Theft is Legal for Big Banks

Theft is Legal for Big Banks- and Your Money Will Never Be Safe

The new rules for keeping too-big-to-fail alive: use creditor funds,
including uninsured deposits, to recapitalize failing banks.




Photo Credit: Shutterstock.com

April 29, 2013
<blockquote>“[W]ith Cyprus . . . the game itself changed. By raiding the
depositors’ accounts, a major central bank has gone where they would not
previously have dared. The Rubicon has been crossed.”

—Eric Sprott, Shree Kargutkar, “ Caveat Depositor”
</blockquote>The crossing of the Rubicon into the confiscation of depositor funds
was not a one-off emergency measure limited to Cyprus. Similar
“bail-in” policies are now appearing in multiple countries. (See my
earlier articles here.)
What triggered the new rules may have been a series of game-changing
events including the refusal of Iceland to bail out its banks and their
depositors; Bank of America’s commingling of its ominously risky
derivatives arm with its depository arm over the objections of the FDIC;
and the fact that most EU banks are now insolvent. A crisis in a major
nation such as Spain or Italy could lead to a chain of defaults beyond anyone’s control, and beyond the ability of federal deposit insurance schemes to reimburse depositors.

The new rules for keeping the too-big-to-fail banks alive: use
creditor funds, including uninsured deposits, to recapitalize failing
banks.

But isn’t that theft?

Perhaps, but it’s legal theft. By law, when you put your money into a
deposit account, your money becomes the property of the bank. You
become an unsecured creditor with a claim against the bank. Before the
Federal Deposit Insurance Corporation (FDIC) was instituted in 1934,
U.S. depositors routinely lost their money when banks went bankrupt.
Your deposits are protected only up to the $250,000 insurance limit, and
only to the extent that the FDIC has the money to cover deposit claims
or can come up with it.

The question then is, how secure is the FDIC?

Can the FDIC Go Bankrupt?

In 2009, when the FDIC fund went $8.2 billion in the hole, Chairwoman Sheila Bair assured depositors that their money was protected by a hefty credit line with the Treasury. But the FDIC is funded with premiums from its member banks,
which had to replenish the fund. The special assessment required to do
it was crippling for the smaller banks, and that was just to recover
$8.2 billion. What happens when Bank of America or JPMorganChase, which
have commingled their massive derivatives casinos with their depositary
arms, is propelled into bankruptcy by a major derivatives fiasco?
These two banks both have deposits exceeding $1 trillion, and they both
have derivatives books with notional values exceeding the GDP of the
world.

Bank of America Corporation moved its trillions in derivatives
(mostly credit default swaps) from its Merrill Lynch unit to its banking
subsidiary in 2011. It did not get regulatory approval but just acted at the request of frightened counterparties, following a downgrade by Moody’s. The FDIC opposed the move, reportedly protesting that the FDIC would be subjected to the risk of becoming insolvent if BofA were to file for bankruptcy. But the Federal Reserve favored the move, in order to give relief to the bank holding company. (Proof positive, says former regulator Bill Black, that the Fed is working for the banks and not for us. “Any competent regulator would have said: ‘No, Hell NO!’”)

The reason this risky move would subject the FDIC to insolvency, as explained in my earlier article here,
is that under the Bankruptcy Reform Act of 2005, derivatives
counter-parties are given preference over all other creditors and
customers of the bankrupt financial institution, including FDIC insured
depositors. Normally, the FDIC would have the powers as trustee in
receivership to protect the failed bank’s collateral for payments made
to depositors. But the FDIC’s powers are overridden by the special status of derivatives. (Remember MF Global? The reason its customers lost their segregated customer funds to the derivatives claimants was that derivatives have super-priority in bankruptcy.)



Source:-
http://www.alternet.org/economy/theft-legal-big-banks-and-your-money-will-never-be-safe