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Your Life Savings Could Be Wiped Out in a
Massive Derivatives Collapse
By Ellen Brown
Al-Jazeerah, CCUN, December
A Crisis Worse than ISIS?
While the mass 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
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 30th article titled “Why
I'm Closing My Bank Accounts While I Still Can,” he writes:
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.
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
. . . Big banks got that language inserted into the 2010
Dodd-Frank law meant to rein in dangerous bank behavior.
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
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
claims have super-priority over all other claims, secured and unsecured,
insured and uninsured.
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
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
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. . . .
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
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.
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
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
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
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
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.
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