After explaining that when you deposit money in a bank, it becomes the bank’s property which they’ve historically been required to surrender on demand, Web of Debt outlines the revised process that the FDIC and the Bank of England have been discussing:
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.
[…]
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.
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.
Read the whole, depressing thing. Hat tip: Angry Bear
As a thought experiment, consider why banks are of public concern at all. In truth they shouldn’t be any more than we’re worried about a furniture store going out of business. The concern that most people have about banks is the security of their deposits. Now remove that security. Who benefits directly from banks being held safe regardless of their behavior? Indirectly?
On the bright side, going long on manufacturers of rope, guillotines, and ammo looks better every day.
If I am reading this correctly, then the FDIC would no longer insure any accounts. The safety of the money would depend entirely upon the integrity, and abilities, of the banks.
Steve
Mattress sales will surely go up.
That’s not the part that I have problems with. What I’m concerned about is that entire accounts including those that are fully ensured could, effectively, be seized.
It seems to me that a better first step would be nationalization of the banks followed by clawbacks of compensation.
Since they arent insured, they are vulnerable to loss anyway. They could be seized by any creditor or could be lost if a bank folds.
Steve
I wonder if a bank could do that with my SS deposit? I have a suspicion it couldn’t as a legal matter (just an intuition, really). Of course, the political SS (=shitstorm) would be tsunamic.
I should add that as of March 1 this year, all SS payments will be direct deposit:
Once it’s in your account, it belongs to the bank.
I don’ t know, Dave. There are limits on what banks can do with SS deposits:
New Regulations Prevent Debt Collectors From Seizing Federal Benefits Deposited Into Bank Accounts:
I would think that if creditors cannot attach my SS deposit, then that same SS deposit cannot be used to discharge a debt of the bank itself.
More generally, federal law protects SS payments prohibits creditors from seizing all forms of Social Security benefits. These include SSI, survivor’s benefits, retirement and disability.
LOL, I suggested something like this FDIC-BOE plan to PD last week as a joke/nightmare scenario. I also read somewhere this week that Canada is looking into putting in the legal framework to do what Cyprus is doing, in the event a TBTF bank starts failing.
Either keep the money in the mattress or, ala Bialystock, FLAUNT IT, BABY! FLAUNT IT!
…
Note that it’s becoming pretty much impossible to conduct financial transactions without a bank or credit union.
Since countries that are allegedly “stable” and “in recovery” are considering these possibilities NOW, it makes me wonder what they know that we don’t know.
…
Also, consider how well this equity thing would have worked out for someone with deposits in CITI during 2007 and 2008. CITI lost something like 93% of its share prices at the bottom, and last I checked (which was over a year ago, I grant) it still hadn’t recovered to much. I’ll note that Vikram Pandit managed to extract about a quarter billion from CITI during the time he was helping crash the company. (The biggest chunk of that came from CITI buying his lousy hedge fund.)
Seriously, the best way to rob a bank is to run one.
http://www.amazon.com/Best-Way-Rob-Bank-Own/dp/0292721390
Bill Black wrote that book.
Steve
I believe the lack of an exemption for the insured deposits is because they are already insured. It becomes harder to sell a failed bank as more depositors leave. Insured depositors are mostly concerned with convenience and access to their money, and to calm them, the FDIC does its takeovers on a Friday and re-opening on Monday.
I am skeptical of most governmental motives, but I think the writer has “jumped the shark”.
@Icepick
LOL, I suggested something like this FDIC-BOE plan to PD last week as a joke/nightmare scenario. …
I took it seriously. The Wickard v. Filburn decision should allow the government to determine the proper use for your property. If growing wheat for your use is going to derail a recovery, pulling your money out of the bank will derail this recovery.
I took it seriously.
It was a joke because it is insane to consider these options. I mean, this is THE surefire way to destroy all trust in government, the currency and the financial system. Not that this will stop the current crop of leaders – as seen in Europe they will do anything to protect the financiers. Ours are no different. I’m wondering how long before the Russian billionaires who are getting screwed by the Cyprus deal start pushing for Putin to declare war on the EU.
I didn’t say own it, I said run it. Why have any of your own money at risk?
@Icepick
… I mean, this is THE surefire way to destroy all trust in government, the currency and the financial system. …
People have an amazing ability to find a positive aspect in anything. In addition, the President Obama supporters would hail this as the smartest move in the history of man. The GM move should have caused the US corporate bonds to skyrocket. The plan would be sold as saving the banks, and it would be accepted by most.
It is a human need to trust something. Religion provides one outlet, but since the Renaissance, the west has become more secular, and religion has little influence in the trust of secular things. For many, the government is above reproach, or at least while their party is in power.
… I’m wondering how long before the Russian billionaires who are getting screwed by the Cyprus deal start pushing for Putin to declare war on the EU.
Never f*ck with a man’s money.