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Dec 19, 2014

After the G-20
== A Follow-Up ==

Did Your Dollars in the Bank
Just Become Dollars at Risk?

BY Craig R. Smith

CHAIRMAN, Swiss America
and Lowell Ponte

A Swiss America Trading Corporation
White Paper, December 2014

Copyright © 2014 by Swiss America Trading Corporation

All Rights Reserved, including the right to reproduce this paper, or parts thereof, in any form except for the inclusion of brief quotations in a review.

Printed in the United States of America.

Some Elements in this White Paper are also discussed in:

Craig R. Smith and Lowell Ponte
Don't Bank On It!
The Unsafe World of 21st Century Banking
Phoenix: Idea Factory Press, 2014.
All Rights Reserved.

For more information contact publisher.
Idea Factory Press
13232 North 1st Avenue, Phoenix, AZ 85029 Tel. (602) 918-3296

Executive Summary

On November 16, 2014, American and global banking were turned upside down because of actions taken by the G-20 at its meeting "down under" in Brisbane, Australia.

The G-20, founded in 1999, is a group of the 20 richest nations whose combined economies account for around 85 percent of Earth's Gross World Product and 80 percent of global trade. Its meetings, which include heads of major central banks and entities such as the European Union, are a forum for harmonizing the international financial system through policy agreements.

The G-20's November actions are redefining the "ownership" of what we used to think of as "our" bank accounts – and mean that depositors urgently need to rethink how much we should entrust to banks.

The message from the G-20 is that our banks are no longer the safe haven we once believed them to be – and the U.S. Dollar may no longer be as reliable a store of value as it once was.

Our deposits in the bank should henceforth be regarded not as secure, but as "at risk" investments for which banks now pay depositors near-zero interest.


Was November 16, 2014 "the day money dies?" This prediction was attributed by BusinessWeek to "uber-analyst Russell Napier." [1]

On that day, according to Napier, the G-20 would announce "that bank deposits are just part of commercial banks' capital structure, and also that they are far from the most senior portion of that structure."

As such, according to Napier, following a bank failure "a bank deposit is no longer money in the way a banknote is."

"In our last financial crisis, [bank] deposits were de facto guaranteed by the state," BusinessWeek ascribes to Napier, "but from November 16th holders of large-scale deposits will be, both de facto and de jure, just another creditor squabbling over their share of the assets" if their bank fails.

On Sunday, November 16, the G-20 – including President Barack Obama in attendance – voted that its member nations would commence rapidly enacting new banking laws and policies remarkably close to what Napier predicted.

Surprised by what the G-20 nations were about to approve, Examiner.com financial reporter Kenneth Shortgen, Jr., seemed dazed as he reported:

"[W]e are all now faced with the realization that the money we thought was our own, and protected in our checking and savings accounts, no longer is."

"And after Sunday at the G20 meeting," Shortgen continued, "the risks of holding any cash in a bank or financial institution will have to be weighed as heavily and with as much determination of risk as if you were holding a stock or municipal bond, which could decline in an instant should the financial environment bring a crisis even remotely similar to that of 2008." [2]

Such journalists could have gotten all this "news" months earlier by reading our 2014 book Don't Bank On It! The Unsafe World of 21st Century Banking.

"When you open a bank account you are taking a risk. You are making an investment, gambling with the fruits of your labor," we warned.

"The risk you take by trusting your money to a bank," we continued, "...is far greater than most people realize – and that risk is rapidly increasing." [3]

"Laws and rules are being changed to make government confiscation of bank deposits as 'unsecured assets' easier via what governments now call 'bail-ins,'" we warned.

"Under today's law," we wrote, "you no longer necessarily 'own' your bank account. Your bank does." [4]

How We Got Here

"We took new steps toward strengthening our banks," said President Obama at the G-20 gathering, "....making sure that we've got a financial system that's more stable and that can allow a bank to fail without taxpayers having to bail them out."

What he meant is that, henceforth, those who thought their money was safe in the bank will now be among the first in line to lose if their bank starts to run out of money.

