Understanding bank bail-ins

[meierlde]

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Originally Posted by Danmar Agree that this is how it has worked in the past and would work this way again. The term "bail in" relates to the forced conversion of certain classes of bonds, pref shares, or possibly even deposits in the case of a bank running into trouble. This is designed to relieve the gov't authority of having to "bail out" the bank. The U.S. does not have a bail in regime at this point. Other countries like Canada have such a bail in system.

If you have uninsured deposits then yes you are subject to bail ins look at Indy Mac or further back Penn Square bank in Ok. In those cases the uninsured depositors got back a percentage of their deposits after the FDIC managed to redeem them. So yes if you have sums above the insurance limits (250 k per depositor noting that pay on death deposits are a distinct deposit for FDIC purposes from deposit in the individuals name alone etc, you will get bailed in.
Or further in the case of Washington Mutual the bond holders of the holding company got wiped out because the FDIC sold the underlying bank out of the holding company leaving it standing with no assets (Geitner did not like this)

[RetireBy90]

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Originally Posted by Golden sunsets "Too big to fail" is still an issue. The Treasury Dept and the Fed kept us from dropping off a cliff in the last crisis. As a former FDIC examiner I can attest to the fact that most banks are solvent and well managed. The crisis of 2008 occurred for a number of reasons, one of which was derivative activities of unregulated non-banks such as AIG. The deregulation of the banking industry started the slippery slope that escalated into the crises we faced in 2008.

Perhaps we could first be honest about the causes of the 2008 crisis, and then perhaps we could plan to keep the causes from happening again. We have taken banks to the shed, but what about the other causes? We had home buyers that lied on load applications, no outrage against them. We had congress pass laws that required a greater percentage of Fannie and Freddy loans be made to lower income buyers, when did we hold them accountable? Must have missed that one. We had shadow lenders deeply involved in financial system that had no backups. We had appraisals that grossly overvalued homes, now I can't get an honest appraisal.

I don't know all the details, but seems naive to me to think we have rooted out the problems and put any kind of fix in place.

Sorry for rant but I do think it is important to understand the causes.

[pb4uski]

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Originally Posted by Gatordoc50 ......It is true that in a failure your deposits can be paid out to creditors. The FDIC insures those losses up to 250k. ....

I don't think you're right on that, doc. As I understand it depositors (even amounts over the FDIC limit) are second in line behind the receivers administrative expenses and general creditors would come after depositors.

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The category given second priority applies to any deposit liability of the institution, including both the insured depositors and the uninsured depositors.

from: https://www.fdic.gov/bank/historical...istory1-10.pdf

[meierlde]

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Originally Posted by pb4uski I don't think you're right on that, doc. As I understand it depositors (even amounts over the FDIC limit) are second in line behind the receivers administrative expenses and general creditors would come after depositors. from: https://www.fdic.gov/bank/historical...istory1-10.pdf

One must consider the corporate structure often there is a holding company and a seperate corporation the bank. Depositors are creditors of the bank subsidiary. Bond holders may be creditors of the holding company or the bank, (for example money market funds may hold holding company paper). The FDIC bails out the bank subsidiary and as in the case of Washington Mutual might just hang the holding company and its creditors out to dry. For example the stock is stock in the holding company, the holding company holds the stock in the bank subsidiary. If you do a bank search at the FDIC site you will find this for the big banks.

[Gatordoc50]

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Originally Posted by pb4uski I don't think you're right on that, doc. As I understand it depositors (even amounts over the FDIC limit) are second in line behind the receivers administrative expenses and general creditors would come after depositors. from: https://www.fdic.gov/bank/historical...istory1-10.pdf

I believe that the Bankruptcy Reform Act of 2005 changed that but I am no expert.

" For starters, the FDIC does not have the sole right to prevent BOA or any other Too Big To Fail Bank from using the Bankruptcy Code to prefer payment to derivatives' counter-parties before making FDIC insured depositors whole."

http://www.dailykos.com/story/2011/1...ite-Dodd-Frank

[meierlde]

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Originally Posted by Gatordoc50 I believe that the Bankruptcy Reform Act of 2005 changed that but I am no expert. " For starters, the FDIC does not have the sole right to prevent BOA or any other Too Big To Fail Bank from using the Bankruptcy Code to prefer payment to derivatives' counter-parties before making FDIC insured depositors whole." Why the FDIC is Upset With Bank of America's Derivatives Transfer Despite Dodd-Frank

