Are Your Savings Accounts Safe? Part II
by Dan Harkey
Business & Financial Consultant
cell 949 533-8315 email dan@danharkey.com
In part I, I discussed why checking and savings accounts are not safe and will not be safe in the future. Those reasons included:
1) The propensity of the leaders in the U.S. Government to pump trillions of fiat currency (dollars) into the economic system primarily to the further their political objectives.
2) The government’s policy of forced near-zero-interest rates, where only Wall Street and Federal Government benefit.
3) Cancellation of the fractional reserve banking system and replacing it with a zero-reserve banking system. Banking reserves that have been required for 300 years are no longer required. This cancellation occurred March 26, 2020.
4) The Dodd-Frank Act of 2010, which contains bail-in provisions. The U.S. Federal Reserve may unilaterally decide to confiscate your bank checking and savings accounts to save insolvent banks and non-bank financial institutions in the even of major financial turbulence.
If you want a copy of the part, I article send a note to me at the above email address.
Part II Expands the conversation to include multiple actions taken by the Federal Government, and large major financial institutions that are harmful to the preservation and safety of checkers and savers account balances.
· Historic banking is dramatically different from today’s banking:
Most folks are correctly under the perception that historically created federally insured banking institutions were formed to collect deposits from the public and in turn, use those proceeds to loan out to credit-worthy consumers (borrowers). Collateral included taking a security interest (deed or mortgage) on real property or unsecured based upon a borrower’s good credit or some form of government-backed insurance program. The system was originally designed to be the primary driving force for growth in the U.S. economy.
Historically banks were allowed to use depositor proceeds to make loans to borrowers 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 different borrowers at interest rates higher than depositor interest rates paid out created a "positive spread." The positive spread became the gross revenue to the bank or financial institution. Banks also added charges, such as overdraft fees, account service fees, and others which enhance the bank's profits. Many banks' primary income stream now comes from overdraft charges and default interest charges. One may argue about the predatory nature of this business model. But save your breath. The banking system is entrenched into the federal government.
Bank balance sheets are different from 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 considered liabilities or unsecured debt. It is important to remember the concept of unsecured debt in the article. Assets minus Liabilities equal the shareholder's equity or "bank capital." In the event of bank default, the unsecured creditors (checkers and savers) have absolutely no legal recourse for losing access to their funds.
Today banks and non-bank financial institutions are some of the most highly leveraged operating companies in the U.S. They are protected from significant losses through multiple financial bailouts, very much like a monopoly cartel. Wall Street ensures this process by actively installing advocates and lobbyists into all levels of government.
Our banking system is now unraveling because most 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 or considerations about depositor safety measures.
The banking system makes tremendously large profits based upon highly leveraged bets that things will go their way. The real question is, how long can they keep up with today's hyper-casino-styled-highly-leveraged-investment-strategies? If there is even a moderate downturn in the stock market, the economic consequences could be severe.
I have the belief that a 200-basis points (2%) increase interest rates would bring both the U.S. and other major world economies to their knees. The negative ripple effect for governments, consumers and businesses debt would be far and wide.
· FDIC insurance of $250,000 per individual account, and the illusion of depositor protection:
In 1933, the Federal Deposit Insurance Corporation (FDIC) was created as an independent federal agency to insure deposits in the event of bank failures or bank insolvencies. The primary purpose of the FDIC was to prevent run-on-the-bank scenarios, which had devastated many banks during the 1929-1933 great depression. The purpose of the FDIC was initially to create and maintain stability and public confidence in the nation's financial system.
Today, depositors are insured up to $250,000 for each separate account for all banking institutions participating in the FDIC insurance program.
The public's perception is that the FDIC somehow, somewhere, maybe stashed on a shelf, has the money in reserves 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 U.S. Department of Treasury must print new money out of fiat (out of thin air) and issue related debt securities (U.S. Treasuries and U.S. bonds) for public or international investors to purchase. All incoming cash proceeds from the sales of these public sale securities are made available to spend on all federal government financial obligations including FDIC liabilities.
FDIC insurance default claims could become staggeringly large. The government may look to taking bank depositors' funds to pay claims as provided for under Dodd-Frank of 2010. As usual, highly leveraged financial companies may take the maximum risks, enjoy the benefits of high profits, and dump any losses into pockets of the public.
Investment U.S. Treasuries and U.S. Savings Bonds are viewed as low risk because they are backed by the full faith of the U.S. Government. The newly created debt securities become U.S. Federal debt, also referred to as central government debt, or sovereign debt and they become a financial obligation of future U.S. taxpayers. Yes, the taxpayers, not the government employees who created the debts, are responsible for the debt.
