Bail-In’s & Why You Should Worry

Most people know what a bailout is, but what is a “bail-in” and why should it scare you? One of the most important pieces of self-sufficiency is protecting your assets, including the money you think is safe in the bank. This article discusses bail-ins and what measures have already been taken in the United States and other countries that put your hard-earned savings at risk.

BailoutBailouts

To understand what a bail-in is, you must first understand what a bailout is, for one is simply another form of the other. A bailout is financial support given to a company or country that faces serious financial difficulty or bankruptcy. These are certainly not modern inventions, and have happened all throughout history. Here are some of the biggest ones in recent times [1]:

  • 1971 – $1.4 billion to Lockhead
  • 1974 – $7.8 billion to Franklin National Bank
  • 1975 – $9.4 billion to New York City
  • 1980 – $4.0 billion to Crysler
  • 1984 – $9.5 billion to Continental Illinois National Bank and Trust Company
  • 1989 – $293.3 billion to several savings and loan institutions after widespread failures
  • 2001 – $18.6 billion to the airline industry following the mandatory grounding of aircraft during the September 11th attacks
  • 2008 – $1,650 billion to Fannie Mae / Freddie Mac, American International Group (AIG), the auto industry, the Troubled Asset Relief Program (TARP), and Citigroup Bank
  • 2009 – $142.2 billion to Bank of America

These are just examples from the US, but of course there have been big bailouts on the international stage, and not just companies. Some big recent sovereign examples happened during the European debt crisis around 2008-2009. Greece, Ireland, Portugal, Spain, and Cyprus had essentially all gone bankrupt and were “bailed out” through roughly 488 billion euros worth of loans.

Survival of the FittestIn a purely capitalistic economy, companies are allowed to go bankrupt. Companies go bankrupt because either their products aren’t wanted or because their management has made poor business decisions. After a company goes bankrupt, it opens up opportunities in the marketplace for smarter, more entrepreneurial businesses to fill market needs. Often times, the assets of the bankrupt company are sold off at super-reduced rates and the business is passed on to more responsible stewards. Bankruptcy is just as important to a healthy economy as death is important to natural evolution and a healthier ecosystem. Interfering in this natural process actually stifles economic growth and usually only favors people in positions of power.

In a more socialized or communist economy, the wealth of the individuals are taxed and redistributed. When a bailout is performed, a nation is basically taking money from the general public and giving it to powerful companies run by people with great influence over those in government.

Bail InBail-Ins

During a bail-in, instead of using public money (raised through taxes and debt) and redistributing it to bankrupt companies or governments, the money is taken directly from the public and handed over right to the recipient. The method by which this happens is simple. Say Bank of America were to declare bankruptcy (or any of the “too big to fail” banks for that matter). The first thing they might do is go to the government and ask for a bailout. Since it is becoming more and more politically distasteful to keep giving out bailouts, Uncle Sam says no. This leaves them only one other choice: they tell their depositors (all the average Joe Savers of the country) that their money is no longer available to them. Poof! Joe Saver just lost his money to the bank. The kicker though is that behind the scenes, the bank has the government’s blessing to do this.

Can this happen?

Yes – it happened in Cyprus in March of 2013. As part of a 10 billion euro bailout package to rescue the Republic of Cyprus, it was agreed that the country’s second-largest bank would be shut down. Any deposits over 100,000 euros would not be given back to the bank’s depositors. In essence, anybody with over 100k euros in their bank account lost a lot of money.

G20But can this happen to Americans?

If you think this can only happen to a small nation like Cyprus, think again. This bail-in concept was first discussed by the Bank of International Settlements (BIS) as early as 2010, as is evidenced in a white paper released by the bank at the time. [2] Then, in November of 2014, the G20 nations (of which the US is a member) decided to reclassify large bank deposits such that they are not considered the same as money, and therefore not protected the same as money.

Large deposits at banks are no longer money, as this legislation will formally push them down through the capital structure to a position of material capital risk in any “failing” institution. In our last financial crisis, deposits were de facto guaranteed by the state, but from November 16th holders of large-scale deposits will be, both de facto and de jure, just another creditor squabbling over their share of the assets of a failed bank. [3]

By reclassifying large bank deposits, this in essence re-prioritized them way further down on the list – in particular, below derivatives.

To briefly summarise, a critical aspect of what the bail-in scheme is intended to do, is to prioritise the payment of banks’ derivatives obligations to each other, ahead of depositors. In other words, it is about stealing the public’s bank deposits, to pay out at least some of the big banks’ Death Star-massive — and toxic — derivatives positions.

Yves Smith of Naked Capitalism explains: “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 depositories to fund derivatives exposures.” [4]

Derivatives are extremely confusing to understand, but all you need to know is that the big banks’ exposure to derivative is massively higher than their exposure to depositors. This means that if a bank goes belly-up, after it pays down all of its derivatives obligations there will be none left for depositors. And poof! Just like in Cyprus, Americans could see their savings evaporate literally in the blink of an eye. Just check this chart out:

Deposits vs Reserves vs Derivs[5]

So, $297 trillion in derivatives are prioritized ahead of only $9 trillion in bank deposits, which is supported by only $0.025 trillion in available funding within the FDIC program. Good luck getting your money when crisis strikes, especially if you’re at one of the big banks with exposure to derivatives.

