Can Banks Keep Your Money in a Financial Crisis?

The surprising details in the Dodd-Frank Act and the insidious plan

There’s a scene at the beginning of the movie The Big Short, where one of the real-life characters, Dr. Michael Burry, is asking Goldman Sachs to create a financial instrument to short the bonds that held housing mortgages. This meant, after studying numerous spread sheets and bank documents, that Burry was expecting the housing market to crash, and if it did, he would win big.

“Why?” asked one of the bankers, “Those bonds only fail if millions of Americans don’t pay their mortgages. That’s never happened in history. Excuse me, Dr. Burry, but that seems like a foolish investment.”

Burry replied, “Based on the prevailing sentiment of banks, the markets, and popular culture, yes, it’s a foolish investment. But everyone is wrong.” The bankers politely snicker and laugh, but they gave him what he wanted. In the end, Burry was right and he made 6 billion dollars when the housing market crashed in 2008, as he expected.

Lest we forget, more than 5 trillion dollars in real estate values, stock prices, savings, 401k retirements, and pensions evaporated in that financial crisis. Plus, 8 million Americans lost their jobs and 6 million lost their homes.

As a result of the carnage, the term “too big too fail” was born and Congress provided a $700 billion dollar bail-out for the banks who had overextended themselves. They had offered subprime loans to people with no income and no jobs, sold the mortgages to Fanny Mae Freddy Mac, and then invested in the bonds that were bundled with those bad loans.

To appease Americans who were screaming and objecting to the bank bailouts, Democrats Barney Frank, chair of the House Financial Services Committee, and Senator Chris Dodd, stitched together the Wall Street Reform and Consumer Protection Act to try and fix the problems. But as you will see, this is a deceptive title. It actually harms consumers and depositors in the next financial crisis.

The Premise:

In most of the world, we have some principals ingrained in our DNA about property rights. What’s yours is yours and what’s mine is mine. If you earn a dollar, it’s your dollar. You can use that dollar to buy a phone and that phone belongs to you. We have many laws that protect your property rights, and those who steal your dollar, or your phone, can be charged with a crime and possibly go to jail.

Likewise, we believe that our money in the bank is our money. And since we believe this, we also believe that banks are obligated to give us our money when we ask for it. On every normal day, this is true, but in the next financial crisis, as Dr. Burry said, “Everyone is wrong.” The assumption of ownership is no longer true and it was changed in the Dodd-Frank Act of 2010, and most people don’t know it.

We must be legally clear:

I’m going to get into some ugly details, but first we must understand some legal terms and conditions. Technically, legally, and officially, when we give our money to the bank, we literally transfer ownership of our dollars to the bank. The money we give to the bank for our deposits belongs to the bank. Technically, the bank borrowed your money, so now it’s theirs, and they owe you a debt. This makes you a creditor of the bank.

More specifically, you are an unsecured creditor. You have loaned your money to the bank with nothing to secure the loan.

It’s not the same if we borrow money from the bank. When we borrow money, say for a car, the bank always wants something to secure the loan in case we default. If we default on the car loan, the bank will hire a big guy to track you down to repossess the car, which now belongs to the bank. The car itself was the security for the money borrowed from the bank.

But when the bank borrows money from you, the depositor, you don’t ask the bank to secure the loan at all. You just give your money to the bank and they take it with a smile. This double standard will become important when I get into the details, so stay with me. Just remember, you are an unsecured creditor of the bank where you deposited your money.

Dodd-Frank stats:

Originally, the Dodd-Frank bill was an 1,800 page monstrosity filled with misleading terms and difficult language. This, of course, is intentional, and giving it a deceptive name, the Wall Street Reform and Consumer Protection Act, also keeps the general public in the dark about what it says, and it keeps Congress in the dark about what they’re signing into law.

Trump reduced many of the regulations in the Dodd-Frank Act to help smaller banks (under $50 billion in assets) because they were being unfairly choked by regulations that were intended to keep big banks in check. So Trump whittled the bill down to it’s current 849 pages, but still, it is confusing and misleading. So let’s clarify some of the definitions in the Dodd-Frank bill.

“Corporation” = FDIC. Technically, some government institutions like the FDIC are corporations. This allows for loopholes to be maximized and liabilities to be minimized, but really, it’s still just the government, and that’s one of the confusing points. So when you see “Corporation” in the bill, think government.

“Covered Financial Company” = bank. This is the bank that is failing or needs help in a financial crisis. This could easily be your personal bank, especially if your bank is one of the big 5: JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, and US Bancorp, with assets of $9.3 trillion dollars as of March 2021.

And once again, “unsecured creditor” = you and me, the depositors who are trusting banks to hold “our money”.

Getting into the weeds:

With that, put your waders on as we step into the swamp. On page 85 of the Dodd-Frank Act we have Section 206, called…

MANDATORY TERMS AND CONDITIONS FOR ALL ORDERLY LIQUIDATION ACTIONS.

