From: AlterNet
Photo Credit: Jean Lee/ Shutterstock.com
April 9, 2013 |
Cyprus-style confiscation
of depositor funds has been called the “new normal.” Bail-in policies
are appearing in multiple countries directing failing TBTF banks to
convert the funds of “unsecured creditors” into capital; and those
creditors, it turns out, include ordinary depositors. Even “secured”
creditors, including state and local governments, may be at risk.
Derivatives have “super-priority” status in bankruptcy, and Dodd Frank
precludes further taxpayer bailouts. In a big derivatives bust, there
may be no collateral left for the creditors who are next in line.
Shock waves went around the world when the
IMF, the EU, and the ECB not only approved but mandated the confiscation
of depositor funds to “bail in” two bankrupt banks in Cyprus. A “bail
in” is a quantum leap beyond a “bail out.” When governments are no
longer willing to use taxpayer money to bail out banks that have gambled
away their capital, the banks are now being instructed to
“recapitalize” themselves by confiscating the funds of their creditors,
turning debt into equity, or stock; and the “creditors” include the depositors who put their money in the bank thinking it was a secure place to store their savings.
The Cyprus bail-in was not a one-off emergency measure but was
consistent with similar policies already in the works for the US, UK,
EU, Canada, New Zealand, and Australia, as detailed in my earlier
articles here and here.
“Too big to fail” now trumps all. Rather than banks being put into
bankruptcy to salvage the deposits of their customers, the customers
will be put into bankruptcy to save the banks.
Why Derivatives Threaten Your Bank Account
The big risk behind all this is the massive $230 trillion derivatives
boondoggle managed by US banks. Derivatives are sold as a kind of
insurance for managing profits and risk; but as Satyajit Das points out
in Extreme Money, they actually increase risk to the system as a whole.
In the US after the Glass-Steagall Act was implemented in 1933, a
bank could not gamble with depositor funds for its own account; but in
1999, that barrier was removed. Recent congressional investigations have
revealed that in the biggest derivative banks, JPMorgan and Bank of America,
massive commingling has occurred between their depository arms and
their unregulated and highly vulnerable derivatives arms. 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. In a major derivatives
fiasco, derivative claimants could well grab all the collateral, leaving
other claimants, public and private, holding the bag.
The tab for the 2008 bailout was $700 billion in taxpayer funds, and
that was just to start. Another $700 billion disaster could easily wipe
out all the money in the FDIC insurance fund, which has only about $25 billion in it. Both JPMorgan and Bank of America have over $1 trillion in deposits, and total deposits covered by FDIC insurance are about $9 trillion. According to an article on Bloomberg
in November 2011, Bank of America’s holding company then had almost $75
trillion in derivatives, and 71% were held in its depository arm; while
J.P. Morgan had $79 trillion in derivatives, and 99% were in its
depository arm. Those whole mega-sums are not actually at risk, but the
cash calculated to be at risk from derivatives from all sources is at least $12 trillion; and JPM is the biggest player, with 30% of the market.
It used to be that the government would backstop the FDIC if it ran
out of money. But section 716 of the Dodd Frank Act now precludes the
payment of further taxpayer funds to bail out a bank from a bad
derivatives gamble. As summarized in a letter from Americans for Financial Reform quoted by Yves Smith:
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