A Serious Case of Déjà Vu
Everyone is going to have to cut me a little slack on the eve of the celebration of the American independence. No, this isn’t about that video that came out a few days ago that demonstrated exactly how ignorant Americans are about the significance of tomorrow or how the accomplishment that day has been eroded over the past 2+ centuries by those eager to ‘re-create’ America in their own twisted image. This one is a companion piece to a series of ‘Two Cents’ articles that have been released over the past few years relating to the bail-in. I know, I know. He’s at it again. The Pessimist of Pennsylvania is going to go on another rant about those rotten banks and how they’re conspiring to rip everyone off.
A few years ago, it was a little island called Cyprus. A weekend crisis followed by a bank holiday followed by the unprecedented move of swiping bank deposits to re-capitalize banks. The action was dubbed a ‘bail-in’ since instead of raiding taxpayers (I guess no taxpayers have bank accounts), the banks would look to the inside and steal from their customers to keep this whole sham afloat. The take-home from Cyprus was simple: the people were not given any chance to take action to protect their deposits. The crisis boiled over on a weekend when banks were normally closed anyway, the ATMs ran dry, and by Monday a ‘holiday’ was announced. By the time depositors could get access to their accounts again, the rip off had taken place. Granted, that particular action only targeted accounts greater than 100,000 Euros, but it’s the principle. Keep that in mind for the future.
In 2011, the Bank of England, in conjunction with the FDIC here in America, drafted a policy paper entitled “Resolving Globally Active, Systemically Important, Financial Institutions”. Concomitant to this, the Bank for International Settlements was preparing its own draft entitled “Report and Recommendations of the Cross Border Bank Resolution Group”. The upshot as I and many others screamed about at the time was to steal bank deposits to cover bank losses in a financial crisis. People hooted and hollered and said ‘it will never happen in America’. To which we responded “It already has”. Eyes immediately glazed over and the focus was lost. That was honestly about as far as I got with most people on this whole topic. Precious few were even willing to listen for the 15 minutes necessary to explain the situation regarding Sentinel, Peregrine Financial, and MFGlobal, as well as the legal precedents set in the Sentinel case. I’m not going to delve into the particulars here because that work has already been done. Links are provided below for those who are not yet up to speed and wish to do so.
The bottom line as I sit here on the eve of American independence is that the bail-in is likely to strike again, this time in a much bigger way, and on an order of magnitude much higher than in Cyprus. To be honest as well as accurate, it actually hasn’t happened yet, but is being discussed as a plan of action should Greek banks continue to be festooned in crisis. So maybe I’ll be accused of jumping the gun, but I’m taking a different angle here so bear with me.
In Cyprus, the ‘haircut’ as it was called was applied to all accounts that were greater than 100,000 Euros. According to the Financial Times, the plan being discussed in Greece is to steal 30% (No, I don’t like the term haircut; this is stealing) of all accounts that are greater than a mere 8,000 Euros. It doesn’t take any kind of rocket scientist to figure out that if this actually transpires in Greece that the scope of impact is going to be far greater than it was in Cyprus. Don’t take that as a justification to rip off people who have a lot of money in the bank. Cyprus was a crime. The criminals walked between the rain drops and got away scot free. Their illegal actions were deemed legal by the banking community. This alone should tell you a lot about who makes the laws when it comes to money and the movement and possession thereof. If the Greek banks go through with their own bail-in, they will be criminals as well, however, the policymakers of the world have said that stealing is ok. No harm, no foul, right?
Those same policymakers have also decided that this new bail-in mantra applies to US banks and their depositors. We know the FDIC is grossly underfunded to handle anything but a miniature crisis. The FDIC is like a car insurance company. It plans for a certain amount of accidents on any given day, but what happens if its clients develop narcolepsy and the number of car crashes goes up dramatically? The auto insurer is in big trouble. And such is the case with the FDIC. If you want to bet your kids’ future on that ridiculous sticker they plaster all over the banks about a $250,000 ‘guarantee’ then be my guest. You have that freedom as an American. Remember, you also bear the responsibility to deal with the consequences of your actions. You are not Bank of America, Goldman, or JP Morgan. You will not be bailed out. Any lifeline you get will have interest upon interest and debt servitude attached to it.
I’ll make this short and sweet. I want everyone who reads this article to take 10 minutes after you read this, and perhaps some of the companion pieces, to think about whether or not your bank might have discussed the bail-in as an action plan should its exposure to the Eurozone crisis be too much. Did your bank have to be bailed out in 2008? Did it take TARP/TSLF money? Do you even know? You can find out easily enough. Was your bank implicated in the rigging of LIBOR? Is it engaging in the same risky behaviors today that got it in trouble in the past? If the answer to any of these questions is ‘yes’, then I’d ask only that you spend some time and seriously consider why you are continuing your relationship with an institution that takes risks, seeks taxpayer money when things go wrong and it goes kerplunk, and now has the legal authority to swipe your hard-earned savings if and when there is a repeat of 2008 or a situation similar to it.
Below are the links to everything related to the bail-in that I’ve compiled. Again, in conclusion, I stress that as of the writing of this column, there has NOT been a bail-in in Greece. It has, however, been made public as a pathway should the crisis continue. That, along with the proposal of hitting accounts with such a low balance, makes it worthy of mention. Don’t get caught in the media and establishment’s mental trap that just because the fireworks are flying here that your savings aren’t in the crosshairs of the same people who are, at this very hour, plotting across the Atlantic.
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Andy Sutton is the Chief Market Strategist for Sutton & Associates, LLC – a Registered Investment Adviser in Pennsylvania. His focuses are econometric modeling and risk management. The firm specializes in wealth preservation and growth and recognizes the validity of non-paper assets in achieving a balanced approach. The firm is also currently working with a growing clientele towards avoiding the risks outlined above.