The propensity of the government to continue printing money has accelerated year after year continually increasing in size. It is currently over $28-30 trillion (on the books only and off books not included). Anytime that economic headwinds show their ugly face, governing elites always print more money. “Build Back Better,” or some other phony mantra, is attached to sell to the adoring public. Printing more money has always been an easy decision for weak and non-existent national leadership.
Our current administration is attempting to increase the national debt to $35-40 trillion+/-. We are witnessing a seat-of-the-pants strategy. Kick-the-can-down-the-road-and-hope. But unfortunately, hope is not a strategy. The current strategy is just a temporary gimmick which ensures inflation and the erosion of purchasing power of the dollar. Yes, $10. Per gallon of gasoline and a $25 hamburger will come.
Accrued but unfunded national public debts are not covered in public disclosures: Keeping the public unaware by feeding them volumes of reinforcing propaganda is the preferred method to keep their attention elsewhere like mainstream news.
The U.S. accrued sovereign debt does not include unfunded and underfunded pension and medical obligations of Social Security, Medicare, Medicaid, Federal, and State Government pensions. These amounts are estimated to be over $210 trillion dollars. Government leaders from both major political parties never provide any solutions to pay for this tsunami of excepted economic benefits over the next 20-30 years.
Maybe borrowing $210 trillion is the answer and kicking-the-can-down-the-road as though the road to financial wealth will never end. Massive inflation and reduced purchasing power are the preferred scheme.
Maybe injecting older folks, weaker folks, and those with pre-existing conditions with a gene-modifying substances may be the answer to reducing the future social safety net cost.
Our current national economic strategy reminds me of the Weimar Republic between 1910 and 1933 until the rise of Nazi Germany (German City where the republic was headquartered), Venezuela, and Argentina, where hyper-inflation destroyed otherwise beautiful countries. Our economic headlights are on high beam with a clear vision focused the turbulence of hyper-inflation. Only raising interest rates will work to combat inflation. The Wall Street elites will not allow this to happen since they make the most money during inflationary times.
· In banking what is not covered by FDIC Insurance
In theory, checking, savings, and certificates of deposit by the depositors for up to $250,000 per separate account are FDIC insured if the proceeds are placed or purchased in participating institutions. Financial instruments, such as stocks, bonds, U.S. Treasury securities (T-bills), safe deposit boxes contents, annuities, insurance products, and money market funds are not covered by FDIC insurance. Check with your bank representative for coverage clarification.
· When did Banks and Large Financial Institutions become allowed to engage in extremely high-risk investment strategies?
The Glass-Steagall Act of 1933 was designed to separate risky investment banking activity from depositor funds. The act was repealed in 1999. The repeal no longer prevents banks from operating only commercial and investment banks.
The change allows significant banks and financial institutions to use (innocent and sometimes naïve) depositor funds to make highly leveraged investments and high-risk casino-style financial bets in the form of derivatives contracts? Mainstreet consumers may no longer have confidence that banks will maintain deposits with ultimate safety and preservation of capital in mind? The change occurred when lobbyists, legislators, and major banks passed laws to allow banks to use depositor funds to invest in super high-risk securities.
Joining in the sellout were Federal Legislators from both major political parties. Sorry that your political party and your opposing political party (perceived enemies) sold you out.
· The Repurchase market (REPO) and the big blow up:
Banks and financial institutions use depositor and investor funds to purchase U.S. Treasury Securities. The public views these securities as extremely safe. Banks use these securities as collateral for overnight borrowing. The borrowers are the other banks and major financial institutions. Short term buyers of the U.S. treasuries function as lenders, and the sellers (banks and financial institutions) function as short-term borrowers.
The Repurchase Agreement Market (Repo) is part of the inner working of the U.S. financial system. Repo refers to short-term borrowing instruments through the Federal Reserve and other approved dealers in government securities. The dealers sell the securities to investors, usually overnight 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 cash flow requirements of the government and meet banks' capital reserve requirements.
The reason for bringing up the repo market is that the functioning becomes very risky. Proceeds in and proceeds out must balance. If there is significant volatility the market in the market could freeze up. If the market freezes up, guess who must step forward. The Treasury Department creates new (fiat) proceeds and injects the new money into to the system. Taxpayers get to pay for the bad bets.
