By Bob Shapiro
In 2007, a Financial Crisis, initially largely involving Sub-Prime Mortgages, hit the US. Many large banks and other financial institutions were on the brink of bankruptcy, and a few slightly smaller ones did fail.
We’re told that the FDIC exists to protect depositors, but the FDIC’s fund is so small, at $25 Billion, compared to depositor’s money at risk, at $9,283 Billion, that it’s considered a joke within the industry.
Sub-Prime Loans, then also called Liar Loans, were packaged, using Fannie & Freddie guarantees, into Collateralized Debt/Mortgage Securities, and sweetheart deal ratings were extorted out of the three major ratings agencies. These, together with other derivatives, totaled almost $300 Trillion of bets made by the various financial institutions.
These derivatives were marketed widely in the US, and also in Europe. When the underlying Sub-Prime mortgages started defaulting, the prices on CMSs plunged – this is what almost crashed Europe!
To try to prevent the “End of the Financial World as We Know It,” the US Government embarked on massive bailouts of the stupidly run, “Too Big To Fail” institutions, at taxpayer expense. These bailouts have never ended, and the US FED added ZIRP (Zero Interest Rate Policy), QE1, Operation Twist, QE2, and QE3 on top of the bailouts .
There has been something of a public uproar over the bailouts, so the idea of a “Bail-In” was tried out in Cyprus a few years ago. A Bail-In is where the law allows depositors to lose their money before others. Deposits are “converted” into stock of the institution so that it can continue mismanaging its affairs without interruption. That stock loses value very quickly.
Since the Bail-Ins “worked” well in Cyprus, the practice has been adopted by most Western governments, including here in the US. So, if you have money in an account with one of the Too Big To Fail banks, and there’s another financial crisis, you’re going to lose part or all of your money! Here’s a list of the 29 banks in this category worldwide:
The Sub-Prime loans fell from about $125 Billion in 2007 to $60 Billion by 2009, so everything is under control now, right? No, not right!
The FED’s ZIRP has caused yet another bubble to be blown, this time for Sub-Prime auto loans. These loans have rates around 20%, with loan amounts as high as 115% of the car price. With these, Sub-Prime loans are back up to $120 Billion.
And now, Fannie & Freddie are starting to rev up their loans again, with down payments as low as 3% of equity. Sub-Prime is likely to be a problem again soon.
And all those derivatives, in the 100s of Trillions, are still weighing on the liability side of the Big Banks. With Bail-Ins protecting these financial institutions with your money, you may want to look at that list again and make sure your accounts are elsewhere.
But, you still aren’t in the clear. If you have a pension, there’s a good chance that all your money in the pension fund may be invested in debt of these banks. It’s your money so it’s up to you to find out and tell your pension to stop.
Action Item: Bail-Ins violate the fiduciary responsibility of the financial institutions which benefit at depositors expense.
- Congress should pass a law, and the President should sign it, outlawing the practice known as Bail-In, returning to the use of bankruptcy proceedings. Bankruptcy should disqualify the managers from continuing at the helm of the institution.
- Depositors should be returned to the head of the line of who gets their money first in case of a bankruptcy.
- Managers of financial institutions which use high leverage or risky investments should be held personally liable if those investments go bad.
- No business should be considered Too Big To Fail. If incompetent managers are allowed to stay in charge as they run the business into the ground, the business should be allowed to go into bankruptcy, an the owners should bear the loss.