must also stand in line, although their deposits are considered “secured,” since they remain junior to the derivative claims with “super-priority.”

Turning Bankruptcy on Its Head

 Under the old liquidation rules, an insolvent bank was actually “liquidated” – its assets were sold off to repay depositors and creditors. Under an “orderly resolution,” the accounts of depositors and creditors are emptied to keep the insolvent bank in business. The point of an “orderly resolution” is not to make depositors and creditors whole but to prevent another system-wide “disorderly resolution” of the sort that followed the collapse of Lehman Brothers in 2008. The concern is that pulling a few of the dominoes from the fragile edifice that is our derivatives-laden global banking system will collapse the entire scheme. The sufferings of depositors and investors are just the sacrifices to be borne to maintain this highly lucrative edifice.
In a May 2013 article in Forbes titled “The Cyprus Bank ‘Bail-In’ Is Another Crony Bankster Scam,” Nathan Lewis explained the scheme like this:

At first glance, the “bail-in” resembles the normal capitalist process of liabilities restructuring that should occur when a bank becomes insolvent. . . .
The difference with the “bail-in” is that the order of creditor seniority is changed. In the end, it amounts to the cronies (other banks and government) and non-cronies. The cronies get 100% or more; the non-cronies, including non-interest-bearing depositors who should be super-senior, get a kick in the guts instead. . . .
In principle, depositors are the most senior creditors in a bank. However, that was changed in the 2005 bankruptcy law, which made derivatives liabilities most senior. Considering the extreme levels of derivatives liabilities that many large banks have, and the opportunity to stuff any bank with derivatives liabilities in the last moment, other creditors could easily find there is nothing left for them at all.

As of September 2014, US derivatives had a notional value of nearly $280 trillion. A study involving the cost to taxpayers of the Dodd-Frank rollback slipped by Citibank into the “cromnibus” spending bill last December found that the rule reversal allowed banks to keep $10 trillion in swaps trades on their books. This is money that taxpayers could be on the hook for in another bailout; and since Dodd-Frank replaces bailouts with bail-ins, it is money that creditors and depositors could now be on the hook for. Citibank is particularly vulnerable to swaps on the price of oil. Brent crude dropped from a high of $114 per barrel in June 2014 to a low of $36 in December 2015.
What about FDIC insurance? It covers deposits up to $250,000, but the FDIC fund had only $67.6 billion in it as of June 30, 2015, insuring about $6.35 trillion in deposits. The FDIC has a credit line with the Treasury, but even that only goes to $500 billion; and who would pay that massive loan back? The FDIC fund, too, must stand in line behind the bottomless black hole of derivatives liabilities. As Yves Smith observed in a March 2013 post:

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 depositors to fund derivatives exposures. . . . The deposits are now subject to being wiped out by a major derivatives loss.

Even in the worst of the Great Depression bank bankruptcies, noted Nathan Lewis, creditors eventually recovered nearly all of their money. He concluded:

When super-senior depositors have huge losses of 50% or more, after a “bail-in” restructuring, you know that a crime was committed.

Exiting While We Can

How can you avoid this criminal theft and keep your money safe? It may be too late to pull your savings out of the bank and stuff them under a mattress, as Shah Gilani found when he tried to withdraw a few thousand dollars from his bank. Large withdrawals are now criminally suspect.
You can move your money into one of the credit unions with their own deposit insurance protection; but credit unions and their insurance plans are also under attack. So writes Frances Coppola in a December 18th article titled “Co-operative Banking Under Attack in Europe,” discussing an insolvent Spanish credit union that was the subject of a bail-in in July 2015. When the member-investors were subsequently made whole by the credit union’s private insurance group, there were complaints that the rescue “undermined the principle of creditor bail-in” – this although the insurance fund was privately financed. Critics argued that “this still looks like a circuitous way to do what was initially planned, i.e. to avoid placing losses on private creditors.”
In short, the goal of the bail-in scheme is to place losses on private creditors. Alternatives that allow them to escape could soon be blocked.
We need to lean on our legislators to change the rules before it is too late. The Dodd Frank Act and the Bankruptcy Reform Act both need a radical overhaul, and the Glass-Steagall Act (which put a fire wall between risky investments and bank deposits) needs to be reinstated.
Meanwhile, local legislators would do well to set up some publicly-owned banks on the model of the state-owned Bank of North Dakota – banks that do not gamble in derivatives and are safe places to store our public and private funds.
_____________________
Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her 300+ blog articles are at EllenBrown.com. Listen to “It’s Our Money with Ellen Brown” on PRN.FM.

What does this guy get out of it?

Donald Trump is a brand.  Plain and Simple.

He has not been a "Builder" for well over a decade.

As a builder he was born as the heir to a real estate empire which he pretty well destroyed.  He went deep into debt and ruined most of his partners.  He is hated in the real estate and banking industries.  Nobody trusts him.  Least of all the employees and ex-partners that he's ruined.

Because of clever use of the bankruptcy laws he escaped with a  personal fortune - which is extremely illiquid and very difficult to value because of the illiquidity of his real estate assets.  Imagine trying to sell a golf course in the suburbs during an economic downturn.

However as a reality television based brand he has been very successful.  He licenses his name on ties, cocktail napkins, belts, sheets, socks, lighters, bath towels (all made in China) and even buildings. He is the male Kim Kardashian.