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 nine 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 twenty-two trillion dollars to somewhere around 28 trillion, all in a matter of 9 months. The public was too busy watching the news (mainstream propaganda discrimination) to notice.
· The catalyst for the next economic crash will be a systemic implosion in a massive number of derivatives contracts and that default that will cause insolvency of the counterparties, mostly the too-big-too-fail-banks.
The coming U.S. financial implosion will be bigger, faster, and more ferocious than anything in our history. Everything appears rosy if the Federal Government continues to mandate close-to-zero and substantially below-inflation interest rates. The size of the economic bubble can and will continue to grow into the stratosphere.
The illusion of assumed and increased wealth along with financial stability permeates every corporate board room and media outlet. Stock buybacks are 40% of 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 stop the occurrence of a financial implosion.
Inflation in the prices of all asset classes will continue to skyrocket to the moon. Investors in the Wall Street casino, as well as the public, will experience the corresponding reduction of purchasing power of each dollar, right up until the day the frantic financial-speculative-watch stops ticking.
· Derivatives as investment instruments by large banks are a ticking time bomb:
A written derivative contract is a contractual agreement 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 (sophisticated) counterparties to bet that fluctuations will or will not occur. In most cases, hedging instruments are based on interest rate movements of underlying financial assets such as bonds, commodities, 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 also very high. Financial corporations will keep profits, but losses can now be transferred to innocent third-party public bank depositors.
· The Dodd-Frank Wall Street reform and Consumer protection Act of 2010
With the passing of this legislation, the U.S. Government has now made bank checkers and savers subject to having their checking and savings confiscated to pay the losses created by major banks and institutional financial defaults.
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One could question whether a major bank default constitutes a central bank default? Yes, absolutely! But, if you are an elite financial powerhouse member who essentially 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 the 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 nearly the collapse of the entire world financial system.
Federal bail-out programs from the 2008 economic collapse came to approximately $29 trillion. It was and will be in the future common for the Federal Government to agree to bail out companies like the largest insurer in the world, American International Group (A.I.G), to the amount of $180 billion to cover derivatives losses. A.I.G is a multinational finance and insurance corporation that operates in over 80 countries and jurisdictions. The insurance giant was among the many who gambled providing insurance for collateralized bet obligation and lost. AIG has paid back their massive bail out debt to the U.S. taxpayers. Another example in this boneyard was the $17 billion bailout to General Motors and Chrysler. The effort cost the taxpayers $10.2 billion.
Bailouts included Morgan Stanley, Goldman Sacs, Bank of America, and others.
Most of the businesses who took on extremely high risks and lost have now recovered. They are now happy campers. They are buying back their stocks with zero interest rate loans. Appx 40% of the market volume is currently stock buybacks.
The federal government and Federal Reserve will continue to provide bail-out schemes to large financial institutions, Wall Street trading houses, and large publicly traded corporations. Minor exceptions would include Leman, who was a competitor of Goldman-Sachs. It is my opinion that Goldman was able to eliminate their major competitor because Goldman controlled Washington, just as they do today.
· A Bit of Perspective about the overall U.S. economy.
The U.S. Gross Domestic Product (G.D.P) is about 23 trillion annually. Taxation takes into federal government pockets approximately $4.5 trillion per year. If the government spends $7.5 Trillion per year it must create the difference borrowing $3 trillion and injecting it into the system. The injection of $3 trillion is using fiat currency that becomes taxpayer debt.
· The Ghost of Dodd-Frank:
The Dodd-Frank Act reorganizes 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). Banks' shareholders could be subject to substantial losses in liquidating since derivative claims get preference over them. Counterparties to derivative losses will have their claims covered and paid before shareholders and depositors.
· If financial institutions becoming insolvent, and the decision is made to trigger the bail-in provisions of Dodd-Frank, then the priority of claims becomes important.
This is stated in 12 U.S.C 5389 and 12 U.S.C 5390
A series of rules that allow for the liquidation of assets and the payment of claims is stated below. Of major importance, note who gets paid first and who may not get paid at all. This is referred to as an orderly liquidation authority by the receiver with a 3 to 5 yeartime frame to finish the liquidation process.
Claims are paid in order as follows:
1) Administrative costs.
2) The government.
3) Wages, salaries, or commissions of employees.
4) Contributions to employee benefit plans.
5) Any other general or senior liability of the company.
