Are Your Savings Accounts Safe? Part II of II

Summary:

Part I discussed why checking and savings accounts are unsafe and will not be safe. 

Those reasons included:

The prosperity of the US government, which pumps trillions of fiat currency into the economic system, is used only to further its political objectives. Political objectives almost always involve propping up public employee labor unions, private company labor unions, and major corporations.

The government's policy of forced near-zero interest rates, from which only Wall Street and the federal government benefit.

The fractional reserve banking system, which has been in effect for 300 years, should be canceled and replaced with a zero-reserve banking system.

The Dodd-Frank Act of 2010, a significant financial reform law, included a provision known as 'bail-in'. This provision allows the US Federal Reserve to potentially use funds from private party checking and savings accounts to rescue failing financial institutions. Put another way, your savings could save a bank in trouble.

Article:

Part II expands the conversation to include multiple actions taken by the Federal Government and large major financial institutions that harm the safety of public checking and savings account balances.

Historic banking is dramatically different from today's banking:

Most folks are correctly under the impression that federally insured banking institutions were historically created to collect public deposits and use those proceeds to loan out to credit-worthy consumers (borrowers). Collateral included taking a security interest (deed or mortgage) on real property, unsecured based upon a borrower's good credit or some form of government-backed insurance program. This system was designed to be the primary driving force for growth in the US economy.

Historically, banks were allowed to use depositor proceeds to lend to borrowers for whom they charged market interest rates, typically in three categories: consumer installment, commercial business, or real estate. The ability to pool deposits and make loans to many borrowers at interest rates higher than depositor interest rates paid out created a positive spread in the form of gross revenue to the bank or financial institution. Banks also added charges, such as overdraft fees, for banking services received from depositors, which enhanced the banks' profits. Many banks'  primary income stream now comes from overdraft charges and default interest charges. One could argue about the predatory nature of this business model. But could you save your breath? They oversee the federal government.

Bank balance sheets differ from those of other businesses because the money deposited from the public (capital) that the bank loans out to borrowers is considered a bank asset. Bank deposits are also considered liabilities or unsecured debt. In simpler terms, if a bank defaults, the people who have deposited money in the bank (the 'unsecured creditors') have no legal guarantee that they will get their money back.

Today, banks and non-bank financial institutions are some of the US's most highly leveraged operating companies. They have been protected through multiple financial bailouts like a monopoly cartel because Wall Street has a propensity to install advocates at all levels of government.

The banking industry appears stable because of a combination of historic fractional reserve banking and insured deposits through the Federal Deposit Insurance Corporation (FDIC). What I mean by historic is that our banking laws required a reserve of about 10% of deposits to be held and not loaned out if the bank needed cash to meet its obligations in emergencies.

As of March 26, 2020, banks are no longer required to keep any reserve deposits on their books. The US has moved away from fractional reserve banking to zero-reserve banking.

Our banking system is now unraveling because all public safety mechanisms and reassurances of confidence have been removed. Banks can now invest, with very minimal limits, in extremely high-risk and highly leveraged securities. Banks no longer need to be bothered with these pesky reserve requirements.

The banking system makes tremendous profits based on highly leveraged bets that things will go its way. The real question is how long it can keep up with today's hyper-casino-styled, highly leveraged investment strategies. The consequences could be severe if there is even a moderate downturn in the stock market. A 200-basis-point increase in the interest rate would bring the economy to its knees.

FDIC insurance of $250,000 per individual account and the illusion of depositor protection:

In 1933, during the Great Depression, the Federal Deposit Insurance Corporation (FDIC) was established as an independent federal agency. Its primary purpose was to restore public confidence in the banking system by insuring deposits in case of bank failures. This was a crucial step to prevent the 'run-on-the-bank' scenarios that had devastated many banks during the Depression.

Today, depositors are insured for up to $250,000 for each separate account for all banking institutions participating in the FDIC insurance program.

The public perceives that the Federal Deposit Insurance Corporation (FDIC), somewhere, maybe stashed on a shelf, has the money in reserve to pay out large amounts of insurance claims if any bank(s) default. It does not! Insured deposits are an economic and propagandized illusion. If the FDIC needed significant funds, the US Department of Treasury had to print new money out of fiat (out of thin air) and issue corresponding debt securities (US Treasury bonds) for public or international investors to purchase. All incoming cash proceeds from these public sale securities are available to spend on all federal government financial obligations. This would include the FDIC liabilities.