Note that regulated banks can not file bankruptcy "The section of the Bankruptcy code that governs which entities are permitted to file a bankruptcy petition is 11 U.S.C. § 109. Banks and other deposit institutions, insurance companies, railroads, and certain other financial institutions and entities regulated by the federal and state governments, and Private and Personal Trusts, except Statutory Business Trusts, as permitted by some States, cannot be a debtor under the Bankruptcy Code. Instead, special state and federal laws govern the liquidation or reorganization of these companies. In the U.S. context at least, it is incorrect to refer to a bank or insurer as being "bankrupt". The terms "insolvent", "in liquidation", or "in receivership" would be appropriate under some circumstances." (From Wikipedia on Bankruptcy).
The holding company might file bankruptcy but not the bank subsidiary.
Rather the FDIC takes the bank over and assigns a reciever. This is why the discussions of where the derivatives are held is important.

[pb4uski]

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Originally Posted by meierlde One must consider the corporate structure often there is a holding company and a seperate corporation the bank. Depositors are creditors of the bank subsidiary. Bond holders may be creditors of the holding company or the bank, (for example money market funds may hold holding company paper). The FDIC bails out the bank subsidiary and as in the case of Washington Mutual might just hang the holding company and its creditors out to dry. For example the stock is stock in the holding company, the holding company holds the stock in the bank subsidiary. If you do a bank search at the FDIC site you will find this for the big banks.

I'm struggling to understand what you point is (and I fully understand the structure of the bank sub and the holding company having issued bonds and stocks). The thing I am questioning is an assertion that general creditors would rank ahead of depositors in liquidation as some have suggested. If Holdco bondholders and stockholders get hung out to dry, that is fine and the way it should be as they should have understood the risks of buying Holdco bonds or stock and that they would be last in line..

[meierlde]

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Originally Posted by pb4uski I'm struggling to understand what you point is (and I fully understand the structure of the bank sub and the holding company having issued bonds and stocks). The thing I am questioning is an assertion that general creditors would rank ahead of depositors in liquidation as some have suggested. If Holdco bondholders and stockholders get hung out to dry, that is fine and the way it should be as they should have understood the risks of buying Holdco bonds or stock and that they would be last in line..

The issue is that only general creditors of the bank sub would be possibly involved not creditors of the holding company. Second according to the FDIC web site :https://www.fdic.gov/deposit/deposits/faq.html It is the FDIC that pays the insured depositors directly backed by the full faith and credit of the US government i.e. it prints the money if need be. Then the FDIC works to get as much money out of the assets of the bank as it can. But as noted earlier bank subsidiaries do not use the bankruptcy code. As note if the FDIC can't sell the bank to another bank, they either open a temporary desposit insurance bank such as happend at Penn Square or cut checks up to the insured limit. So any playing around with deriviates would only possibly increase the FDIC's losses not the insured depositors.

[imoldernu]

I think that understanding what the FDIC is all about, may be the first step in discussing responsibilities for keeping bank funds safe. Not as simple as it seems, beginning with the oft quoted phrase "full faith and trust"...

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"FDIC deposit insurance is backed by the full faith and credit of the United States government. This means that the resources of the United States government stand behind FDIC-insured depositors." The statutory basis for this claim is less than clear. Congress, in 1987, passed a non-binding "Sense of Congress" to that effect, but there appear to be no laws strictly binding the government to make good on any insurance liabilities unmet by the FDIC

The full history of the FDIC, and its predecessors is quite involved... with the early pre-FDIC insurance entities insuring much smaller amount, which rose to $100K in 2008, and then (temporarily) to $250K in 2009, an amount that became permanent with Dodd-Frank. That extends to these totals...

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a depositor with $250,000 in each of three ownership categories at each of two banks would have six different insurance limits of $250,000, for total insurance coverage of 6 × $250,000 = $1,500,000

There is much more that gets involved with the concept of "deposit insurance" that is too complicated to spell out here, but the actual dollars available to be paid out represents a very tiny percent of the deposits they insure. (At times less than 2%)...

Wiki has an extensive article about the FDIC.

As to the FDIC, gold, derivatives or Greece being a concern for me... not so much. Not from a personal monetary concern, but more from being interested in and trying to look ahead to see what my children may be facing. Children = ages 47 to 57 . They're pretty busy with their lives, and don't get involved in the larger picture, so we do have some interesting discussions about what the world will be like when they reach my age.

Back to bail-ins. Should a time come to be face to face with the national debt, inflation and/or a major market disruption, understanding how the law will deal with the consequences could provide some guidance as to ways to mitigate a major negative effect on personal finances.

