Mar 16, 2014
Bail-Out Is Out, Bail-In Is In
Posted on Apr 30, 2013
By Ellen Brown, Web of Debt
An interesting series of commentaries starts with one on the website of Sprott Asset Management Inc. titled “Caveat Depositor,” in which Eric Sprott and Shree Kargutkar note that the US, UK, EU, and Canada have all built the new “bail in” template to avoid imposing risk on their governments and taxpayers. They write:
Dave of Denver then followed up on the Sprott commentary in an April 3 entry on his blog The Golden Truth, in which he pointed out that the new template has long been agreed to by the G20 countries:
The links are in Dave’s April 1 article, which states:
Dave goes on:
Jesse at Jesse’s Café Americain then picked up the thread and pointed out that it is not just direct deposits that are at risk. The too-big-to-fail banks have commingled accounts in a web of debt that spreads globally. Stock brokerages keep their money market funds in overnight sweeps in TBTF banks, and many credit unions do their banking at large TBTF correspondent banks:
Also at Risk: Pension Funds and Public Revenues
William Buiter, writing in the UK Financial Times in March 2009, defended the bail-in approach as better than the alternative. But he acknowledged that the “unsecured creditors” who would take the hit were chiefly “pensioners drawing their pensions from pension funds heavily invested in unsecured bank debt and owners of insurance policies with insurance companies holding unsecured bank debt,” and that these unsecured creditors “would suffer a large decline in financial wealth and disposable income that would cause them to cut back sharply on consumption.”
The deposits of U.S. pension funds are well over the insured limit of $250,000. They will get raided just as the pension funds did in Cyprus, and so will the insurance companies. Who else?
Most state and local governments also keep far more on deposit than $250,000, and they keep these revenues largely in TBTF banks. Community banks are not large enough to service the complicated banking needs of governments, and they are unwilling or unable to come up with the collateral that is required to secure public funds over the $250,000 FDIC limit.
The question is, how secure are the public funds in the TBTF banks? Like the depositors who think FDIC insurance protects them, public officials assume their funds are protected by the collateral posted by their depository banks. But the collateral is liable to be long gone in a major derivatives bust, since derivatives claimants have super-priority in bankruptcy over every other claim, secured or unsecured, including those of state and local governments.
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