Cash BannedCash Becoming Illegal – And Here’s Why

If you run a business that makes regular cash deposits, you will have noticed that making those deposits is becoming more and more difficult with each passing year. In 2014, JP Morgan Bank banned cash from being deposited into another person’s account. [6] This means if you wanted to give you brother $100 by depositing it into his account, you wouldn’t be allowed to. Likewise, if you ran a business that routinely collected cash receipts from customers, you couldn’t have your accountant go to the bank to make the deposit for you. Imagine how difficult this would make running a business.

And that’s just deposits. When it comes to withdrawls, banks are now required to file Suspicious Activity Reports (SAR’s) when customers withdraw more than $5,000 in cash. [7]

More recently, in March of 2015 Chase Bank changed the terms of its service such that the following restrictions are now on their customers:

  • Customers cannot use cash to make payments on their credit cards, mortgages, equity lines, and auto loans.
  • Storage of cash and non-collectable coins in safe deposit boxes is now prohibited. [8]

Why, might you ask, do some banks now prohibit you from depositing money into another person’s account? Why do they make you think twice before withdrawing a lot of cash? Why would they discourage you from keeping cash as opposed to electronic deposits? And finally, what does this have to do with bail-ins? Clearly they want your money to be in electronic format at all times, not in your physical possession. The reason is that if a liquidity crisis ever hits, meaning a distressed bank needs as much cash as possible to save itself from bankruptcy, that it has instant access to your deposits. Now that it has been agreed upon by the G20 nations (including the US), that paying down bad derivatives are to be given priority over paying back depositors, you can be absolutely sure that banks want as much of your deposits as possible “in the cloud” so that they can redirect that money towards their bad debts.

The idea on taxation or a compulsory levy on savings and assets to solve the debt problem, the bail-ins, has infected all governments. They see a massive compulsory levy on property and bank assets as the silver bullet to solve the debt crisis. This is in part the drive to eliminate cash and force people into electronic money. [9]

Indeed it is a silver bullet for the banks, but unfortunately that bullet may be pointed right at you and me. And finally, is it any coincidence that the banks most aggressively discouraging cash transactions are those at the top of this list of banks with derivatives exposure?

Banks with Highest Derivatives Exposure

[10]

Of course it’s not a coincidence. These banks are first in line to get hammered by a crisis involving derivatives, and they may be counting on that big bail-in to help them dig their way out.

Conclusion

Throughout various crises, governments have offered bailouts to bankrupt companies and governments. In today’s age it is the “too big to fail” banks and the indebted governments of the world that are at risk of bankruptcy. All the while, the general public is becoming less and less tolerant of bailouts given to the already-rich at the expense of the taxpayers. Bail-ins are a tool first discussed in 2010, trialed in 2013, and formally mechanized in 2014, that will allow banks to take money from depositors without repercussion. This will allow the banks to save themselves from bankruptcy while insulating politicians from direct blame. To take advantage of the new bail-in structure, banks are increasingly making it more and more difficult to conduct cash transactions – especially the banks with high exposure to derivatives. When the next financial crisis hits, it will be these banks that will be most susceptible to collapse, and therefore it’s those banks that are most aggressively deterring depositors from conducting cash transactions. It is for precisely this reason that these banks should be avoided altogether, and it’s also for this reason that some physical cash should be kept somewhere safely outside the banking system in case you need access to it in a pinch.

Know their rules so that you don’t have to play by them, so that you don’t get hurt by them.

Sources

  1. Nankin, Jesse, and Kjellman Schmidt, Krista. “History of U.S. Government Bailouts.” ProPublica.org, 15 April 2009. [Source]
  2. Corbett, James, and Chossudovsky, Prof. Michel. “Bail-in and the Confiscation of Bank Deposits: The Birth of the New Financial Order.” GlobalResearch.ca, 13 April 2013. [Source]
  3. Napier, Russell. “November 16, 2014: The Day Money Dies.” ZeroHedge.com, 13 November 2014. [Source]
  4. “Australian Banks Demand Protection from Derivatives Losses Under Bail-In Plan.” BarnabyIsRight.com, 8 August 2013.
  5. “US Deposits In Perspective: $25 Billion In Insurance, $9,283 Billion In Deposits; $297,514 Billion In Derivatives.” ZeroHedge.com, 19 March 2013. [Source]
  6. Watson, Paul Joseph. “Chase Imposes New Capital Controls on Cash Deposits.” InfoWars.com, 17 February 2014. [Source]
  7. Snyder, Michael. “They Are Slowly Making Cash Illegal.” TheEconomicCollapseBlog.com, 23 March 2015. [Source]
  8. “Largest Bank In America Joins War On Cash.” ZeroHedge.com, 23 April 2015. [Source]
  9. Armstrong, Martin. “IMF Reports Warn of Financial Instability – Low Interest Rates Will Be Our Doom.” ArmstrongEconomics.com, 23 April 2015. [Source]
  10. “OCC’s Quarterly Report on Bank Trading and Derivatives Activities First Quarter 2013.” Office of the Comptroller of the Currency. [Source]
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