In the financial crisis that began in 2008-2009, the Federal Reserve rushed to prop up "Too Big To Fail" (TBTF) giant banks – so called because the collapse of such "Systemically Important Financial Institutions" (SIFIs) could risk bringing down the entire economy – by quietly making or arranging a staggering $16.115 Trillion – roughly equal to the entire annual Gross Domestic Product of the United States – in various loans arranged to rescue banks and other major financial institutions. [5]

To prevent another such crisis, the world's most powerful nations resolved to replace future taxpayer bailouts with what they called "bail-ins." They wanted to stick somebody other than governments and politicians with the cost of resolving future bank crises. They began planning the best ways to expropriate the assets of bank shareholders, creditors and depositors to pay a bank's shortfall before taxpayer money would be used.

By April 2012 this new doctrine was already being developed in detail by economists of the International Monetary Fund, as evidenced by their study From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions. [6]

In December 2012, America's Federal Deposit Insurance Corporation (FDIC) and the Bank of England published a joint memo that approved this new "bail-in" banking doctrine. [7]

Scarcely three months after the FDIC-Bank of England memo agreeing to this, the Eurozone carried out its first "bail-in."

Citizens of the Mediterranean island nation Cyprus awoke one morning in March 2013 to find their banks padlocked, their accounts inaccessible via ATM, and their bank credit cards no longer usable. The government, with European and International Monetary Fund approval, had seized their bank accounts to pay the deficiencies of Cypriot banks. [8]

This "bail-in" would be the "template" of future government policies towards troubled banks, the Netherlands finance minister told a reporter.

The people of Cyprus have been under currency controls ever since, restricted in how many Euros they may take out of their island country.

Why Cyprus? It is a small nation on which to test the new deposit-grabbing policy. Worse, in the view of European welfare states with high taxes, Cyprus was a tax haven whose banks paid depositors higher interest and did more to protect their privacy than in most other European nations.

By seizing Cypriot banks and their accounts, the European Union aimed to shut down a competitor and snatch billions of Euros from Russians and others sheltering their wealth on the tiny island. The EU succeeded in choking Cyprus as a tax haven, but the EU failed to prevent wealthy Russian oligarchs from withdrawing their bank accounts before it could seize them.

Could a Cyprus-like bail-in happen here? Of course, as President Obama affirmed with his vote in Brisbane for the G-20 policy.

How Safe Are Our Banks?

The G-20 rush to impose this new bank "bail-in" policy worldwide is happening for a reason. The world's central bankers and political leaders know that the global economic system is fragile and getting worse. Europe with its double-digit chronic unemployment is on the knife edge of falling back into deep recession. China's economy is weakening.

The system is being held together with cheap money and interest rates kept artificially close to zero so government can afford to borrow trillions of dollars. This easy money keeps the stock market casino rising, but in the real economy it stifles growth, jobs and economic health. We continue to have the lowest job participation rate since the economic malaise of President Jimmy Carter, and a large share of what jobs are being created are part-time work for hamburger flippers.

But the easy money will continue because the world could plunge into near-fatal economic withdrawal symptoms if this addictive drug of easy money is taken away.

Economists use a formal term for the Federal Reserve policy of holding bank interest rates below the rate of inflation. That term is "financial repression." [9] It robs and discourages savers, who lose purchasing power every day their money is in the bank.

This was imposed, in part, to help the government and others "deleverage" their enormous debt – but instead of seriously cutting back spending, those in power pushed our national debt in December 2014 above $18 Trillion – nearly doubling it in the last six years.

Our global banking system is a house of cards that might be blown down by any gust of financial, political or computer-hacker wind in our stormy world. Bank depositors now face 20 major risks to the safety of their accounts, as we document in Don't Bank On It!, yet depositors receive near-zero interest for braving those risks.

Truth be told, it has become illogical for most people to keep much money in a bank account. So where, other than government, will banks get the money to lend when savers withdraw their accounts? And if government becomes the chief lender, as Karl Marx advocated, then how long before government simply replaces private banks?

