Federal Reserve governor: If large financial institutions fail, there'll be no bailout of depositors

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In March 2013, something quite extraordinary happened in the Mediterranean island country of Cyprus. In return for a loan from the Eurozone to bail out the heavily-indebted country and its banking system, as much as 80% of “large” (over €100,000) bank deposits in the country’s largest bank, Cyprus Popular Bank, would be confiscated.
At the time, I warned about contagion effects from Cyprus. Sure enough, talk of a wealth tax on bank deposits immediately began in New Zealand and Spain, followed by the Eurozone chair saying the personal bank accounts of other countries can also be raided.
Now, it looks like the Cyprus contagion has reached the United States.
Before you read further, please familiarize yourself with the following:

  • The initials TBTF stand for “too big to fail”.
  • The initials FDIC stand for the Federal Deposit Insurance Corporation, a United States government corporation operating as an independent agency created by the Banking Act of 1933. As of January 2013, FDIC provides deposit insurance guaranteeing the safety of a depositor’s accounts in member banks up to $250,000 for each deposit ownership category in each insured bank. As of September 30, 2012, the FDIC insured deposits at 7,181 institutions. The FDIC also examines and supervises certain financial institutions for safety and soundness, performs certain consumer-protection functions, and manages banks in receiverships (failed banks). The FDIC receives no Congressional appropriations – it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities. The FDIC does not provide deposit insurance for credit unions, which are insured by the National Credit Union Administration (NCUA).

Jeremy Stein sworn inJeremy Stein (r) sworn in as a new member of the Federal Reserve Board, by Federal Reserve chairman Ben Bernanke May 30, 2012.

On April 17, 2013, at a conference sponsored by the International Monetary Fund in Washington, D.C., Harvard University economics professor Jeremy C. Stein, a member of the presidentially-appointed Federal Reserve Board of Governors, said something that should send chills down the spine of anyone who has money in U.S. banks and other financial institutions, and who is counting on the FDIC or the federal government to insure their money.

In his speech on “Regulating Large Financial Institutions,” Stein said:

“Where do we stand with respect to fixing the problem of ‘too big to fail’ (TBTF)? Are we making satisfactory progress, or it is time to think about further measures?

I should note at the outset that solving the TBTF problem has two distinct aspects. First, and most obviously, one goal is to get to the point where all market participants understand with certainty that if a large SIFI were to fail, the losses would fall on its shareholders and creditors, and taxpayers would have no exposure. However, this is only a necessary condition for success, but not a sufficient one. A second aim is that the failure of a SIFI must not impose significant spillovers on the rest of the financial system, in the form of contagion effects, fire sales, widespread credit crunches, and the like. Clearly, these two goals are closely related. If policy does a better job of mitigating spillovers, it becomes more credible to claim that a SIFI will be allowed to fail without government bailout.
[…] if […] a SIFI does fail, the orderly liquidation authority (OLA) in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act now offers a mechanism for recapitalizing and restructuring the institution by imposing losses on shareholders and creditors. In the interests of brevity, I won’t go into a lot of detail about OLA. But my Board colleague Jay Powell talked in depth about this topic in a speech last month, and I would just register my broad agreement with his conclusion–namely that the Federal Deposit Insurance Corporation’s (FDIC’s) so-called “single point of entry” approach to resolution is a promising one.2

2 Powell, Jerome H. (2013). “Ending ‘Too Big to Fail’,” speech delivered at the Institute of International Bankers 2013 Washington Conference, Washington, D.C., March 4

Perhaps more to the point for TBTF, if a SIFI does fail I have little doubt that private investors will in fact bear the losses–even if this leads to an outcome that is messier and more costly to society than we would ideally like. Dodd-Frank is very clear in saying that the Federal Reserve and other regulators cannot use their emergency authorities to bail out an individual failing institution. […]”
Read the rest of Stein’s speech here.
Tyler Durden of ZeroHedge brings home the reality of Stein’s words with this graphic below:
FDIC illusion

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0 responses to “Federal Reserve governor: If large financial institutions fail, there'll be no bailout of depositors

  1. Now doesn’t that just make Grandpa’s idea of keeping his savings under the mattress sound like a pretty sound idea!!!

  2. traildustfotm

    Every time I hear the term, “Dodd-Frank,” I want to puke. It makes me see images of streets lined with FOR SALE and FORECLOSED signs.

