Bank bail-ins have become the biggest threat to the U.S. financial system and it is only a matter of time before the $297 trillion in bank derivatives cause the whole system to crash.
The collapse of the global financial system led to the loss of $16.4 trillion in U.S. household net worth by the first quarter of 2009. Six years after the bottom of the financial crisis and a time-bomb has started ticking that will make the global financial meltdown look like a minor hiccup.
The time-bomb is called bank bail-ins and it could wipe out every penny of U.S. bank deposits and bankrupt every pension fund in the country. It’s a $297 trillion time-bomb that has already started the countdown.
What are bank bail-ins?
Bail-ins are the government’s politically-correct answer to the bail-outs. Already used in the U.K. and Cyprus, bail-ins allow banks and financial firms to convert any of their liabilities to stock or to wipe them out entirely. Bank or brokerage house liabilities are the funds it owes to depositors and anyone with a debt investment. Stock in an insolvent financial institution is likely to be worthless, so the difference between conversion and simply writing off debts is semantic.
Bank bail-ins were formalized into the international banking system by the G20 in November 2014 and its Financial Stability Board resolution – Adequacy of Loss-Absorbing Capacity of Global Systemically Important Banks in Resolution. The rule prioritizes the payment of bank derivative obligations above all other unsecured creditors including depositors. Basically, if derivative investments become a problem (again), a bank must move cash from other sources to pay the investors in its derivative notes first, even if it means not paying others that have loaned the bank money.
With a combined $297.5 trillion in U.S. bank derivative exposure, that is an extremely big priority. More than 32 times larger than the $9.3 trillion in deposits held and nearly 16,000 times larger than the $25 billion FDIC insurance fund that “guarantees” deposits. In fact, derivative exposure is more than 17 times the size of the entire U.S. economy. When derivatives suffer another drop in value, every other creditor in the banking system will be wiped out.
How bank bail-ins will lead to the next global financial meltdown
Threatened by public opinion over the buyouts, politicians instituted Dodd-Frank, which makes bail-ins an inevitability in banking. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed in 2010 and allowing sweeping powers to the government, gives Washington “resolution authority” to takeover and dismantle failing financial institutions. Instead of risking a government takeover, banks will use their power to liquidate creditors in a bail-in and save themselves. Not only does Dodd-Frank make bail-ins the preferred strategy for banks, it means they’ll be quick to cover their own insolvency rather than risk government intervention.
Think you are going to be able to withdraw your money before things get too bad? The Federal Reserve Board already knows how it’s going to stop depositors from protecting their money. It’s called Regulation D and it actually limits the number of withdrawals you can make from a savings or money market account to six transactions per month.
Under Regulation D, you cannot make more than six transactions by check, draft or debit card without paying a steep fine. You are allowed to make as many “non-covered” transfers as you like, which include repaying a loan to the bank. So you’re “allowed” to pay the bank back for a loan, but the bank can hold your money from you if you’ve already made six transactions.
Besides depositors with checking and savings accounts, pension funds and insurance annuity companies will also be big losers when bail-ins are enacted. These institutional investors have been forced by government regulations to allocate larger investments to “safety” in bank debt but will ultimately find their portfolios wiped out in a bail-in.
The loss of trillions in deposits, pension funds and insurance assets could cause a complete collapse of confidence in the financial system. Whatever is left in bank accounts will be withdrawn and the problem will snowball until there is nothing left but to reset the whole system with a devaluation of the dollar.
Having the benefit of hindsight may offer investors their only protection when bank bail-ins bring about the next financial collapse. A chart of gold prices against the S&P 500 and a timeline of the 2008 crisis shows gold’s value as protection against global systemic risk.
As investors watched their investments in stocks melt by more than half to March 2009, gold investors benefited from a flight to safety and asset protection. Even as the S&P 500 recovered against a shaky financial system and burdening government spending, the price of gold shot up 180% to 2012.
The crisis from bank bail-ins could be far worse than the financial collapse of 2008, on order of several times worse, leading to an even bigger collapse in financial markets. Gold is again likely to be the only true protection, in particular physical investment in gold bars and coins.
Investors should take advantage of a short window before banking derivatives lead to massive losses to protect themselves with an allocation to gold and other precious metals. Certified Gold Exchange has been America’s trusted source for gold since 1992 and holds an A+ rating from the Better Business Bureau. CGE acts as an advisor only and customers have complete control of their investments.
Call Certified Gold Exchange at (800) 300-0715 to talk to an account representative about protecting your assets ahead of bank bail-ins and the next financial collapse.
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