Consider the world as leaders at the G-20 now see it:

In 1787, as she traveled to her newly conquered Crimea, the German-born Russian Empress Catherine the Great saw villages of smiling, well-fed peasants who cheered her. She took this as a sign that her policies were producing prosperity and widespread happiness among her people.

Unknown to her, these tiny towns were little more than stage props, and the smiling peasants were actors – an illusion conjured to deceive her by one of her top officials, Grigory Potemkin.

The term "Potemkin village" has come to mean any such construction, physical or in mere words, built as a deception to make things seem better than they actually are. When those in power start building Potemkin villages, this is usually a sign that things are in reality worse than we know.

Readers of Don't Bank On It! will immediately recognize and understand Potemkin villages being built in some disquieting news stories that reveal the insecurity of our banks.

The London Telegraph's James Titcomb reports [10] that the chairman of the international Financial Stability Board Mark Carney, who is also Governor of the Bank of England, reveals how future bank problems will be handled.

His plan is that future problems in banks that are "Too Big To Fail" will never again end in government bailouts using taxpayer money. Instead, as we explained in Don't Bank On It!, governments will employ "bail ins," forcing what he calls "creditors" of various kinds to bear banks' losses.

This seemingly good news, however, conveniently neglects to reveal who all these "creditors" are. It turns out that they include not only bank stockholders but also mere bank employees, whose income and pensions may get a "haircut" to cover bank shortfalls.

Banking's Potemkin Village

Those stuck paying for bank shortcomings may also include customers, depositors who do not understand that when they opened a bank account, they were in effect lending their money to a bank that could go bankrupt, and getting in return only an IOU.

Did you know that under this emerging "bail in" legal doctrine, the money you deposit in today's banks in a sense ceases to be yours and can be confiscated, or turned into bank "shares" of uncertain value, to cover bank shortfalls? This is what the G-20 affirmed, and its members are rapidly turning this agreed doctrine into law.

Carney's focus was also on raising the ability of 30 major "systemically important banks" (SIFIs) globally to withstand financial problems.

Of these 30 banks subject to additional regulation and requirements, eight are American: JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, State Street, and Wells Fargo.

As we discuss in Don't Bank On It!, the United States has created its own "Financial Stability Oversight Council" that has already identified as Too-Big-To-Fail "dozens of banks, insurance companies, mutual funds and more. It seems to be throwing its net wider and wider. And every company caught in that net is a target for extra government scrutiny and pressure." [11]

The aim of this Council, we note one Securities and Exchange Commission commissioner saying, appears to be not to strengthen such financial entities but to single them out for costly new requirements...and regulatory penalties that enrich money-hungry government.

Such "Financial Stability" policies can also mean lower bank interest and higher fees for those with bank deposits, but do they protect taxpayers?

Not necessarily. the London Telegraph quotes one major bank chairman as saying that these new policies "are about distributing the burden of failure; they are not about avoiding the burden of failure."

"Bail-in rules will still mean the public being on the hook for banks," writes Titcomb.
Safety for the taxpayer remains an illusion.

A healthy economy needs both risk and reward – reward to encourage effort, and risk to encourage prudence. One reason our banking system has problems is that banks deemed "Too-Big-To-Fail" could gamble more than their smaller competitors, because everyone knew that if these megabanks started to fail, taxpayer money would bail them out; they lived in a heads-I-win, tails-taxpayers-lose world that encouraged unwise speculation.

Another problem in our banking system is that depositors believe that, no matter how unwise or reckless their bank might be, the Federal Deposit Insurance Corporation guarantees that their bank account is safe.

Created during the Great Depression to prevent depositor runs on fractional-reserve banks that were unable to redeem only a small fraction of deposits at the same time, the FDIC is what we call "fractional-reserve insurance." It at any given time has only around $37 Billion of its own reserves funded by bank payments, plus vague promises of up to another half-trillion dollars of crisis money that the U.S. Treasury and Federal Reserve might provide.

