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Are Vermont state funds deposited in TD Bank North safe?
This paper is an investigation into whether or not Vermont State funds, deposited in TD Bank North, are safe. Documents and opinions from several experts were solicited and received. Gary Murphy and I examined the new regulations of the FDIC in an effort to find out if the FDIC had set the stage for the confiscation of state money that was deposited in a “TBTF” (Too Big to Fail Bank). We looked at the confiscation of deposits and pensions in Cyprus and Poland, and at the debacles in Detroit and Philadelphia.
We compared the placement of Vermont’s funds to those in other states and found that states, by law, “collateralize” their deposits, which are considered “secured.” These deposits are generally held in a large national or international (TBTF) bank. Vermont places them in Toronto-Dominion which is not considered to be one of those.
First, note that the TBTF banks are not banks: not legally and not by function. They even have a new name SIFIs which stands for Systemically Important Financial Institutions. Financial institutions are not depositories. Banks are depositories.
We examined the machinations that the SIFIs had perpetrated over the last several years, especially as described and analyzed by Matt Taibbi in his series of historic articles in Rolling Stone Magazine. Particularly enjoyable is “The Scam Wall Street Learned from the Mafia.”
Though expert opinions varied as to what these institutions might pull off next, specifically how and if they plan to confiscate our deposits, some aspects of the investigation achieved unanimous agreement. There is irrefutable proof of, and agreement with, the following:
1) Certain executives of the Royal Bank of Scotland, Bank of England, UBS, JP Morgan Chase, Goldman Sachs, Citigroup, Wells Fargo, Bank of America, the Federal Reserves itself and other central/ international banks engaged in conspiracies to defraud, to steal, to launder drug money (HSBC) and to rig markets.
2) They are still protected in the US by Obama and Holder who have prohibited prosecutions and appointed those responsible (such as Larry Summers who withdrew his name as a candidate for chair of the Federal Reserve) to positions of leadership.
3) They put regulations in place to insure their positions of “superior claimants” and “safe harbor” counterparties. Larry Summers in particular, in the words of Nobel Laureate Joseph Stiglitz “supported banking deregulation, including the repeal of the Glass-Steagall Act, which was pivotal in America’s financial crisis. His great ‘achievement’ as secretary of the treasury from 1999 – 2001, was passage of the law that ensured that derivatives would not be regulated – a decision that helped blow up the financial markets.” A move for which he was greatly rewarded.
What this means, as explained by our colleague, Michael Taub, in a Times Argus op-ed from Thursday, Sept 12, is that steps should be taken by our treasurer to ensure that our money is deposited in a bank or banks that are not subject to “superior claimants” or “safe harbor” counterparties that will claim their collateral before the state is allowed to gather the crumbs. The other alternative is for Vermont to form a partnership with its state chartered banks, depositing its money there.
How is this possible?
It may help here to explain why it will be so easy for the FDIC and the big financial institutions to confiscate our money rather than to protect it.
Your deposit in a bank is a loan to the bank. It goes on the bank balance sheet as a liability because they are supposed to give it back to you whenever you want it. They owe it to you. When a bank lends money, it goes on the asset side of the account because it is money the bank created and is owed to them by the borrower. So, just as any loan can go bad, so can your loan (deposit) to the bank. That was impossible, of course, with FDIC insurance, and until the FDIC changed the rules. Here is what the rules are now according Dr. Mark J. Roe, professor of corporate law and corporate bankruptcy at Harvard Law School.
Chapter 11 bars bankrupt debtors from immediately repaying their creditors, so that the bankrupt firm can reorganize without creditors’ cash demands shredding the bankrupt’s business. Not so for the bankrupt’s derivatives counterparties, who, unlike most other secured creditors, can seize and immediately liquidate collateral, readily net out gains and losses in their dealings with the bankrupt, terminate their contracts with the bankrupt, and keep both preferential eve-of-bankruptcy payments and fraudulent conveyances they obtained from the debtor, all in ways that favor them over the bankrupt’s other creditors. Their right to jump to the head of the bankruptcy repayment line, in ways that even ordinary secured creditors cannot, weakens their incentives for market discipline in managing their dealings with the debtor because the rules reduce their concern for the risk of counterparty failure and bankruptcy.2
In other words, if you and I each lend $5000 dollars to Paul, and he signs over to me the title to his car as collateral, then, if Paul can’t pay, I have his car, and you have nothing. If he can pay, then I return the title and we both get our $5000 plus interest. You didn’t know anything about my deal with Paul. It was made before the bankruptcy. If I (as a counterparty to you) walk away with the car due to Paul’s bankruptcy, you get nothing. That is what the bankrupt’s derivatives counterparties get to do now. And, if the car is worth more than $5000, I benefit if Paul can’t pay back the loan.