FDIC insurance claims could become staggeringly large. The government may look elsewhere for money for FDIC claims, and bank depositors'  funds became legal under Dodd-Frank of 2010. As usual, highly leveraged financial companies take the maximum risk, enjoy the benefits of success, and dump any losses in the public's pockets.

Investment in US Treasuries and US Savings Bonds are viewed as low risk because the full faith of the US Government backs them. The newly created debt securities become US Federal debt, also called central government debt or sovereign debt, and is a financial obligation of future US taxpayers. Yes, the taxpayers, not the government employees who created the debt, are responsible.

The government's propensity to continue printing money has accelerated year after year, continually increasing in size, currently over $28-30 trillion. Anytime economic headwinds show their ugly face, governing elites always print more money. Build Back Better, or some other phony mantra, is permanently attached to sell to the unsuspecting public. Printing more money is an easy decision for weak and non-existent national leadership.

Our current administration is attempting to increase the national debt to $35 trillion+/-. We are witnessing a seat-of-the-pants strategy: kick the can down the road and hope. Unfortunately, hope is not a strategy. Our current strategy is just a temporary gimmick.

Accrued national public debts are not included in public disclosure. Keep the public unaware:

The US-accrued sovereign debt does not include unfunded and underfunded pensions and medical obligations of Social Security, Medicare, Medicaid, and federal and state government pensions, estimated to be over 200 trillion dollars. Government leaders from both major political parties never provided any solution to pay for this tsunami of accepted economic benefits over the next 20-30 years.

Borrowing $200 trillion is the answer, and we should kick the can down the road as though the road to financial wealth will never end. Massive inflation and reduced purchasing power are the preferred schemes.

Maybe injecting older folks, weaker folks, and those with pre-existing conditions with a gene-modifying substance may be the answer to reducing the future social safety net cost.

Our current national economic strategy reminds me of the Weimar Republic between 1914 and 1923 (a German city where the republic was headquartered), Venezuela, and Argentina, where hyperinflation destroyed otherwise beautiful countries. Our headlights are on high beam with a clear vision in front for hyperinflation. Only raising interest rates to combat inflation will work. The Wall Street elites will not allow this to happen.

FDIC Insurance and Safety Deposit Box Security:

In theory, depositors' checking, savings, and certificates of deposit for up to $250,000 per separate account are FDIC-insured if proceeds are placed or purchased in participating institutions. FDIC insurance does not cover financial instruments such as stocks, bonds, US Treasury securities (T-bills), safe deposit box contents, annuities, insurance products, and money market funds. Could you check with your bank representative for clarification on coverage?

When were banks and large financial institutions allowed to engage in high-risk investment strategies?

The repeal of the Glass-Steagall Act of 1933 in 1999 was designed to separate risky investment banking activity from depositor funds. The repeal no longer prevented banks from operating only as commercial and investment banks.

Federal Legislators from both major political parties joined the sellout. I'm sorry that your political party and the opposing party (your drastic enemy) sold you out.

The Repurchase Agreements (REPO) market:

The US Treasury is considered safe and serves as collateral for overnight borrowers, usually banks and major financial institutions. Buyers of US treasuries act as short-term lenders, and sellers (banks and financial institutions) act as short-term borrowers.

The Repurchase Agreement Market (Repo) is part of the inner workings of the US financial system. Repo refers to short-term borrowing instruments through approved dealers in government securities. The dealers sell the securities to investors overnight to other financial institutions and repurchase them the next day or later at a slightly higher price. This process is fundamental to the central banks, which constantly need to raise capital to feed the government's cash flow requirements and meet banks' capital reserve requirements.

On September 17, 2019, the Repo market froze up. Liquidly became so strained that the Federal Reserve began providing hundreds of billions of dollars per week in Repo Loans to participant trading houses. Since then, the government has created an additional 9 trillion dollars to primarily bail out Mega Banks and Wall Street while they dumped the debt on the backs of the taxpayers. The National Debt increased from 22 trillion dollars to around 28 trillion, all in 3/4th of a year. The public was too busy watching the news (mainstream propaganda discrimination) to notice.

The subsequent US financial implosion will be bigger, faster, and more ferocious. Everything appears rosy if the Federal Government continues to mandate close-to-zero and below-inflation interest rates. The size of the economic bubble can and will continue to grow to the stratosphere.

The illusion of assumed and increased wealth and financial stability permeates every corporate boardroom and media outlet. Stock buybacks account for 40% of the current daily trading volume. Rising G.D.P.s, rising corporate profits, stock buybacks with cheap borrowed money, taking on highly leveraged debt, and the continued speculative frenzy are all necessary to prevent a financial implosion.

