Overexposure to US Bank Deposits is Risky Investment

Posted on 09. Jun, 2013 by in Economics, Education, Politics

Greetings Regular Joes,

Many in the US think that a Cyprus-like event could not happen here. There is a sense of arrogant American invulnerability that leads to a haughtiness that will eventually be our undoing. It’s already taking form in the empiricism so rampant in our military (as well as financial – FATCA) fronts.

Before getting into the details of the Cyprus-like event planned for the US (I know, sounds tin-hattish), consider these facts. Recently a survey was taken, comparing world banks in order to determine which are the safest. Of all the world banks, not a single US bank made the top 20. In a nation that prides itself as a pinnacle of banking prowess, let that sink in.

In fact, out of the top 50, only five made the list. The first was BNY Mellon, coming in at 29th. The list was based on evaluation of long-term credit ratings, fwiw.

Now, considering the tenuousness of US banks, where should you savings be? It’s a legitimate question, and one made even more pertinent in light of Cyprus-like planning that’s already on the books in the US. If/when banks fail in the future, there will be mechanisms in place to protect the banks at all costs, including the loss of deposits, or the exchange of deposits for equity in the failing bank. What’s perceived as minor risk in depositing cash in an FDIC insured US bank is subsequently turned into greater risk as cash is converted into stock in a failing bank. It’s wealth consolidation in the form of forced investment, and nothing depositors say will affect the outcome.

David Tanzer (I have no affiliation), an attorney specializing in offshore structuring, make these observations recently in his excellent article, “The Blur Between Legal and Illegal.” I’d encourage anyone of substance to read this very carefully and thoughtfully – emphasis mine.

You think it’s better to just stay home and avoid going offshore? You think your cash is safer in U.S. banks instead? And that a depositor haircut – Cyprus style – couldn’t happen in the U.S.?

Think again.

The $25 billion in U.S. deposit insurance (FDIC) arises from federal law designed to preserve and protect some $9.2 trillion in U.S. deposits. That’s a paltry amount designed to protect huge deposits. But a far bigger problem exists when you consider the “asset” side of the U.S. banks’ ledger. Remember, deposits are unsecured liabilities. And for U.S. banks, sadly, over the counter derivatives represent the vast majority of “off the books” assets. According to the latest OCC quarterly report, the total derivative notional outstanding of the top 25 holding companies is nearly $300 trillion…with a ‘T’.

In other words there are 32 times more notional derivatives than there are total deposits, while the ratio of gross derivatives to deposit insurance is a concerning 11,900-to-1.

To solve the lack of FDIC insurance amounts in the U.S., there is a little known Cyprus ‘haircut’ scheme that the U.S. and British governments quietly prepared to resolve the next financial crisis. In other words, already set in place is an advance plan to give depositors haircuts on their federally insured deposits in U.S. banks.

The 15-page FDIC-BOE document is called “Resolving Globally Active, Systemically Important, Financial Institutions”.  You can locate your copy here. 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, already anticipating that the next financial collapse will be on a far grander scale than either the taxpayers or Congress is willing – or able – 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. and the U.K., the new equity would become capital in one or more newly formed operating entities (i.e. good banks and bad banks). 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 bank. In either country, the new equity holders would take on the corresponding risk of being shareholders in a financial institution and no longer have cash on deposit. Don’t believe it? Read the above FDIC-BOE resolution.

No exception is made for “insured deposits” in the U.S., meaning those deposits under $250,000 – the deposits you 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 as a plan that “would be triggered in the event of the failure of an insurer . . . .”

There can often be a fine line between being an alarmist and responsibly sounding an alarm. While I’ve tried to maintain that line, from time to time I know I cross it. It’s just the nature of trying to be discerning.

Having said that, this is not a “run for the bunker” post. It’s a warning. the US founding fathers were Libertarian at heart, establishing a country where the free market would determine successes and failures, for the most part. Of course, once it became so successful, resulting in massive wealth and a growing middle-class, the government decided it should go from small to large, systematically turning the people of the nation into tax cows. Gary Gibson recently wrote an excellent article for TDV regarding this very topic.

Make no mistake, this is wealth confiscation and consolidation among the elite. Consider it carefully, and what you plan on doing about it.

 

Kind regards,
Another Joe

 

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