Those of us following the news in Cyprus are probably all appalled by the seizure of customer deposits in order to save its banks. We have to ask ourselves: can that happen here?
As it turns out, the FDIC actually has such a plan in its back pocket. It would be an alternative to a future taxpayer bailout. Rather than do into the details in this blog post I recommend you read the following articles:
One of our contributors points out that there are three options if we are to take a taxpayer bailout off the table to salvage a threatened or insolvent bank (or even close it):
1) Losses will go to shareholders of the bank first then unsecured creditors (depositors) second. FDIC insurance fully protects the cash values of deposits under $250,000.
2) Identify solvent subsidiaries of the bank deemed necessary and keep them open under a new parent company and new management. Close insolvent ones following option 1 for distribution of any losses.
3) The new FDIC proposal where unsecured credit (deposits) are turned into shares of these newly established companies (option 2), thus capitalizing the new operations.
Option 1 is what most of the general public thinks is supposed to happen (at least, that is my presumption as it is my expectation). I fully expect that investors would bear the brunt of any losses and that accounts under $250,000 would be made whole by FDIC deposit insurance.
The big issue for most of us is what happens to FDI insured accounts. The Ellen Brown articles suggest that the FDIC proposal would allow conversion of some deposits, even those FDIC insured deposits under $250,000, to stock rather than an actual full cash compensation. In other words, no longer is FDIC insurance for your deposits truly insurance because the value of the stock is not guaranteed. If this were to take place, rest assured depositors would be outraged.
The second issue is whether investors in derivatives would have a higher priority than depositors. The article suggested that this would be the FDIC position. Again, most of us would find this to be an outrage. Derivatives are a risky investment. If someone or some entity invests in a derivative they accept that risk and should be the first to take losses, not depositors who, in contrast, have chosen to put their money in a bank which is supposed to be an extremely safe investment for which they accept a return that is less than the rate of inflation.
Personally, I suggest that we express our outrage about this FDIC proposal now, before it is actually ever implemented.
This is another good reason to pursue public banks and Move Your Money out of FDIC banks.