A Crisis Worse than ISIS? Bail-Ins Begin

Author, attorney and public banking advocate Ellen Brown summarizes the ‘state of the union’ of the bail-in regime in her latest blog A Crisis Worse than ISIS? Bail-Ins Begin. Here is a quick summary.

Europe

An Italian pensioner hanged himself after his entire life savings were confiscated in a bank ‘rescue’ scheme which saw the bank-issued bonds he bought bailed-in to save the bank. Apparently, the Italian government pulled the trigger to bail in the bondholders in order to avoid an even nastier scenario whereby bank depositors would be bailed as well – a new rule imposed across the EU starting in 2016.

United States

The US has not yet passed similar explicit bail-in rules, but based on the amount of derivatives the Too Big To Fail banks have on their books, the situation would be worse should something go wrong. For those who have just recently dialled in, here’s a quick refresher.

  • A change in bankruptcy law in 2005 has made derivatives the most senior of liabilities.
  • Bank deposits are unsecured liabilities as far as a bank is concerned. Your deposit money is at the very bottom of the totem pole, below the various levels of senior liabilities (e.g. bonds and other debt instruments) and definitely below the derivatives.
  • The TBTF banks hold a notional value of $280 trillion (with a T) of derivatives at last count. (see Bail-in at your local bank Part 2: the derivatives time bomb)
  • The amount of FDIC funds would amount to a few drops in the bucket if a portion of these derivatives blow up, as they did in 2008. What types of derivatives out there are particularly vulnerable? Oil and commodities related ones immediately come to mind.

This is how Yves Smith of Naked Capitalism describes it.

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.

Bank bail-in

This article is part of the Bank bail-in in-depth topic. Get a crash course and read the latest developments on this topic.

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