Can a bank confiscate your deposits? The War on Cash.

I pass this along as a topic for discussion, in part because many of us keep our best coins in a safety deposit box. The FDIC currently has enough capital to cover only a small fraction of bank deposits. Its borrowing authority would raise that percentage to something less than 20%, although the borrowed capital does not currently exist; it would be "created" as a bookkeeping entry by the Federal Reserve.

(Excerpted from a publicly-distributed e-mail newsletter called “Private Wealth Advisory.”)

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August 18, 2015

Could the FDIC Seize Bank Deposits During a Crisis?

As we noted last week, one of the biggest problems for the Central Banks is actual physical cash.

The financial system is predominantly comprised of digital money. Actual physical dollar bills and coins only amount to $1.36 trillion. This is only a little over 10% of the $10 trillion sitting in bank accounts. And it’s a tiny fraction of the $20 trillion in stocks, $38 trillion in bonds and $58 trillion in credit instruments floating around the system.

Suffice to say, if a significant percentage of people ever actually moved their money into physical cash, it could very quickly become a systemic problem.

Indeed, this is precisely what caused the 2008 meltdown, when nearly 24% of the assets in Money Market funds were liquidated in the course of four weeks. The ensuing liquidity crush nearly imploded the system.

Because of this, Central Banks and the regulators have declared a War on Cash in an effort to stop people trying to get their money out of the system.

One policy they are considering is to put a carry tax on physical cash meaning that your dollar bills would gradually depreciate once they were taken out of the bank. Another idea is to do away with actual physical cash completely.

Perhaps the most concerning is the fact that should a “systemically important” financial entity go bust, any deposits above $250,000 located therein could be converted to equity… at which point if the company’s shares become worthless, your wealth evaporates.

Indeed, the FDIC published a paper proposing precisely this back in December 2012. Below are some excerpts worth your attention.

This paper focuses on the application of “top-down” resolution strategies that involve a single resolution authority applying its powers to the top of a financial group, that is, at the parent company level. The paper discusses how such a top-down strategy could be implemented for a U.S. or a U.K. financial group in a cross-border context…

These strategies have been designed to enable large and complex cross- border firms to be resolved without threatening financial stability and without putting public funds at risk…

An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company into equity. In the U.S., the new equity would become capital in one or more newly formed operating entities.

…Insured depositors themselves would remain unaffected. Uninsured deposits would be treated in line with other similarly ranked liabilities in the resolution process, with the expectation that they might be written down.

http://www.fdic.gov/about/srac/2012/gsifi.pdf

In other words… any liability at the bank is in danger of being written-down should the bank fail. And guess what? Deposits are considered liabilities according to US Banking Law. In this legal framework, depositors are creditors.

So… if a large bank fails in the US, your deposits at this bank would either be “written-down” (read: disappear) or converted into equity or stock shares in the company. And once they are converted to equity you are a shareholder not a depositor… so you are no longer insured by the FDIC.

So if the bank then fails (meaning its shares fall)… so does your deposit.

Let’s run through this.

Let’s say ABC bank fails in the US. ABC bank is too big for the FDIC to make whole. So…

1) The FDIC takes over the bank.

2) The bank’s managers are forced out.

3) The bank’s debts and liabilities are converted into equity or the bank’s stock. And yes, your deposits are considered a “liability” for the bank.

4) Whatever happens to the bank’s stock, affects your wealth. If the bank’s stock falls at this point because everyone has figured out the bank is in major trouble… your wealth falls too.

This is precisely what has happened in Spain during the 2012 banking crisis over there. And it is perfectly legal in the US courtesy of a clause in the Dodd-Frank bill.

This is just the start of a much larger strategy of declaring War on Cash. The goal is to stop people from being able to move their money into physical cash and to keep their wealth in the financial system at all costs. [more]

 

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Possession is 9/10's of the law. In the event as you describe, just try to get it back. Not going to happen.

 

I really don't see a problem, considering the ability of the FED to print as much digital currency as needed. Congress would quickly pass legislation enabling depositors to be made whole.

 

Your first two sentences, "I pass this along as a topic for discussion, in part because many of us keep our best coins in a safety deposit box. The FDIC currently has enough capital to cover only a small fraction of bank deposits.", concern me.
Are you assuming that FDIC insures the contents of safe deposit boxes? They don't. There is no insurance on safe deposit boxes unless the renter buys it on their own.