  3. Friends, I’m absolutely aghast at what this means. I started writing and warning about it BEFORE I left Vallejo, CA in September 2003, nearly TEN years ago, as the greatest Ponzi scheme in the universe. Now the situation is exponentially WORSE. I am NOT a gold or silver ‘bug’ but it now behooves anyone w/any savings to buy junk silver & rounds to the amount of 5% of their net worth. DO IT ASAP. Afterwards DO NOT put these into a safe deposit box, as you will NOT be able to get to it when you most need it. Few people outside of the banks and Wall St rogues REALLY comprehend the consequences.

  4. When people come to understand that money is not wealth then the threats of these guys will be exposed for what they really are, a house of cards, not a house built on THE ROCK. Money is just currency that circulates based on the productive capability of a nation, or nations labor force. If the citizens of the globe were engaged on meaningful projects, such a vast water management projects, with nuclear power being utilized to a greater extent immediately followed by further developed and less wasteful and expensive forms of energy, not solar panels or windmills, which are tools for genocidalists to force us back into the stone age, but modern self replenishing forms of energy such as nuclear fission and fusion to be followed by even more sophisticated and greater energy flux density that even those two, the productive power of labor would be greatly augmented and this productive force would increase the overall wealth being generated worldwide, because of greater ability to increase food production and accelerate industrialized industries that produce the components for first and foremost space exploration and for scientific research that will enable us as a race, the human race to evolve as a species and combat the maladies that result from poor education, poor nutrition, poor healthcare etc etc. For us to become more civilized rather than to continue to deteriorate at an everincreasing rate as we are now, degenerating mentally, morally, spiritually and physicically, we need to understand how true wealth is produced, and stop clinging onto the “money” that is associated with the current “monetary system” which is in free fall collapse. We need to have HR 120 passed to reinstate Glass Steagall, and then have Congress to start uttering credit through a new national bank to finance worthwhile infrastructure projects in order to get our people back to work and for currency based on the long term prospects of the profitability of those worthwhile projects being undertaken to be put into circulationl The income that will result from these projects will have to be long term and huge enough to be able to confidently refinance the bankrupt states, put the social security net back into place and make it sufficient to meet the need of those who are being helped and to make a vast quantity of high skilled jobs available and offer training for those who need skills and want to make a future possible for their families and the generations to come.
    The so called money in circulation now is worthless, you can see that by the fact that inspite of the deposits being snatched from Cypriots the banks are still desperate after all the bailouts and there is not one shred of evidence to be found that any of the measures taken since the Bush administration caused the first bailout has any positive effect whatsoever. No matter what anyone says the monetary system run out of the City of London, Wall Street and the Federal Reserve etc, with the petrodollar and all, is kaput. There isn’t enough productive labor being engaged in to carry it, let alone pay off the debts and combat the hyperinflation or deflations or devaluation or whatever description you can come up with the describe the plummeting lack of productivity worldwide. The virtual economy, the trading of derivatives and worse in cyberspace doesn’t house people, it doesn’t feed people and it certainly isn’t a real wealth creator, and on top of that it isn’t godly. It is a filthy sinful mess, composed of greed, lust and all kinds of diabolical things that God hates and will never bless.
    So, let’s go back to the idea that Alexander Hamilton had that was the basis of the American Credit System which was based on the future income based on the productive capability of labor, per sq kilometer per head. Let’s get out of the clutches once and for all of the oligarchs, the War of Independence was fought for this freedom, why on earth are we risking our lives by allowing the oligarchs to take this freedom fought for so hard, away from us?

  5. What very few people know about FDIC insurance on their deposits is they only get back a percent of their original deposit. It depends how much money the bank still has after it is closed and counted. Depositors may only get five cents on the dollar. That would be the case if the bank still had five percent of all deposits. That is FDIC insurance. It is a pitiful lie to call it insurance.