But the Reality Television business is fickle and he knows it.  He has had a great run but people are getting tired of his "You're fired" shtick on his fantasy business program.  So he's risking it all on a bid for the greatest reality television post of all; the Office of President.

He's running his campaign as a reality tv program.  And he's great at it.  He's knows what to say to get the maximum attention. And he knows that only one thing counts: Maximum Attention.

If he wins, he knows he's set financially for life.  He's watched the Clintons make hundred of millions of LIQUID CASH off the presidency.  And he wants in. He knows in a downturn his illiquid assets could evaporate.  And he knows his tv program has been trending downward in the ratings.

So he has gambled everything on the Presidency.  And he has to win.  Because even if he gets the Republican nomination and loses the general election his brand will take a huge hit.  So he will do or say anything at all to win it at all costs.  The payoff is huge. So are the risks.

He's a human brand.  And like all brands he exists for the money. 

The Result of Financial Repression:

After 30 years of Financial Repression - in the form of negative real rates which constitute a heavy tax on the household sector and an enormous subsidy to the banking sector and the corporate sector - the vast middle class of the United States feels angry and cheated.

Financial Repression also takes the form of other policy initiatives that result in an outcome where worker compensation has sorely lagged worker productivity for 30 years.  This also constitutes a tax on the household sector and a subsidy for the corporate sector.

Few understand this, but everyone feels it.

We all feel screwed.

We all feel cheated.

We all feel angry as hell.

We all want somebody to stand up and screw and cheat somebody else in return.

Enter Donal Trump.

And the more he pledges to cheat and screw OTHERS the more we love him.

Unfortunately, Financial Repression is very hard to understand.  It shouldn't be.  But it is.

And we all want to get someone back.  So rather than direct our intense anger at the source of Financial Repression: The Fed and our own Government, we direct our anger at the easiest targets: IMMIGRANTS.

The goddam brown people who are stealing our jobs and murdering our grandparents.  If we screw and cheat them we'll all feel better.  And the more Donald Trump pledges to screw and cheat people the better we like him.

Of course, the corporate/banking/government sector that spawned him - that taught him to cheat and screw - doesn't like him.  Because he'll cheat and screw them too, if it profits him.  And right now, it does.  He'll screw every last one of them if it gets him the presidency.  Everyone and everything.  And we love him for it.

We reap what we sow.

How Did Gold as a currency help create Democracy? And why is Democracy nearly impossible without a gold currency?

The first gold currency in the form of coinage was invented by Kroisos (Croesus) of Lydia in about 545 BCE.  He created a bimetallic gold/ silver coinage with Gold Staters of 10.7 grams down to 1/48th staters of about .35 grams.  We can see from the tiny fractions that the coinage was meant to be used for every day transactions by common citizens.

The invention of coinage was preceded by a few hundred years with the invention of Alphabetic Language.  Alphabetic Language was invented by the Phonecians in about 1000 BCE, but it wasn't until about 700 BCE that we begin to see stamped images with lettering (much like those on coinage) on the handles of ewers and other earthenware goods used in trade, as well as stamps with images and lettering on signet rings used on official correspondence.

Both these innovations greatly facilitated trade.  But the salient fact is that these innovations greatly facilitated trade between private citizens.

Before then, all trade had to be sanctioned, and initiated by the Royal House.  Wealth was stored either at the Palace or in the Temple which served also as the Central Bank.  Wealth in the form of goods, as well as wealth in the form of whatever was used as money.  It was all under the direct control of the Royal Family and the Priest Class - which were most often one and the same. 

But it wasn't simply the stamp and the lettering that permitted trade to devolve into the hands of the private citizen.  It was also the unanimous selection of Gold as the substance of official coinage.

Why Gold?  Because Gold was thought by every single society on earth to have Intrinsic Value.  What value is that?  It was thought to be imbued with a natural beauty reflected in the virtues of the susbtance: it is Unchanging.  It is inert and immutable and shiny.  Like God.

I know,  This sounds primitive.  But the Unchanging is a concept that describes God that is actually extraordinarily complex as elucidated by Parmenides and Heraclitus - philosophers whose works have never been equaled in the history of thought.  So, perhaps, not so primitive.

But this concept of inherent value is exactly the mechanism that allowed Power in the Economy to move into the hands of the Private Citizen.  Because for the first time in the history of humanity, with the advent of gold coinage the Private Citizen had the power to conduct his economic affairs by Initiating and conducting his own trades without the direct sanction of the State.  And he was able to store his wealth in his own home.

Of course, silver was used too, as a proxy for, and convertible into Gold, wherever there was not enough gold to serve for common transactions.

And this wealth, in the form of gold and silver coinage, could not be confiscated,  degraded, inflated, without the State declaring war on its own citizenry. 

Thus Economic Power devolved from the State to the Private Citizen.  And within a hundred years of this movement, DEMOCRACY was born in Athens.

Gold (and silver) coinage was the principle weapon of the private citizenry against the State.  More than arms - as private citizens had always had arms.  More than laws - which are always exercised by the State.  More than constitutions - which can be changed on the whim of the state.

It was the privately owned Money of Intrinsic Value that guaranteed the Private Citizen could conduct his own affairs Independent of the State.

And without this Basic Tenet of Democracy, it is unclear how Democracy is even possible, as the State will have absolute control over all transactions.  Thus private transactions cease to exist.