So I have a financial incentive to make Paul go bust, even though you, my friend, lose your entire $5000. I can even bet against Paul’s ability to pay back the loan (that’s a derivative) and also set up terms that guarantee his failure. Specifically, that makes me a counterparty in a credit default swap. (And I could make a side bet that you couldn’t pay your creditors either, knowing that Paul is going bust.) That’s what the gangs from Goldman Sachs and J.P. Morgan did to home-“owners” and to the stock, pensions and 401(k)s of Lehman Brothers and AIG; and those who did it still “rule the world.” Read the Summers/Geithner set up in a report by Greg Palasthere.
Bail In vs. Bail Out
The above scenario could be played out against any bank that borrows money from Wall Street. Therefore any bank that plays in that casino could be gutted of its assets by the protected SIFIs that see a profit in ruining a bank so they can buy it cheap. And since asset depletion by SIFIs through predation is a constant modus operandi, then the likelihood of “contingent capitol” (your money) for “loss absorbency” (bail-ins) is a given. In other words, it could now happen to any entity that deposits money in a bank, even if that money is collateralized. If it’s paid out to superior claimants before the bankruptcy, it’s gone. And even if it’s not gone, it could be “bailed in” to save the bank and to satisfy counterparties who get to cut to the head of the line. And those counterparties are the ones who make the deals that a state would know nothing about until the state discovers that its funds had been confiscated. The bank is now allowed to confiscate deposits to save the bank. Those funds become bank equity so that the bank can stay in business and maybe buy up some more banks and raise the salaries of their executives. And it’s all legal thanks to a series of de-regulations and new regulations that leave depositors holding the bag.
This “bail-in” regulation as quoted from the source is:
”The unsecured debt holders can expect that their claims would be written down to reflect any losses that shareholders cannot cover, with some converted partly into equity in order to provide sufficient capital to return the sound businesses of the G-SIFI to private sector operation.” -Resolving Globally Active, Systemically Important, Financial Institutions, coauthored by the FDIC & the Bank of England, December 10, 2012, Page ii.
We, the depositors, are the “unsecured debt holders.” They are the “G-SIFI,” Global Systemically Important Financial Institutions. It’s not the SIFI of Ray Bradbury. They’re really here.
What would make your money safer in this current scenario is to deposit your savings in a credit union or local, state chartered bank, as most of their creditors are us and our local businesses. They are probably not exposed to creditors/super priority counterparties that can claim your deposits. They may, however, expose your deposits by leveraging them in “overnight sweeps,” allowing banks to earn extra interest while you sleep.
This all started with the repeal of Glass-Steagall in 1999, and was further enshrined in April 2005 with the “Bankruptcy Abuse Prevention and Consumer Protection Act” aka the “Bankruptcy Reform Act.” The BRA:
1) created the “super-priority status” for the derivatives claims to go to the front of the line,
2) overrode the FDIC’s power to insure us, the depositors,
3) guaranteed that the SIFIs get the money before we do, and also before local and state governments,
4) turned depositors into cash cows, collateral, and contingent capitol for the insiders in super-priority.
Pray, note the title of the Act. Both names are the opposite of what the acts actually do.
The story: Following the repeal of Glass-Steagall was the bail-out of AIG in 2008, which was bailed-out to pay off Goldman Sachs, which had knowingly insured fraudulent mortgages through . . . AIG.
In April of 2009, the Financial Stability Board was created as a subcommittee of the Bank of International Settlements with the powers to regulate banking world wide.
In July of 2010 came Dodd-Frank which, in sections 204a, 214, and 716, prohibited government bail-outs, opening the discussion as to where the money would come from to save the big banks next time. (This time)
In October of 2011 that discussion went as you would expect: The Financial Stability Board paved the way for the bail-ins in a document called: “Key Attributes of Effective Resolution Regimes for Financial Institutions.” And the “effective resolution” turns out to be turning your money into bank equity to prevent bank failure. The G-20 immediately endorsed this.
End of 2011: J.P. Morgan and Bank of America move their gambling (derivatives) operations to the their banking operations. Thanks to Larry Summers for removing Glass Steagall!
