Learned Something New Today

Regarding the Cyprus 'situation', I've been of the opinion that: 1) it was a more honest way to bail-out banks then public bailouts and 2) that because depositors would receive equity in exchange for thier liquid funds that it could - mind you I said 'could' be a money-making proposition.

All that said (and I was never in favor of it being done without a poplular referendum in favor of the scheme) I found out something new today on Alternet about 'title' to funds on deposit in banks:

www.alternet.org...

Although few depositors realize it, legally the bank owns the depositor’s funds as soon as they are put in the bank. Our money becomes the bank’s, and we become unsecured creditors holding IOUs or promises to pay. (See here [6] and here [7].) But until now the bank has been obligated to pay the money back on demand in the form of cash. Under the FDIC-BOE plan, our IOUs will be converted into “bank equity.” The bank will get the money and we will get stock in the bank. With any luck we may be able to sell the stock to someone else, but when and at what price? Most people keep a deposit account so they can have ready cash to pay the bills.

Earlier in the article, a little history is given:

A joint paper by the US Federal Deposit Insurance Corporation and the Bank of England dated December 10, 2012, shows that these plans have been long in the making; that they originated with the G20 Financial Stability Board in Basel, Switzerland (discussed earlier here); and that the result will be to deliver clear title to the banks of depositor funds.

And goes on to conclude with another stategy for failing banks:

The Swedish Alternative: Nationalize the Banks

Another alternative was considered but rejected by President Obama in 2009: nationalize mega-banks that fail. In a February 2009 article titled "Are Uninsured Bank Depositors in Danger? [16]", Felix Salmon discussed a newsletter by Asia-based investment strategist Christopher Wood, in which Wood wrote:

It is . . . amazing that Obama does not understand the political appeal of the nationalization option. . . . [D]espite this latest setback nationalization of the banks is coming sooner or later because the realities of the situation will demand it. The result will be shareholders wiped out and bondholders forced to take debt-for-equity swaps, if not hopefully depositors.

On whether depositors could indeed be forced to become equity holders, Salmon commented:

It’s worth remembering that depositors are unsecured creditors of any bank; usually, indeed, they’re by far the largest class of unsecured creditors.

President Obama acknowledged that bank nationalization had worked in Sweden, and that the course pursued by the US Fed had not worked in Japan, which wound up instead in a "lost decade." But Obama opted for the Japanese approach because, according to Ed Harrison [17], “Americans will not tolerate nationalization.”

But that was four years ago. When Americans realize that the alternative is to have their ready cash transformed into “bank stock” of questionable marketability, moving failed mega-banks into the public sector may start to have more appeal.

The article is well annotated and the original can be found at the 'Web of Debt' Blog. I used this version because of live links to the source references and just all-around better presentation.

I didn't know that the banks (have to find out about Credit Unions - I don't do Banks personally) were the legal owners of deposits - that deposits were unsecured debt granted the bank (makes sense to me now about some bank accounting practises).

The reason few people know that is because the vast majority of people fail to read all of the fine print on the form they sign to open an account. This is not the bank's fault... it is the depositor's fault for being ignorant and apathetic.

Someone tell me in plain english what this means to anyone with money in a US bank.

Edit: Oh, now I get it.