Inflation in the prices of all asset classes will continue to skyrocket to the moon. Investors in the Wall Street casino and the public will experience a corresponding reduction of purchasing power of each dollar right up until the day the frantic financial speculative watch stops ticking.

The catalyst for the next economic crash will be a systemic implosion in a massive number of derivative contracts that default, which will cause insolvency of the counterparties, mostly the too-big-too-fail banks.

Derivatives as investment instruments by large banks are a ticking time bomb:

A written derivative contract is a contractual or hedging-bet agreement that derives its value based on pegging value movements with or against other financial assets. The amount of speculation here is very high. The process requires multiple (sophisticated) parties and (refined) counterparties to bet on whether fluctuations will or will not occur. Usually, hedging instruments are based on interest rate movements of underlying financial assets such as bonds, commodities, and currencies.

Derivative contracts are contractual agreements among counterparties that are off-balance-sheet hedging bets. The profitability potential is very high, but the risk exposure to downside reversal and loss of corporate and bank capital is very high. The corporation keeps profits, but losses can now be transferred to innocent third-party public bank depositors.

Dodd-Frank of 2010- With the passing of this legislation, the US Government has now made bank checkers and savers subject to having their checking and savings confiscated to pay the losses created by a central bank and financial institutional defaults.

One could question whether a significant bank default constitutes a central bank default. Yes, absolutely! But if you are an elite financial powerhouse member who controls the federal government and the government allows you to transfer the losses to someone else, why not? The public is too busy watching daily news and gobbling up false propaganda to notice.

History of Derivatives Losses:

Derivatives losses were the catalyst for the 1998 collapse of Long-Term Capital Management, Inc., a prominent hedge fund, and the near-collapse of the entire world financial system.

The federal government and Federal Reserve have caved in and provided bail-out schemes to large financial institutions, Wall Street trading houses, and large publicly traded corporations. Very minor exceptions would include Leman, who was a competitor of Goldman-Sacs. Goldman eliminated its major competitor because it controlled Washington as it does today.

Federal bail-out programs from the 2008 economic collapse came to approximately $29 trillion. It was and will be expected in the future for the federal government to agree to bail out companies like the largest insurer in the world, American International Group (AIG), to the tune of $185 billion to cover derivatives losses. AIG is a multinational finance and insurance corporation that operates in over 80 countries and jurisdictions. Another example in this boneyard was how the $11 billion stock equities of General Motors were extinguished and the proceeds reallocated to the labor unions. This $29 trillion is now a debt to be owned by taxpayers rather than the businesses who took an extremely high risk and lost.

A Bit of Prospective:

The U.S. Gross Domestic Product (GDP) is about 27 trillion annually. Taxation takes approximately $5 trillion per year into government pockets. If the government spends $10 trillion annually, it must create a difference by injecting it into the system.

The Ghost of Dodd-Frank:

The derivatives market is largely unregulated. Lobbyists representing large banks convinced the US Congress to allow banks to invest in derivative contracts with minimal regulation. The Dodd-Frank Act has authorized future derivative claims from losses to have a super or senior priority for repayment over all other claims against the defaulted banks.

The Dodd-Frank Act also reorganized the priorities of all debts, after the costs of administration necessary in any liquidation process, first to the government, then to the banks, then to derivatives, then to secured and unsecured creditors (including checkers and savers) of the bank, and then finally to equity (stockholders). Bank shareholders could be subject to substantial losses in liquidation since derivative claims are preferred over them. Counterparties to derivative losses will have their claims covered and paid before shareholders and depositors.

Claims are prioritized if Financial Institutions Become Insolvent and the Decision to Trigger the Bail-In Provision of Dodd-Frank.

This is stated in 12 USC 5389 and 12 USC 5390

As stated, a series of rules allow for the orderly liquidation of assets and the payment of claim holders according to a list of priority payments. The receiver refers to this as an orderly liquidation authority. Claims are paid in order as follows. Anyone involved with a bankruptcy court knows everyone gets cared for; the innocent investors are the last.

When the government withdraws money from your accounts, it no longer belongs to you. You become an unsecured creditor, and unsecured creditors are the last to be taken care of.

Administrative costs. The government would hire private companies to administer the process. Who gets paid big bucks?

The government; costs of government employees who are in no hurry.

Wages, salaries, or commissions of employees.

Contributions to employee benefit plans.

• Any other general or senior liability of the company. This would most likely include amounts under derivative defaults. This may be an astronomically large number that would gobble up all proceeds confiscated from the public under the bail-in provision. 12 US Code 5389 refers to rules and regulations concerning the rights, interests, and priorities of creditors, counterparties, security entitlement holders, and others concerning such covered financial companies. Note very clearly that this includes counterparties of defaulted derivatives.
• Obligations to shareholders, members, general partners, and other equity holders.