 

I simply did not find anything in the OP's post news. A depositor is a creditor of a bank, always has been. Its a special type though. The reading also said that insured deposits would still be deposits. The limit currently under the FDIC is $250,000. Yes, I believe the limit is probably too low, but if you have more simply open up accounts at numerous banks. Each bank you are covered up to $250,000.

Who wants to keep more than $250,000 in a single bank anyway? If you have that much money buy a rental house or farmland and have your money work for you, not collecting .01% interest.

 

Has this not been hashed-out before ? Does 1933 ring a bell ? Collecting Nut is correct, possession is 9/10ths the Law. Aside from that, do you insure ALL your Coins ?

 

I have heard lawyers and judges discuss this and the general outcome is that it is a statistical proportion of how, in possession cases, the laws favor the person who has the property over the those who want the property, but the 9/10 does not mean that the finder is actually the keeper as most imply. There is no single encompassing law which says if you have it , it is yours. One lawyer said if you were to research all laws determining possession, about 90% ( especially land property) says the one with the property gets to hold it unless legally shown it belongs to the other party. I am not a lawyer , so research yourself, but again seems to be fear mongering,

 

No, I certainly know that safety-deposit boxes are not insured. I mentioned that aspect because a lot of us deal with banks repeatedly (and assume everything's great).

I have read (can anyone verify?) that upon an order from DHS, a bank can open your box and not even tell you. DHS has powers totally unknown to the public.

If the "persons" who want the property are the Feds, you may as well kiss it goodbye.

 

http://www.snopes.com/politics/business/safedeposit.asp

http://www.nwcua.org/posts/debunking-the-rumor-regarding-dhs-access-to-safe-deposit-boxes

 

The only thing that made me nervous was, in late June at the height of the Greek crisis, the banks forbade access to SDBs. I thought that was a scary thought. I have no idea as to the applicability here though. I am not worried about some secret government agency looking in it, I am more worried about the possibility that in the event of a bank extreme emergency someone may view SDB contents as potential bank assets. Again, not saying I know anything about this at all, its just Greek bank actions made me nervous.

 

Well, good, I have accomplished something. When we start talking about possession and nine-tenths of the law, blah, blah, blah, every collector needs to swallow hard and admit that he does not have "possession" of what's inside, and that the box's contents are only 5 minutes away from a locksmith.

I have kept valuables in SDB's for over 50 years now, and there used to be an almost sacred trust in their anonymity and security. No longer. Banks used to be just a necessary evil (although I preferred S&L's) - now they're predators.

Chris, I admit there's little new in the post, but I'll bet if you stop a hundred people on the street and ask them, "Can a bank enter your safety-deposit box without asking or telling you?", about nine out of ten will be impatient and indignant and say, "NO, of course not!!"

Challenge a xxx or xxx or xxx at the scene, you'll get a free ride downtown...

 

I believe recently there was a 60 minutes episode (not sure) which described how in California banks were going into people's safe deposit boxes without notice to the owner, saying they were "abandoned" when they were in fact not. The owner of the SDB had no recourse and many of their possessions were sold by the banks.

 

But in your first sentence, you referred to safe deposit boxes, implying that their contents are insured. I'm just trying to make it clear to readers that the contents of those boxes are not insured.

 

Frankly this sounds like an improvement. Under the current system any deposits over $250,000 in a failed institution would simply be lost. The description in the OP says

Note that is says NEWLY FORMED entities, not equity in the failing institution. What it does is creates new smaller institutions that hopefully will be more stable. You have not lost your uninsured deposits (which you would have), instead they have been changed to stock in other companies that can later be liquidated recovering your funds. This protects wealth not loses it.

 

I would spread it around as well. As I said it is an improvement, but the new institutions could fail as well so their stocks could become worthless and that equity is NOT insured. So the new system would be better, but you COULD still lose your uninsured deposits. But that is still better than the fact that under the current system you WILL lose your uninsured deposits.

 

To me, the OP sounds suspiciously like a gold/silver bullion salesman as this is exactly the tactic they take to "scare" folks into buying gold and silver.

I find these posts boring and deceitful simply because there is no specific recognition of the Federal Reserve Bank which in actuality, is the ONLY Bank in this country.

Let's say that an individual has $178,591 dollars on deposit at "the Bank".
This post, more or less, is designed to scare that individual into "believing" that the $178,591 is at "risk" simply because it is on deposit at a Bank which could go belly up.

EXACTLY what is a person to do?

Withdraw all the deposits demanding "cash"?

I expect that this is exactly the intent of the letter at which point the individual is encouraged to put that money into a safe haven, such as gold bullion, for the future.