This sounds impressive until one learns that the FDIC currently claims to insure more than $7 Trillion in depositor accounts. The FDIC at best would be able promptly to restore roughly one dollar of every $14 it claims to insure. If even one of the biggest five banks – which among them hold approximately half of all U.S. accounts – were to fail, the FDIC might be unable to restore the accounts in that single bank. [12]

In a major economic collapse, the FDIC might within months be able to reimburse all depositors with money hot off the government presses, debased dollars printed out of thin air by the trillions that would have only a fraction of the purchasing power of the dollars depositors lost. The resulting high inflation would also bleed away the value from paper dollars hidden under your mattress or closet floor. (In fact, the government and Fed are doing this right now – taxing you by deliberately creating dollar-debasing inflation. [13]) Ask yourself: how many days, weeks or months could you go without your bank account or credit?

Fractional-Reserve Banking is why regulators have demanded that banks maintain a certain percent of cash in reserve, demand "Living Wills" by banks to show how best they could go broke without causing major economic disruption, require "stress tests" to show their financial fitness, and in our new G-20 age demand of the top 27 G-Sibs (Global Systemically Important Banks) TLAC, "Total Loss Absorbency Capacity," which involves, among other things, reserves of 15-20 percent of deposits or more. The aim is to make banks well-enough funded that governments can let them fail without facing major problems in the whole economy. [14]

And this intense regulatory environment has become a source of pressure that allows politicians to strong-arm banks to lend billions to partisan allies, spy on customers and reveal their financial activities to government, under the current Administration's "Operation Choke Point" force the cutting off of banking services to law-abiding businesses the ruling politicians dislike such as gun stores, and use regulatory fees and penalties as a source of tens of billions of dollars used by both politicians and their activist comrades. We document all this and much more in Don't Bank On It!

A Potemkin Supernova

A second Potemkin village crops up in a November 2014 Wall Street Journal editorial about how "18 giant banks signed on to a plan 'developed in coordination with' global regulators, including the Treasury and Federal Reserve." [15]

The Journal notes that "the world's largest banks have 'agreed' to forfeit contractual rights in order to help regulators during a crisis" by agreeing "to rewrite all of their derivatives contracts with each other." [16] Note that this agreement applies only to specific bilateral agreements these banks have with each other, and nobody else.

This may sound simple and reassuring to those who know nothing of the astronomical magnitude of bank exposure to derivatives.

However, here is what we wrote in Don't Bank On It!:

Many of America’s big investment banks have made risky bets and left themselves dependent on
government and the Fed to bail them out. These megabanks are too deep in potential trouble to be
saved in a dire crisis. The Fed, according to the Government Accountability Office, from 2007
through 2010 committed $16.115 Trillion in various loans to rescue banks.

However, today’s biggest banks have stratospheric exposure to derivatives that even the Fed would find hard to bail out: reportedly at least $44.19 Trillion for Goldman Sachs, $50.13 Trillion for Bank of America, $52.1 Trillion for Citibank, $70.15 Trillion for JPMorgan Chase, and $72.8 Trillion for Deutsche Bank. Just 9 major banks on which the world economy depends have derivative exposure of more than $290 Trillion in a global $693 Trillion derivatives market! Listen for a moment and you can hear this time bomb -- called by Warren Buffett a "Financial Weapon of Mass Destruction" -- ticking. If this explodes, neither the Fed nor the FDIC could put your bank or deposits back together again. The paper dollar would be ashes to ashes, dust to dust.

The Economist described the 18-bank handshake deal to slow down derivatives from reaching critical mass during the first 24 hours of a bank crisis as "throwing sand into the gears of the financial doomsday machine," and heralded the agreements as "Armageddon delayed." [18]

If regulators believe they can make $290 Trillion of potential value on the books of our biggest banks – roughly four times the annual Gross Domestic Product of our entire planet – simply vanish by having banks modify their contracts, this should be proof why sane people are taking their money out of our banking system – and out of fiat dollar currency and dollar-denominated investments – as fast as they can.

