Big Bank Bail-Ins vs. Bail-outs: Bad News in Disguise

By Lowell Ponte, Special for USDR


In 1787, as she traveled to her newly conquered Crimea, the Russian Empress Catherine the Great saw villages of smiling, well-fed peasants who cheered her. She took this as a sign that her policies were producing prosperity and widespread happiness among her people.

Unknown to her, these small towns were little more than stage props, and the smiling peasants actors, created for her by one of her top officials, Grigory Potemkin.

The term “Potemkin village” today means any such construction, physical or in mere words, built as a deception to make things seem better than they actually are.  When those in power start building Potemkin villages, this is usually a sign that things are in reality worse than we know.

Readers of Craig R. Smith’s and my latest book Don’t Bank On It! The Unsafe World of 21st Century Banking will immediately recognize and understand Potemkin villages being built in two disquieting news stories about the insecurity of our banks.

In the November 10 London Telegraph, James Titcomb reports that the chairman of the international Financial Stability Board Mark Carney, Governor of the Bank of England, reveals how future bank problems will be handled.

His plan is that future problems in banks that are “Too Big To Fail” will never again end in government bailouts using taxpayer money. Instead, as we explained in Don’t Bank On It!, governments will employ “bail ins,” forcing what he calls “creditors” of various kinds to bear banks’ losses.

This seemingly good news, however, conveniently neglects to reveal who all these “creditors” are. It turns out that they include mere bank employees, whose income and pensions may get a “haircut” to cover bank shortfalls.

The Growing Risks of Banking

Those stuck paying for bank shortcomings may also include customers, depositors who do not understand that when they opened a bank account, they were in effect lending their money to a bank and getting in return only an IOU.

Did you know that under this emerging “bail in” legal doctrine, the money you deposit in today’s banks in a sense ceases to be yours and can be confiscated, or turned into “shares” of uncertain value, to cover bank shortfalls?

Carney’s focus was also on raising the ability of 30 major “systemically important banks” globally to withstand financial problems.

Of these 30 banks subject to additional regulation and requirements, eight are American: JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, State Street, and Wells Fargo.

As we discussed in Don’t Bank On It! (pages 160-161), the United States has created its own “Financial Stability Oversight Council” that has already identified as Too Big To Fail “dozens of banks, insurance companies, mutual funds and more. It seems to be throwing its net wider and wider. And every company caught in that net is a target for extra government scrutiny and pressure.”

The aim of this Council, we note one Securities and Exchange Commission commissioner saying, appears to be not to strengthen such financial entities but to single them out for costly new requirements…and regulatory penalties that enrich money-hungry government.

Such “Financial Stability” policies can also mean lower bank interest and higher fees for those with bank deposits, but do they protect taxpayers?

Not necessarily. the London Telegraph quotes one major bank chairman as saying that these new policies “are about distributing the burden of failure; they are not about avoiding the burden of failure.”

“Bail-in rules will still mean the public being on the hook for banks,” writes Titcomb.

Safety for the taxpayer – as for the depositor who trusts a Federal Deposit Insurance Corporation able to reimburse only $1 of every $14 it insures – remains an illusion.

A Potemkin Supernova

A second Potemkin village crops up in a November 9 Wall Street Journal editorial about how “18 giant banks signed on to a plan ‘developed in coordination with’ global regulators, including the Treasury and Federal Reserve.”

The Journal notes that “the world’s largest banks have ‘agreed’ to forfeit contractual rights in order to help regulators during a crisis” by agreeing “to rewrite all of their derivatives contracts with each other.”

This may sound simple and reassuring to those who know nothing of the astronomical magnitude of bank exposure to derivatives.

However, here is what we wrote in Don’t Bank On It! (page 187):

Many of America’s big investment banks have made risky bets and left themselves dependent on
government and the Fed to bail them out. These megabanks are too deep in potential trouble to be
saved in a dire crisis.  The Fed, according to the Government Accountability Office, from 2007
through 2010 committed $16.115 Trillion in various loans to rescue banks.

However, today’s biggest banks have stratospheric exposure to derivatives that even the Fed
would find hard to bail out: reportedly at least $44.19 Trillion for Goldman Sachs, $50.13 Trillion
for Bank of America, $52.1 Trillion for Citibank, $70.15 Trillion for JPMorgan Chase, and $72.8
Trillion for Deutsche Bank. Just 9 major banks on which the world economy depends have
derivative exposure of more than $290 Trillion in a global $693 Trillion derivatives market!
Listen for a moment and you can hear this time bomb — called by Warren Buffett a “Financial
Weapon of Mass Destruction” — ticking. If this explodes, neither the Fed nor the FDIC could put
your bank or deposits back together again. The paper dollar would be ashes to ashes, dust to dust.

If regulators believe they can make $290 Trillion of potential value on the books of our biggest banks – roughly four times the annual Gross Domestic Product of our entire planet – simply vanish by having banks forfeit these contracts, this should be proof why sane people are taking their money out of our banking system….and out of fiat dollar currency and dollar-denominated investments as fast as they can.

The entire global banking system may be a Potemkin village about to explode as a Supernova. The good news is that those who act prudently now can escape such devastation.

All opinions expressed on USDR are those of the author and not necessarily those of US Daily Review.

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