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There Are No Rules in Bank Bail-In; Only the ‘Principle’ of Theft

Dec. 31, 2015 (EIRNS)—In yet another warning of the coming chaotic looting of the "bank bail-ins," posted on several sites yesterday, economic blogger Michael Snyder says, "Now the exact same principles that were used in Cyprus are going to apply to all of Europe. And with the entire global financial system teetering on the brink of chaos, that is not good news for those that have money stashed in shaky European banks."

The bail-in "principle" is: theft by expropriation of bondholders and depositors, to provide "recapitalization" to an insolvent bank which should, instead, be shut down. Beyond that lawless "principle," there are in fact no "bail-in rules" that resolution authorities in London, Brussels, and Washington are bound to follow. Various rules have been thrown out the window in each bail-in crisis, from Cyprus, to Spain’s Bankia, to Italy and Portugal. One institutional investor expropriated in Portugal’s Novo Banco bail-in yesterday protested, "In the event of bail-in the Central Bank claims the right to change all the rules." The Portuguese Central Bank was being directed by the European Central Bank to, in this case, ignore the rule of so-called "equal treatment" for unsecured creditors.

  • The rule that "unsecured despositors (over €100,000) would be affected last," from the EC Directive announcing the Jan. 1 mandatory bail-in policy. This is meaningless; they have been, and will be expropriated, and "last" only if the resolution authority decides that hitting them earlier would affect the health of the financial system.

  • The rule that "Smaller depositors [under €100,000] would in any case be explicitly excluded from any bail-in," from the same EC Directive. That is, where sufficient deposit insurance exists to exclude them. Italy is one of numerous countries where this was clearly not the case even with four smaller banks failing at once. Europe-wide deposit insurance? Schäuble’s gang has blocked its development.

  • The rules for including a bank’s derivatives holdings in bail-in? Only if the resolution authority decides that many orderly conditions are met, including that the health of the financial system would not be affected by bailing in derivatives. Otherwise, they are sacrosanct and excluded.

  • The rule that national authorities will cooperate in orderly resolution of a global bank; and particularly, that derivatives counterparty banks abroad [i.e., in London] will wait 24 hours before seizing collateral from a failing bank. Economist Simon Johnson, an FDIC advisory board member on bank resolutions, told a Washington audience recently to "forget about" cooperation from European [i.e., London] bank authorities in a crisis; "There will be no cooperation."

  • Then the insolvent banks losses will be so large that bailing in ALL creditors and ALL depositors may be insufficient to recapitalize the bank. What about that famous Dodd-Frank rule that the Fed can no longer make bailout loans to banks under any circumstances? Instead, it will be the FDIC, or similar bank insurance agency in a European country, which provides new capital from its "resolution fund." And this comes from...? An FDIC credit line of up to $500 billion from the Treasury.

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