    • The FDIC is the co signer of the document that was co released by the Bank of England that is complicit with the bail in idea. If an insurer were to fail, i.e. run out of funds then the plan is to bail in the situation. The FDIC is an insurer who might just run out of funds, so they are looking ahead and governing themselves accordinly, or otherwise it could be that everything is going just as planned. The new Pope recently said that the banksters rule monopoly thingmy is for profit only and does not take into account the need for people to have work, he points out that reducing everything to how much profit can be squeezed out of a deal isn’t what God had in mind for mankind, he expects us to work and alongside him, to take care of his vinyard so to speak. PUt it another way, the FDIC is a government body that is there to protect depositors, and the government has to make sure that it is funded adequately. If we can fund Al Qaeda and associates we most certainly can fund the FDIC. The reason that the FDIC is most likely to be unable to meet the demands made upon it is because of the derivatives and toxic asset manipulation and hedging that goes on at top speed in cyber space, where big banks have access to more sophisticated technology and trading aids that the average stock marketer, and they also have inside protection from people inside governments who are swayed by donations and contributions to their members which come from the too big to fail or jail banking and stock market institutions.
      The FDIC could just be operating according to a plan that is being orchestrated by oligarchs who are pushing an agenda that allows for mass unemployment, austerity measures, privatization of things like water and power supplies etc as well as scientific research and development for transportation, education, and space exploration that would result in protecting our planet and our species from asteroids and comets about which we have very little knowlege. The plan to send a solar powered device into space to capture an asteroid and then find out what it’s made of is symptomatic of the desire of the oligarchs to keep us all in the dark so that our minds are stultified and our mental capabilities are reined in so that we will become couch potatoes or worse, drug addicts and from there on to being euthanized.
      We can analyze the remains of the asteroid that just crashed over Russia to find out what it’s made of and then? What about all the other hundred if not thousands of asteroids that are rampant throughout our galaxy and beyond? We most certainly are wasting valuable time by not making the most of the technological advances we made during the presidency of JFK and on from there, and recently the little we have gleaned from weather reports based on satelites in space about floods and earthquakes have proved pretty good, and with austerity, a lot of the capability would be lost and the week or so or warning these precautions afford us would not be available, we would most likely just be taken by surprise.
      We don’t have to be taken by surprise by the antics of the FDIC et al, we have ample warning that is being published all over the place by alternative media sources, and the fear factor that appears to have US citizens captive is together with a bit of denial and possibly ignorance or ostrich, head in the sand syndrome is not a good enough reason for us to allow our civilization to be destroyed and for our species to be obliterated in a puff of thermonuclear smoke.
      I didn’t enjoy the Dr Strangelove movie at all, and the idea of it becoming a reality is just not on.
      Insuring money that is an apendage of a collapsed monetary system is nothing to spend time on.
      We need to replace the oligarchical monetary system with the Hamiltonian Credit System which is the economic principle set forth in the Constitution and to get the ball rolling, the reinstatement of Glass Steagall is necessary to separate the commercial banking activities from the investment ones. Then the FDIC will only have to insure the real liabilities, the legal ones, not the fraudulent gambling debts that have piled up since the repeal of Glass Steagall during the Clinton years. Sure Wall Street don’t like that idea, but hey, cookies do crumble and mops do flop.
      The law of reaping and sowing is still operating and the grim reaper has been in the news lately in a recent TV series, and whose photo has gone viral.
      We can only reap the rewards promised to us under the terms of the New Covenant contained in the shedding of the precious blood of our LOrd and Savior Jeus Christ if we abide in the vine which means the vinyard has to be kept in good order. Make any sense?

  6. After reading the headline , there should only be one response . Withdraw from the mega-banks and deposit in local institutions . Better yet , by a safe and keep your money in your domicile and arm yourself to the teeth .
    Just one day of a en-mass withdraw of the ” little people’s” money would send this matrix into oblivion . I did my share this a.m. and the young man made the mistake of asking me why ………. It wasn’t pretty !

  7. Thank you Dr. Eowyn for this interesting post. Frankly, I am not sure what do do at this point. I am not sure how local banks are preferred, inasmuch as they are also subject to federal laws and provisions.

    • Joan,
      Since Fed Reserve Gov. Stein said financial institutions that once were referred to as Too Be To Fail are on their own and govt won’t rescue the depositors if the institutions fail, that implies smaller banks and financial institutions won’t be rescued either. 🙁

      • Hi, I hope this isn’t too naive of a question, but isn’t the FED one of the too big to fail banks itself? It’s assets are collossal and what they are marked at on their balance sheets isn’t any different from any of the way the assets of other huge banks are marked as being worth. The BIS is supposed to be the last bus stop but will the bus actually stop before it careens over into the abyss? The FED is supposed to make sure that employment is happening and it has failed miserably.
        So the reason why it will be on it’s own is because tax payers and the like have not performed and created economic wealth on account of the fact that no jobs or proper advances scientifically, industrially or agriculturally have been funded and the health care that we are being threated with will not keep people in good health and the level of poverty caused by the antics of the FED is criminal in it’s intent. What is going to happen to the FED presidents, have they got their futures already lined up with a new currency that will keep them and their families protected and leave the rest of us biting the dust? What does he mean by his statement?

  8. With personal savings accounts earning only one fourth of one percent in interest there is no reason to put your money at risk by holding it in a bank. Your only giving the bank and the government access to it, and as we have seen in Cyprus, your giving the government the opportunity to steal your money from you. It would be better secured in gold and silver in a safe in your home closet.


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