This deal, notes the Journal, was achieved not via an open democratic legal process but involved "the world-wide surrender of contractual rights in a closed-door meeting one Saturday at the Fed" that included regulators eager to have an agreement before the G-20 meeting.

Nobody can see the future, but this deal-under-pressure has the potential to undermine the rule of law, compromise bank investor interests, beget lawsuits, involve possible comingling of derivative debt with savings accounts, and perhaps even lead to taxpayers backing a U.S. bank because the agreement coerces it into losing money by helping a foreign bank.

The Wall Street Journal quoted one unnamed "old Wall Street hand" as saying: "Some regulators liken a run on the bank to the flight from a fire in a crowded theater. What the regulators have done here is lock the 18 signers in the theater. Of course, now it will be even more important for the regulators to put the fire out. They'll argue they must bail out the bankrupt, in order to save the 18 counterparties." [19]

Even in late November, during the "lame duck" session of Congress, lawmakers in both parties were at work trying to pass a measure to benefit the biggest banks. [20]

In other words, the Too-Big-To-Fail may yet get bailed. The Wall Street Journal warns: "Taxpayer, beware." In light of what happened at the G-20, we would add "Bank Depositor, beware."

If, as the G-20 agreed to, your bank account becomes merely one of many creditors if your bank fails, then what matters is whether the emerging law makes depositors high or low priority for repayment. The G-20 agreement makes reimbursing you a low priority. But prior to the 18-bank agreement, according to Public Banking Institute President Ellen Brown, bank derivatives had "Super-priority status." [21]

The entire global banking system may be a deceptive Potemkin village about to go Supernova. Why else would this urgent effort be underway to neutralize the explosive risk of banks with exposure to tens of trillions of dollars worth of derivatives....or as happened at the G-20, why are bank depositors now being set up as almost the last guy on the totem pole who could be stuck paying the bill when a major bank collapses?

The good news is that those who act wisely and decisively now can escape such devastation, as our new book Don't Bank On It! explains.


[1]C. Thompson and Laurence Arnold, "Cash Under Mattress May Be Better Than G-20 Bank: Opening Line," Bloomberg BusinessWeek, November 13, 2014. URL: http://www.businessweek.com/printer/articles/854966?type=bloomberg

[2]Kenneth Shortgen, Jr., "Bank Deposits Will Soon No Longer Be Considered Money But Paper Investments," Examiner.com, November 12, 2014. URL: http://www.examiner.com/article/bank-deposits-will-soon-no-longer-be-considered-money-but-paper-investments

[3]Craig R. Smith and Lowell Ponte, Don't Bank On It! The Unsafe World of 21st Century Banking. Phoenix: Idea Factory Press, 2014. Page 213.

[4]Ibid., p. 216.

[5]Ibid., p. 187.

[6]Jianping Zhou and others, From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions. Washington, D.C.: International Monetary Fund, April 24, 2012. URL: https://www.imf.org/external/pubs/ft/sdn/2012/sdn1203.pdf

[7]"Resolving Globally Active, Systemically Important, Financial Institutions: A Joint Paper by the Federal Deposit Insurance Corporation and the Bank of England" (monograph), December 10, 2012. URL: http://www.fdic.gov/about/srac/2012/gsifi.pdf

[8]Craig R. Smith and Lowell Ponte, op cit., pp. 141-151.

