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February
09
2023

The Banksters Want Your Money
Sean King

Happy Thursday from lovely Northern Italy!

I’m sure you’re wondering, “Why the hell is he writing about bailouts? Isn’t this an ancient topic?”

I don’t blame you. Back in 2008 in the US, bailouts were the order of the day. And in 2011 in the European Union, depositors at Cypriot banks were bailed in.

Allow me to set the stage…

First, thank you for your generous feedback. I was nervous writing for the Morning Reckoning – if people would find my insight useful – and you’ve put my mind at ease.

Second, the feedback has been of particularly high quality. Those who’ve written in have brought up all kinds of interesting subjects, from vaccines, to Russia, to central bank digital currencies (CBDCs). It’s been wonderful – and humbling – to read.

So when I saw bailouts and bail-ins in the mailbag, it piqued my curiosity…

Here what one of you had to say:

I’d love to see you cover the topic of “bail-ins” and how the banks can now bail-in our deposits during any financial crisis, to bail-out, once again the “BANKSTERs!”

What options do we have to safeguard our cash, other than to deposit in a bank?

Sure, own a little gold, bitcoin, etc.…. I don’t want to be bailed-in!

–Mike M.

Well, Mike, you’re correct. The government can bail depositors in. And it may be legal, but I personally think it’s a crime.

But – and it’s a big “but” – there are specific rules as to how a bail-in occurs.

So in this Morning Reckoning, I’m going to talk about the difference between bail-ins and bailouts. Then I’ll explain under what conditions a bail-in can occur. Finally, I’ll give you a couple of ways to make sure that never happens to you.

Let’s get to it.

What are bailouts?

First, let’s go over the easy part and get it out of the way.

A bank bailout is when the government provides financial assistance to a poorly managed bank to prevent its collapse and protect the depositors’ money.

Which depositors? We’ll answer that question further down…

Former U.S. Treasury Secretary Paul O’Neill once said of bankruptcy that it’s the “genius of capitalism.” By speaking that fundamental truth, O’Neill was relieved of his job.

Banks are companies and ought to be allowed to go bankrupt. I was against the bailouts in 2008 and my position has never wavered.

Once poor banks go under, the space is cleared for new banks – or new methods for saving – to spring up.

Sure, would bankruptcy hurt some depositors? Yes. But not those who have less than the maximum deposit insurance level. I’ll talk more about that later.

Now… how does the government execute a bailout?

This can be done by injecting capital into the bank, guaranteeing the bank’s debts or nationalizing the bank. Or, in the case of Bank of America and Merrill Lynch, the Federal Reserve Chairman can force an acquisition.

Bank bailouts are controversial for good reason. They usually involve taxpayers’ money to rescue financial institutions that are too big to fail.

But even worse is that the central bank may print money to cover the losses. From September 2008 to mid-November 2008, the Fed’s balance sheet doubled.

To quell public anger about bailouts, governments came up with a new method to save overextended banks: the bail-in.

What are bail-ins?

A bank bail-in is when a troubled bank’s creditors and depositors with large balances are forced to bear some of the losses instead of taxpayers.

This is done by converting a portion of their debt into equity or by seizing their deposits to recapitalize the bank and restore its financial stability.

A couple of things: creditors (bondholders) take this risk every day. It’s why fixed income traders are so miserable compared to equity traders. Equity traders ask, “How much money am I going to make today?” Fixed income traders ask, “How much am I going to lose today?”

Regarding depositors with large balances, this is the key to the whole conundrum.

It’s critical to remember the Federal Deposit Insurance Corporation (FDIC) in the United States insures your deposits up to $250,000 at each institution.

And that covers:

-Checking accounts
-Negotiable Order of Withdrawal (NOW) accounts
-Savings accounts
-Money market deposit accounts (MMDA)
-Time deposits such as certificates of deposit (CDs)
-Cashier’s checks, money orders, and other official items issued by a bank

What’s more is that each ownership category is covered. That is, if you have two or more accounts in two or more different ownership categories, you’re insured up to $250,000 on each.

Here are the different ownership categories:

-Single Accounts
-Certain Retirement Accounts
-Joint Accounts
-Revocable Trust Accounts
-Irrevocable Trust Accounts
-Employee Benefit Plan Accounts
-Corporation/Partnership/Unincorporated Association Accounts
-Government Accounts

So this begs the question: if the FDIC insures all this, how can you possibly get bailed in?

How can you get trapped in a bail-in?

Let’s say you only have one single account at one bank. You’ve got $300,000 in that single account. Your bank is about to go under, but the government has ordered a bail-in.

