Bail-ins for Banks Too Big to Fail

Stanley Fisher is the former governor of the Bank of Israel, former chief economist at the World Bank, and current Vice Chairman of the Federal Reserve . According to the Daily Paul, (“The U.S. Plans To Bail-In The Banks—Federal Reserve

Maybe Not. [courtesy Google Images]
Maybe Not.
[courtesy Google Images]
Vice Chairman”) Mr. Fisher recently declared:

 “. . . the United States is preparing a proposal to require systemically important banks to issue bail-inable long-term debt that will enable insolvent banks to recapitalize themselves in resolution without calling on government funding–this cushion is known as a ‘gone concern’ buffer.

“Mr. Fisher gave no details as to whom in the United States was preparing the bail-in proposal and what “bail-inable long term debt” is.”

 •  First, Mr. Fisher implies that the US government is preparing to pass a law that will require those banks, but only those banks, that are “systemically-important” to issue “bail-inable long-term debt” instruments.

What are “systemically-important banks”? They must be the major banks (such as Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan, Morgan Stanley, State Street, and Wells Fargo) that were previously described as “too big to fail”.

More, these “systemically-important banks”:

  1) Must be insolvent; and,

2) Can’t expect help from government funding—before they can issue the “bail-inable long term debt” instruments.

These conditions imply that the Federal Reserve and federal government anticipate:

 1) At least one, probably several, and perhaps all of the “too big to fail banks” are going to become openly and undeniably “insolvent” in the near future;

2) The federal government will be too broke to save these insolvent banks with more “Quantitative Easing” (government funds); and,

3) Since government can no longer save the “too big to fail banks,” those banks are will failunless they can find a “savior” other than government.

 Get that? Federal Reserve vice chairman Fisher has implied that some or all of the “too big to fail” banks will soon become insolvent and government will be too broke to bail them out.

The result of another Lehman-Brothers-like bank failure could be a collapse of the US and/or global economies.

When might this happen?

You can bet that the gov-co will do everything it can to postpone the insolvency of one or more “too big to fail” banks until after this year’s election in November. But any time after that election—say, first or second quarter of A.D. 2015—we might expect to see significant bank failures and economic chaos.

•  Second, in order to mitigate this coming economic chaos, the government is proposing a law that will “require” the “systemically-important banks” to “recapitalize” from a source other than government. What could that source be?

I can imagine only one possible answer: bank depositors.

Vice chairman Fisher’s remarks are evidence that the Federal Reserve believes a financial crisis may be approaching that is so severe that, as in Cyprus, the only way to keep the banks solvent is let them seize their depositor’s funds.

By passing a law that “requires” the “systemically-important banks” to seize their depositors’ funds, the government would give those banks a certain amount of plausible deniability.

I.e., if insolvent banks were required by law to seize their depositors’ funds, perhaps the depositors wouldn’t blame those banks for taking their funds and would instead blame the government for passing that law. If the depositors don’t blame the banks that seize their funds, those depositors might continue to do business with the insolvent (failed) banks and those banks might continue to hold enough customers to stay in business.

Written by: ALFRED ADASK – continue reading at ADASK’S LAW

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