And now it’s ready to roll as we see from the “bail-in” document of Dec 10, 2012 from the FDIC quoted above. Here’s another translation from Randy Langel:
“One day you may go into your big US bank and when you ask for a withdrawal they give you a share of stock in a new company instead of cash. It will be your responsibility to get that share of stock converted to cash. Of course, since the new company was formed from the failed bank in the first place, it may be difficult to sell it, much less get remuneration equal to the cash you lost when the bank absconded with your money. Since your account has been converted to equity (stock) from cash, the FDIC is no longer responsible for the deposits. Why? Because the FDIC only insures cash accounts not equity accounts. Cute trick. You can’t really blame the FDIC because they were forced into action when BofA and JP Morgan Chase moved their trillions of derivatives into their depository arms. There is no way the government could make up the money lost with one of those giants failing.”
The effectiveness of the steps taken to set this up, and of the power of the FSB, was shown when the EU mandated the bail-in in Cyprus, and the next one in Poland where they pillaged the pension funds.
At last count, the total amount was $232 trillion in the derivative casino.
What does this mean for Vermont?
And so, to return to our story, TD Bank North has $3.32 trillion on the table, many times its total assets of $835 billion and having a book value of $46 billion (see “Morningstar” or any of the investment reporting services that provide company statistics). You know what position that could put you in if you have deposits in Toronto-Dominion. And it is your treasurer’s fiduciary responsibility to look this in the eye.
On the other hand, TD is not in the same legal category as the SIFIs. What this appears to mean is that TD, if it fails, will have to enter into for-real bankruptcy proceedings, and a judge will adjudicate the distribution of the remaining assets. In that case, I doubt, personally, that your deposits will be automatically swept up by the bank. But TD could probably be destroyed by any of the SIFIs, just as JP Morgan did to MF Global – claiming assets and deposits, and getting them because they were powerful and well-enough connected to do so. This was theft. That’s why Jamie Dimon was protected by Obama and Holder from prosecution. Otherwise Dimon would be in jail. If he had been put in jail when he started his sprees of naked short selling, market rigging and manipulation, bribes, illegal foreclosures, and outright theft, his career in crime would have been cut short, rather than perpetually extended. In the words of William K Black, Associate Professor of Law and Economics at the University of Missouri-Kansas City, “We increasingly live in a cheater-take-all system.” He quotes from “Looting: The Economic Underworld of Bankruptcy for Profit” by George Akerlof and Paul Romer who wrote, “Why abuse the system to pursue a gamble when you can exploit a sure thing with little risk of prosecution?” For Jamie Dimon et al, there is no risk of prosecution.
Could this happen here? As Gary Murphy puts it: “If counterparties in contracts that are not governed by the Fed, FDIC or some other government body can do an end run around the receiver, all bets on money kept in a depository institution being kept out of the resolution process are off.” TD Bank North has subsidiaries, “some of which are depositories, and these depositories (under Dodd-Frank) would be spun off into bridge companies, and deposits would therefore be left intact.” Much depends on whether money is in a bank (depository) or a financial company. TD is both, and furthermore, it’s Canadian, which presents a question of jurisdiction.
Add to this the illegal activities of TD. It was connected to a ponzi scheme in Florida for which it paid a settlement of $52.5 million, and its new “Rental Agreement, Safe Deposit Rules and Regulations” #10, prohibiting the “storage of currency, ” violates VT law 27 V.S.A. chp 14, not to mention common sense and customer trust.
There is a section in Dodd-Frank that is boiler plate bankruptcy law. It gives the FDIC the authority to “repudiate” prior contracts. This means that, even if they claim your money as assets for the bank, the FDIC can repudiate that confiscation. In that case the bank fails or is about to fail, and you keep your money. But it hasn’t come up yet over here as it did in Cyprus, so we don’t know how the FDIC will play it. There could be compromises and you could lose only some of your savings, and the state could lose only some of the millions it has deposited in TD Bank North.
What else could stop it? A state bank that keeps public money in the state. Confiscation of deposits to boost bank assets could not happen in North Dakota because they have a state bank, so they will not suffer the slings and arrows that the rest of us are heir to.
Gary Murphy, who contributed to this article, was Chair of Bradford Planning Commission 1985-87, Vice president/legal researcher for union local at Capital City Press, former member of Vermont State Labor Council, AFL-CIO e-board VT Working Families Party state banking committee chair and web master for vtpublicbank.com