Claims would most likely include amounts owed from derivatives defaults. The losses may be an astronomically large number that would gobble up all proceeds confiscated from the public checkers and savers under the bail-in provision. The 12 US Code 5389 refers to rules and regulations with respect to the rights, interests, and priorities of creditors, counterparties, security entitlement holders, and other persons with respect to such covered financial company. Note very clearly that this includes counterparties of defaulted derivatives.
If the losses in defaulted derivatives are large enough and far more than the claims under this provision of Dodd-Frank, the government may first sweep a significant portion of consumer checking and savings accounts. There may be a necessity to create additional trillions of new public dollars out of fiat to pay for the derivatives losses of defaulted banks and large financial corporations. This is referred to as crony capitalism.
6) Obligations to shareholders, members, general partners, and other equity holders.
7) Unsecured creditors for 3rd party claims.
The checkers and savers who thought bank accounts were safe will be left holding the bag, losing their hard-earned savings, while the large financial institutions will be bailed out for their super high risk, highly leveraged, defaulted derivative contracts. They are unsecured claimants.
The system, including lawyers, judges, consultants, receivers, government employees, and employees of the insolvent financial institutions, and their respective labor unions will continue to get paid and accrue employment benefits while the public gets shafted.
The liquidation could cause reallocation of the depositor's savings of the insolvent bank to future equity (stock) and, thus, be extinguished as a savings asset. The depositors' alternative is for the bank to repay amounts owed for an extended period of up to 30 years. Some observers believe that depositors will be allowed special drawing rights (SPRs) or credit lines for partial payments with government approval.
The consequence of a systemic melt-down 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. A more significant percentage 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 thrive in the high-risk derivatives business if there are no systemic financial failures?
Too big to fail (TBTF) a concept that government cannot allow very large firms (including major banks and financial institutions) to fail. Failure means declared insolvency and liquidation through the bankruptcy system.
The alternative is for the government to step in and bail out the firms to prevent economic disaster.
Please review a recent listing of banks ranked by Derivatives as of 06/30/2021
Should derivative contracts fail, causing bank defaults, minimal government insurance proceeds exist unless the government just prints additional money by issuing new debt to replace the funds paid out in defaulted bank insurance claims.
Warren Buffet has called derivatives "financial weapons of mass destruction." The bank statistics below begin to explain why: Market capitalization refers to the total outstanding shares outstanding and is commonly used as a measure of how much the company is worth.
· J P Morgan Chase has a market capitalization of $472 billion, total deposits of $2,253,482,000, and has $53.4 trillion off-balance sheet notational derivatives. Derivatives contracts are 113 times greater than market capitalization.
· Bank of America has a market capitalization of $338 billion, $1,906,458 total deposits, and its total off-balance sheet notational derivatives are $19.3 trillion, 57 times market capitalization. Its net exposure is in the trillions
· Wells Fargo has a market capitalization of $308 billion, $1,479,499,000 total deposits, and $11 trillion total off-balance sheet notational trading derivatives, 36 times market value.
· Citicorp has a market capitalization of $203 billion (as of Aug 2021), $1,282,071 total deposits, and its total off-balance sheet notational trading derivatives is about $47 trillion, 204 times its market capitalization. Its net exposure and risk are in the trillions.
The above totals fluctuate over time. Consult your banker or broker for 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 counterparty bets in the derivatives market by these banks through Wall Street trading houses is primarily hedging interest rates. In a market collapse, which would trigger a derivatives melt-down, not all derivatives would lose. With counterparty betting, there will be winners and losers.
The real crisis will occur when major banks become insolvent and cannot cover their losses in the settlement process. That is when the government will reach into the pockets of the depositors to cover the losses.
Depositor accounts held in the U.S. 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 current deposits held in commercial banks and bail-in provision allowed the government to confiscate one half or more, $8.5 trillion would not go very far for $10's of trillions of derivative losses.
The derivatives market in the entire world is gigantic, estimated to be $1.2 quadrillion or more that 10 times the size of the global Gross domestic product of $88 trillion. An implosion would catastrophic!
Remember the phrase, "you-can-take-it-to-the-bank." Figuratively, this means that something to be verified as true by a third-party source. The something is assumed reliably safe. Well, 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.
· Find a bank or other financial institutions with little or no derivates exposure.
I have researched the above subjects through various data sources. There may be conflicts, especially with time and different data sources. Content may reflect opinions of Dan Harkey, not shared to others. Thank you for taking your valuable time to read this article. I hope you found the information useful.
Dan Harkey
Director, Real Estate Develop. w/ Entitlements, Multi-Family, Mix-Use, & Construction | Open to New Opportunities
3yYou are the best Dan!! 👍