In a plain vanilla bail-in scenario, $250,000 of your deposit will be perfectly safe. The $50,000 you’ve got over the deposit insurance limit will be “bailed in.” That means the $50,000 will likely be exchanged for stock in the bank that’s worth nowhere near $50,000.

You’ll probably feel like you’ve lost $50,000, even if you didn’t lose the whole amount.

So how do you make sure this doesn’t happen?

What can you do to avoid getting bailed in?

There is no guaranteed way to avoid a bail-in, but depositors can take steps to reduce their risk:

–Don’t keep one large deposit at a single bank: Keep smaller deposits in multiple banks. That reduces the risk of losing a large amount in case of a bail-in. Also, ask your accountant to help you make sure separate amounts are in different ownership categories if you must, for some reason, stay at one bank.

–Spread your deposits across different banks: Keep amounts less than $250,000 at multiple banks within the U.S. That’s easy.

-Bonus tip: Since I’ve lived in a few countries, I never closed those foreign bank accounts and I use them as cash protection vehicles. If you’re American, keep in mind that you must declare your foreign bank accounts to the IRS (FBAR) with your tax returns if those accounts exceed $10,000 at any point in the year.

–Know the bank’s financial situation: Forgive me for being so obvious… but you definitely want to avoid banks that are in financial distress.

–Consider different investments: The easiest thing in the world to do is to buy US Treasury bills and bonds. They’re liquid cash substitutes the USG guarantees. And thanks to Chairman Pow, you even get a bit of yield nowadays.

Remember, these ideas only reduce the risk of a bail-in, they don’t guarantee that outcome. Ultimately, governments decide and they’re unpredictable.

Wrap Up

Not only do you now know how to reduce your chances of getting bailed in, but you also know why governments invented them.

Think about it. Only people with amounts over $250,000 would be affected by a bank going down.

So yes, your instinct was correct. In 2008, the government only bailed out their rich friends. It didn’t “save the world economy.”

And since the public figured this out pretty quickly, the Europeans invented the bail-in to require those rich folks to participate in the losses.

America later adopted bail-ins as a legal measure which will probably only be used for banks that aren’t too big to fail.

A big thank you to Mike M. for the stimulating question.

I try and read all the emails you all send me… it helps me get down to what really matters to the people I’m writing for.

If you have any feedback or topics you want covered, be sure to click here and drop me a line.

Otherwise, I hope you take measures to protect yourself if you haven’t already.

Once you do, stop worrying about it. There are far bigger fish to fry nowadays.

 
My story starts in Hasbrouck Heights, New Jersey, where I grew up. My childhood was idyllic. I never thought I'd leave the Heights. Well, maybe just for college. When I was searching for colleges, I only looked within a hundred miles or so. I wound up going to Villanova. I stayed there for four years and earned — their word, not mine — a finance degree with a minor in political science. After that, I went to work on Wall Street. I had a menial job at Paine Webber to start, but then I got my first real Wall Street job at Lehman Bros. (before its collapse, of course). I worked there in Global Corporate Equity Derivatives as an accountant, believe it or not. Honestly, I hated the job back then. I didn't know how spreadsheets worked — yes, even with a finance degree. (Now I'm a Microsoft Excel nut. I think it’s one of the most extraordinary things ever invented.) After that, I moved to Credit Suisse, who sent me to London — the center of global operations for banking. I was young. Not only did I love the city for being a Candyland for alcoholics, but I also needed the international experience to cancel out my mediocre grade point average to get into a top 25 U.S. business school. Somehow, though, I stayed for a decade, until I discovered London Business School. There I earned a master’s (HA!) degree in finance. My next job was as a futures broker, which I utterly loathed. When I had enough, I took a year off — pub crawling around London and pissing away my bonus money. Then I figured out that I needed a new job. So I went to work for a company called 7city Learning, where all of the best finance trainers were working. I had no idea about any of that, but imagine walking into the 1927 Yankees locker room and being taught how to hit. I spent my time teaching all the traders exams, the graduate programs of the various big banks and then the CFA Level 1 review courses. Yes, that's the only level I've passed. I hate that exam. I never really wanted to run money anyway. In 2009, my boss asked me to move to Singapore to help build the business in Asia. Then I went to work for another financial training company where all of my friends had migrated. Around the time I was getting bored of Singapore, my old bank asked me to work at talent development for them in Hong Kong. Nearly three years later, I moved to the Philippines, where I started an EdTech startup called Finlingo. Along the way, I’ve racked up a ton of qualifications — I am a CAIA, FRM and CMT, amongst a few other things — but they don't mean anything. All that matters are my experience, my connections and my takes on things. So every day I'm going to do my snarky best to inform and entertain you.

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