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Sunday, March 31, 2013

US depositors worse off than those in Cyprus

PATHOS – While bureaucrats and technocrats in Nicosia have been busy trying agree on an even horrible haircut than the each of the previous Troika proposals, the EU’s deadly pathogen has begun to spread to the far corners of the country, hitting the southern seaside tourist town of Pathos.Cyprus managed to avoid the initial danger of an all out bank run and the potential for mass rioting this week, which is probably down to the fact that no Cypriot wants to see their country become a lawless banana republic in the Mediterranean. 

But that calm will not last for long if banking oligarchs continue to pressurize this economy.

Capital controls and frozen bank deposits mean that thousands of businesses are now being strangled of operating funds. It’s a very bad scene. One successful Pathos bar owner, named Nicolas, is being hit particularly hard, and told us that his story is the same as every local trader he knows. 

He explained, “Our credit card merchant account was with Laiki Bank and we cannot access it anymore, so we cannot take cards. People aren’t spending money. All my suppliers are demanding cash for deliveries, and we just haven’t got enough. They’ve got our cheques in the bank but we don’t have the funds to cover them. Staff need to be paid in cash daily now. My emergency funds are frozen in another bank account and cannot be accessed for 45 days. On top of that, tourism is down, and there’s no foreign money coming in anymore. We’ll be lucky if we’re still here in 4 or 6 months time.

“The only thing which might remedy the situation is if the government impose austerity cuts on government spending”.

Patrick Henningsen 21st Century Wire


It Can Happen Here: The Bank Confiscation Scheme for US and UK Depositors

Global Research, March 29, 2013

Confiscating the customer deposits in Cyprus banks, it seems, was not a one-off, desperate idea of a few Eurozone “troika” officials scrambling to salvage their balance sheets. A joint paper by the US Federal Deposit Insurance Corporation and the Bank of England dated December 10, 2012, shows that these plans have been long in the making; that they originated with the G20 Financial Stability Board in Basel, Switzerland (discussed earlier here); and that the result will be to deliver clear title to the banks of depositor funds.
New Zealand has a similar directive, discussed in my last article here, indicating that this isn’t just an emergency measure for troubled Eurozone countries. New Zealand’s Voxy reported on March 19th:
The National Government [is] pushing a Cyprus-style solution to bank failure in New Zealand which will see small depositors lose some of their savings to fund big bank bailouts . . . .
Open Bank Resolution (OBR) is Finance Minister Bill English’s favoured option dealing with a major bank failure. If a bank fails under OBR, all depositors will have their savings reduced overnight to fund the bank’s bail out.
Can They Do That?
Although few depositors realize it, legally the bank owns the depositor’s funds as soon as they are put in the bank. Our money becomes the bank’s, and we become unsecured creditors holding IOUs or promises to pay. (See here and here.) But until now the bank has been obligated to pay the money back on demand in the form of cash. Under the FDIC-BOE plan, our IOUs will be converted into “bank equity.” The bank will get the money and we will get stock in the bank. With any luck we may be able to sell the stock to someone else, but when and at what price? Most people keep a deposit account so they can have ready cash to pay the bills.
The 15-page FDIC-BOE document is called “Resolving Globally Active, Systemically Important, Financial Institutions.” It begins by explaining that the 2008 banking crisis has made it clear that some other way besides taxpayer bailouts is needed to maintain “financial stability.” Evidently anticipating that the next financial collapse will be on a grander scale than either the taxpayers or Congress is willing to underwrite, the authors state:
An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company [meaning the depositors] into equity [or stock]. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailed-in creditors would become the owners of the resolved firm. In either country, the new equity holders would take on the corresponding risk of being shareholders in a financial institution.

US depositors worse off than Cyprus

No exception is indicated for “insured deposits” in the U.S., meaning those under $250,000, the deposits we thought were protected by FDIC insurance. This can hardly be an oversight, since it is the FDIC that is issuing the directive. The FDIC is an insurance company funded by premiums paid by private banks. The directive is called a “resolution process,” defined elsewhere as a plan that “would be triggered in the event of the failure of an insurer . . . .” The only mention of “insured deposits” is in connection with existing UK legislation, which the FDIC-BOE directive goes on to say is inadequate, implying that it needs to be modified or overridden.
An Imminent Risk
If our IOUs are converted to bank stock, they will no longer be subject to insurance protection but will be “at risk” and vulnerable to being wiped out, just as the Lehman Brothers shareholders were in 2008. That this dire scenario could actually materialize was underscored by Yves Smith in a March 19th post titled When You Weren’t Looking, Democrat Bank Stooges Launch Bills to Permit Bailouts, Deregulate DerivativesShe writes:
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 depositaries to fund derivatives exposures. And as bad as that is, the depositors, unlike their Cypriot confreres, aren’t even senior creditors. Remember Lehman? When the investment bank failed, unsecured creditors (and remember, depositors are unsecured creditors) got eight cents on the dollar. One big reason was that derivatives counterparties require collateral for any exposures, meaning they are secured creditors. The 2005 bankruptcy reforms made derivatives counterparties senior to unsecured lenders.





4 comments:

wasp said...

Hi Tap here is an addon, when I tell People The $ is on it's way out they, think I am CRAZY, maybe I am, but I think not. The resoning I give them appears to me to be far more Logicial than the, stuff they Spout Back, atained brobably from National media Sources.

I enjoy Trowing Stones into The Pond & Watching The Ripples: Much can be learned by doing so.

This in some respects is a continuation from Cyprus wishes it was Iceland with its own currency but in many ways ties into this Article.

Concerted QE – The Beginning of HYPERINFLATION

We are living in unprecedented times. The perceived prosperity that the world has enjoyed in the last 100 years and in particular the last 40 years is coming to an end. The debt based wealth that has been created is now at great risk of imploding both for nations and for individuals. Never before in history have most major nations been on the brink of bankruptcy. In addition, the world financial system is bankrupt and only still standing due to false valuations of banks’ toxic assets

The risk of sovereign or bank failures is major. Can it get worse? Of course it can. We have only seen the beginning of the collapse of the credit enhanced bubble economy. Every single country in the world is having problems. In addition to the European and US economies, the economies of India, China, Japan, Korea to mention just a few are all turning down fast.

USA Next
The US has enjoyed a relative calm in the last few years since all the attention has been on Europe. But the debt and deficit in the US dwarfs what is happening in Europe. And the difference in the US is that there is no attempt whatsoever to cut the deficit of around $1.5 trillion p.a. or the unfunded liabilities which are growing by $10 trillion p.a. The world is now starting to worry about the massive danger to the rest of the world of the greatly indebted US economy. The dollar is now coming under pressure and opposite to many “experts”, it is not the Euro that will collapse next but the dollar. All currencies will continue their fall to their intrinsic value – Zero. It is just that against each other they can‘t all fall at the same time. But against gold they are already down 97-99% since the creation of the Fed in 1913 so there isn’t far to go to Zero.

So we are now starting the acceleration phase of rising deficits, falling currencies and rising inflation leading to a hyperinflationary depression. This is a vicious circle that will not stop until we have seen the “final and total catastrophe of the currency system involved” (von Mises). The big difference this time is that it will involve most major nations. This is unprecedented in world history.


REGARDS ......... WASP

Tapestry said...

Deflation.

Toad Hall said...

http://www.zerohedge.com/news/2013-03-31/cyprus-presidents-family-transferred-tens-millions-london-days-deposit-haircuts

Ajay said...

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