Unsecured creditors for 3^rd party claims. (This includes bank checkers and savers who are uninsured by the FDIC. The FDIC has no money. It only holds very low-yielding U.S. Treasuries, which essentially makes it insolvent.

The checkers and savers who thought their bank accounts were safe will be left holding the bag, losing their hard-earned savings. At the same time, the large financial institutions will be bailed out for their super-high-risk, highly leveraged, and defaulted derivative contracts.

The system, including lawyers, judges, consultants, receivers, government employees, and employees of insolvent financial institutions, will continue to get paid and accrue benefits while the public gets shafted.

The liquidation could cause the depositors' savings of the insolvent bank to be reallocated to future equity (stock) and, thus, extinguished as a savings asset. The depositors' alternative is for the bank to repay amounts owed for up to 30 years. Some observers believe that depositors can draw rights or credit lines for partial payments with government approval.

The consequence of a systemic meltdown will be much more severe for the lower and middle class, including retired folks and those living off a pension with deposits directed into a bank account. Most of their available assets are deposited in banks for security and convenience. Also, the contents of a safety deposit box in the bank may be confiscated and used.

Too Big to Fail Banks the high-risk derivatives business.

The six too-big-to-fail ( TBTF ) banks account for 67% of all outstanding bank assets in the USA.

The risk in the derivatives market is concentrated in the US. In 2011, four US banks held 95.9% of US derivatives. Should derivative contracts fail, causing bank defaults, minimal government insurance proceeds exist unless the government prints additional money by issuing new debt to replace the funds paid out in defaulted bank insurance claims.

The government's full faith does not back derivatives, but losses have been deemed more important than public assets of checking and savings. Therefore, the losses will be transferred to the public. In effect, the Dodd-Frank Act has shifted the ultimate risk for highly speculative derivatives losses to depositors in US banks, typically members of the working middle class.

Warren Buffet has called derivatives financial weapons of mass destruction. The bank statistics below explain why: Market capitalization refers to the outstanding shares commonly used to measure a company's worth.

• J P Morgan Chase has a market capitalization of $472 billion, total deposits of $2,253,482,000, and $53.4 trillion off-balance sheet notational derivatives. Derivatives contracts are 113 times greater than market capitalization. Chase has 63% of the total of $4.197 trillion of equity derivative contracts held by all US federally insured banks and saving associations. Its net exposure is in the trillions. (verify this statement)
• Bank of America has a market capitalization of $338 billion, $1,906,458 total deposits, and its total off-balance sheet notational derivatives is $19.3 trillion, 57 times the market capitalization. Its net exposure is in the trillions
• Wells Fargo's market capitalization is $308 billion, its deposits are $1,479,499,000, and its off-balance sheet notational trading derivatives are $11 trillion, 36 times its market value.
• Citicorp's market capitalization is $203 billion (as of August 2021), its total deposits are $1,282,071, and its total off-balance sheet notional trading derivatives are about $47 trillion, 204 times its market capitalization. Its net exposure and risk are in the trillions.

The above totals fluctuate over time. Could you consult your broker for the exact figures?

Conclusion:

FDIC government-insured deposit accounts held by the public are now expressly subordinated to derivative losses of banking participants in the event of a market collapse. The risk associated with the total sum of $288 trillion in counter-party bets in the derivatives market by these banks through Wall Street trading houses is primarily hedging interest rates. Not all derivatives would lose in a market collapse, triggering a meltdown. With counter-party betting, there will be winners and losers. In the settlement process, the real crisis will occur when central banks become insolvent and cannot cover their losses. That is when the government will reach into the pockets of the depositors to cover the losses.

Depositor accounts held in the US banking system carry the most significant risk exposure for loss or the potential of a long-delayed or deferred recovery. If about $17 trillion in deposits currently held in commercial banks and bail-in provisions allowed the government to confiscate one-half or more, $8.5 trillion would not go very far for $ 10 trillion of derivative losses.

Remember the phrase, You can take it to the bank? This means a third-party source can verify something as accurate and is assumed to be reliable. The new phrase should be, Do not rely on receiving your money back if you deposit it in the bank. You are better off with your deposits held in small regional banks or, better yet, state-chartered credit unions.

I have researched the above subjects through various data sources. There may be conflicts, especially with time and different data sources. Thank you for taking the time to read this article. I hope you found the information valuable.