[9]Carmen M. Reinhart, "Financial Repression Back to Stay," Bloomberg, March 11, 2012. URL: http:// www.bloomberg.com/news/2012-03-11/financial-repression-has-come-back-to-stay-carmen-m-reinhart. html; Carmen M. Reinhart and M. Belen Sbrancia, "The Liquidation of Government Debt," National Bureau of Economic Research (NBER) Working Paper # 16893. March 2011. URL: http://www.imf.org/ external/np/seminars/eng/2011/res2/pdf/crbs.pdf; Alberto Giovanni and Martha De Melo, "Government Revenues from Financial Repression," American Economic Review, Vol. 83 #4 (September 1993).
URL: http://www.jstor.org/discover/10. 2307/2117587 uid=3739560&uid=2&uid=4&uid=3739256&s id=21101221127691; Buttonwood, "Carmen Reinhart and Financial Repression," The Economist, January 10, 2012. URL: http://www.economist.com/blogs/buttonwood/2012/01/debt-crisis/print; Member of the European Parliament Nigel Farage, "Europe Is About to Impose Extreme Repression," King World News (Interview), June 22, 2012. URL: http://kingworldnews.com/kingworld- news/KWN_DailyWeb/ Entries/2012/6/22_Nigel_Farage_-_Europe_is_About_to_Impose_Ex- treme_Repression.html

[10]James Titcomb, "Mark Carney: No More Bank Bail-outs," London Telegraph, November 10, 2014. URL: http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11220192/Mark-Carney-No-more-bank-bail-outs.html

[11]Craig R. Smith and Lowell Ponte, op cit., pp. 160-161.

[12]Darrell Delamaide, "Can FDIC Handle the Failure of a Megabank?" USA Today, May 30, 2013. URL: http://www.usatoday.com/story/money/business/2013/05/28/delamaide-fdic-megabank-failure/2365955/; see also Craig R. Smith and Lowell Ponte, Op Cit., pp. xi, 217.

[13]For a complete explanation, see Craig R. Smith and Lowell Ponte, The Inflation Deception: Six Ways Government Tricks Us...And Seven Ways to Stop It! Phoenix: Idea Factory Press, 2011. Pages 1-264.

[14] "Bank Regulation: Buffering," The Economist, November 15, 2014. URL: http://www.economist.com/node/21632647/print

[15]"Another Big Bank Handshake," Wall Street Journal, November 9, 2014. URL: http://online.wsj.com/articles/another-big-bank-handshake-1415577485

[16]Gregory Mott, "Banks Back Swap Contracts That Could Help Unwind Too-Big-To-Fail," Bloomberg, October 11, 2014. URL: http://www.bloomberg.com/news/2014-10-12/banks-back-swap-contracts-that-could-help-unwind-too-big-to-fail.html; Peter Eavis, "Expected Change in Derivatives Aims to Curb Damage From Bank Failure," New York Times, October 8, 2014. URL: http://dealbook.nytimes.com/2014/10/08/expected-change-in-derivatives-aims-to-curb-damage-from-bank-failure/?_r=0; Eleanor Bloxham, "How We Can Prevent Another Financial Derivatives Disaster,: Fortune, October 20, 2014. URL: http://fortune.com/2014/10/20/derivatives-big-banks-living-wills/; Philip Stafford and Tracy Alloway, "Banks Agree to Derivatives Rules to Cope with Future Crisis," Financial Times, October 11, 2014. URL: http://www.ft.com/intl/cms/s/0/923fbbe6-509b-11e4-b73e-00144feab7de.html#axzz3KxnhIuq2

[17]Craig R. Smith and Lowell Ponte, op cit., p. 187.

[18]"Armageddon Delayed," The Economist, October 11, 2014. URL: http://www.economist.com/news/finance-and-economics/21623739-throwing-sand-gears-financial-doomsday-machine-armageddon-delayed

[19]"Another Big Bank Handshake," Wall Street Journal, November 9, 2014. URL: http://online.wsj.com/articles/another-big-bank-handshake-1415577485

[20] "Washington's Quiet Bankruptcy Rewrite," Wall Street Journal, November 28, 2014. URL: http://online.wsj.com/articles/washingtons-quiet-bankruptcy-rewrite-1417219846

[21]Ellen Brown, "Winner Takes All: The Super-priority Status of Derivatives," Huffington Post, April 11, 2013. URL: http://www.huffingtonpost.com/ellen-brown/winner-takes-all-the-supe_b_3054522.html; see also Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution: Consultative Document (Monograph). Basel, Switzerland: Financial Stability Board / Bank of International Settlements, November 10, 2014.

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