http://www.nationofchange.org/bail-out-out-bail-time-some-publicly-owned-banks-1367416438
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?
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.)
The FDIC has only about $25 billion in its deposit insurance fund, which is mandated by law to keep a balance equivalent to only 1.15 percent of insured deposits. And the Dodd-Frank Act (Section 716) now bans taxpayer bailouts of most speculative derivatives activities. Drawing on the FDIC’s credit line with the Treasury to cover a BofA or JPMorgan derivatives bust would be the equivalent of a taxpayer bailout, at least if the money were not paid back; and imposing that burden on the FDIC’s member banks is something they can ill afford.
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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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