At this point, I haven't seen a comprehensive and believable analysis that digs down to the nitty gritty. At the very least, most seem to agree that a bailout similar to the last one cannot and will not happen.

Am tackling The Peterson Institute for International Economics outlook on the subject... here:
http://www.piie.com/publications/cha...8/1iie3713.pdf
A dated article, but one that spells out the process of bail-ins.

So far, I haven't found a simplified explanation that gives a full picture.

[pb4uski]

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Originally Posted by meierlde The issue is that only general creditors of the bank sub would be possibly involved not creditors of the holding company. Second according to the FDIC web site :https://www.fdic.gov/deposit/deposits/faq.html It is the FDIC that pays the insured depositors directly backed by the full faith and credit of the US government i.e. it prints the money if need be. Then the FDIC works to get as much money out of the assets of the bank as it can. But as noted earlier bank subsidiaries do not use the bankruptcy code. As note if the FDIC can't sell the bank to another bank, they either open a temporary desposit insurance bank such as happend at Penn Square or cut checks up to the insured limit. So any playing around with deriviates would only possibly increase the FDIC's losses not the insured depositors.

Agreed, which is why there are regulations and restrictions of a bank's use of derivatives.

So while the statement that deposits (or perhaps more properly bank assets) might be used to pay derivative counterparties may be technically correct because the FDIC takes over the bank and pays the depositors. to say that your deposits will be used to pay counterparties as the OP link suggests is just sensationalism and misleading because depositors will get paid. Depositors will get their money from the FDIC either way.

[imoldernu]

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Originally Posted by pb4uski to say that your deposits will be used to pay counterparties as the OP link suggests is just sensationalism and misleading because depositors will get paid. Depositors will get their money from the FDIC either way.

I don't really have a dog in this fight, so don't want to try to sound like an expert. Just a matter of disinterested interest, and curiosity.
Re: "counterparty"... as I understand this, the basic problem has to do with what used to be called "dual liability" where bank shareholders were held heavily responsible for depositors savings. This was changed, but is planned to be reinstituted in 2017, according to Dodd-Frank. In the meantime, the concern is that bankers and shareholders could bow out of this responsibility before depositors could retrieve their savings. In effect, if this were true, we could be "between laws"... and thus the concern.

I'm not really clear on this, but that's the sense that I got from this recent article.From Bailouts to Bail-Ins: Understanding the Dodd-Frank Act :: The Official Site for the Infinite Banking Concept - R. Nelson Nash

re derivatives... I don't understand the involvement in or the liability of the banks in this matter. In some of the articles on bail-ins, authors seem to indicate that this puts the banks in the position of being shareholders with the benefits accruing to bankruptcy exemption. I cannot believe that this could be the case, but it's what got me started in trying to decipher the topic in the first place.

[Another Reader]

I would not put much stock in what the infinite banking people say. They just want to sell you life insurance and they are all about creating fear and distrust of other financial institutions and products.

[John Galt III]

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Originally Posted by RetireBy90 Perhaps we could first be honest about the causes of the 2008 crisis, and then perhaps we could plan to keep the causes from happening again. We have taken banks to the shed, but what about the other causes? We had home buyers that lied on load applications, no outrage against them. We had congress pass laws that required a greater percentage of Fannie and Freddy loans be made to lower income buyers, when did we hold them accountable? Must have missed that one. We had shadow lenders deeply involved in financial system that had no backups. We had appraisals that grossly overvalued homes, now I can't get an honest appraisal. I don't know all the details, but seems naive to me to think we have rooted out the problems and put any kind of fix in place. Sorry for rant but I do think it is important to understand the causes.

I, for one, appreciate the rant. Who would have thought that Wall Street would need to be, and would be allowed to be, bailed out from a disaster they caused themselves. But it happened. So bail-ins could happen, too. The simplifying cliche I like, that came out of the whole 2008 debacle was "Privatize the profits, and socialize the losses". So bail-ins would just be a case of socializing the losses. A facile description, yes, but easy to visualize. I admit I don't understand all the details.

[MichaelB]

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Originally Posted by Another Reader It's a short article. Lots of intrigue drifting out from smoke (or ouzo) filled back rooms during the crisis. Especially amusing was the plan to arrest the president of the Bank of Greece if he opposed emptying the vaults. We all have heard of Greek tragedy. But Greek comedy?

There is a great deal more on this today from the FT, including a OpEd by the former Minister of Finance. Your choice of the term "Greek Comedy" is looking prescient.