Notice the word “Mandatory”. This is what will happen when a bank is going under and the bank’s assets are being liquidated. The following excerpts are directly from the Dodd- Frank bill (emphasis is mine):

In taking action under this title, the Corporation [FDIC/government] shall —

(2) ensure that the shareholders of a covered financial company [the bank] do NOT receive payment until after all other claims and the Fund are fully paid;

So, for example, if your 401k retirement account is holding stocks of a failing bank, then you are the “shareholder” who will not get paid until “after all other claims” are settled.

(3) ensure that unsecured creditors [you and me, the depositors] bear losses in accordance with the priority of claim provisions in Section 210;

Here’s where we start jumping around as they try to confuse us.

Section 210 is titled “Powers and Duties of the Corporation,” where it says in section (M) that the Corporation [FDIC/gov]

“shall terminate all rights and claims that the stockholders and creditors [you] may have against the assets of the covered financial company [the bank].”

This means that the FDIC can terminate your rights to your money. Furthermore, section (M) states that

“The Corporation [FDIC/gov] shall ensure that shareholders and unsecured creditors [you] bear losses, consistent with the priority of claims provisions under this section.”

The priority of claims is covered in section 204(d), Funding for Orderly Liquidation, which spells it out in more legalese, the order in which a bank in crisis must settle their debts. The weeds are heavy and thick through here, so I will boil this down:

1. The first bank creditor that gets paid are the debts owed to other banks. [This is the good old boys taking care of each other.]
2. Second, any possible losses of the bank assets. [For example, if the bank had losses in the stock market, those have to be settled.]
3. Third, the debts and obligations toward third parties. [This might be wire transfer companies or armored transport services or office cleaners, etc.]
4. Fourth in line is paying off any liens held on the bank.
5. Fifth, selling acquired assets and liabilities [like foreclosed property].
6. Sixth, this references other sections in the document, which requires the failing bank to pay the FDIC for administrative expenses, vacation time, and the salaries and benefits of the FDIC employees who are in charge of liquidating the bank’s assets. [This is the FDIC making sure they get their cut.]
7. Finally, and last in line, the Orderly Liquidation gives priority to bank employee pension funds, and even the salaries and benefits of senior bank executives who mismanaged your deposits, likewise with any partners or investors of the bank. [Yes, the CEO and Executive Board still get their 7 figure bonuses before the depositors get a dime.]

Notice, there is no mention of paying you, the unsecured creditors. All of these creditors listed above (1–7) are in line to get paid before the bank has to compensate their depositors. Even if you ask for your money, the FDIC has the the sole discretion and power, according to Dodd-Frank, to pay or not pay the bank’s unsecured creditors as they see fit, stating that the “Corporation determines [if] such payments or credits are necessary or appropriate.”

The only stipulation on paying unsecured creditors is that they have to treat these creditors in a “similar manner”. But if the next financial crisis is as devastating as many are saying it will be, this will only mean that everybody will get screwed equally, and will probably lose at least some of their money.

The scary truth about bail-ins:

In 2008 the banks were bailed out by Congress with $700 billion plus several rounds of Quantitative Easing. But it is we, the American people and our children, who will have to pay the resulting government debt. In the next financial crisis, we’re just going to skip that part about asking Congress to bail out the banks. The too-big-to-fail banks will instead be rescued by the depositors and stock holders directly. This is what they call a bail-in.

One motivation for this theft is efficiency. It’s much easier for banks to just keep the money they already have than it is to ask Congress for it. In a 2019 article from Investopia, Richard Best put it like this:

With a bank bail-in, the bank uses the money of its unsecured creditors, including depositors and bondholders, to restructure their capital so it can stay afloat. In effect, the bank is allowed to convert its debt into equity for the purpose of increasing its capital requirements. A bank can undergo a bail-in quickly through a resolution proceeding, which provides immediate relief to the bank. The obvious risk to bank depositors is the possibility of losing their deposits.

The plan is world wide:

Moving internationally, the FDIC has been working with the Bank of England to agree on what the new bail-in procedures will be. The HM Treasury, UK’s economic ministry, clearly confirmed the plan in their “Bail-in powers implementation” report, saying:

Bail-ins involve shareholders of a failing institution being divested of their shares, and creditors of the institution having their claims cancelled or reduced to the extent necessary to restore the institution to financial viability.

Is anyone feeling sick yet, having any doubts?

Other European banks have also passed laws which allow them to keep depositor’s money. The Bank Recovery and Resolution Directive (BRRD) legalizes the same actions. The Isle of Man, in the UK, confirms the plan to possibly confiscate deposits in their Bank Recovery and Resolution overview:

In the wake of the global financial crisis, work has been ongoing internationally to address the issue of banks being ‘too big to fail’ — i.e. to ensure that the cost burden of any future bank failure is for the account of its shareholders and creditors, and not for the taxpayers, who ultimately ‘bailed-out’ troubled banks during the [2008] crisis.

They say this like it would be so much better if the stockholders and creditors rescued the bank with a bail-in, rather than tax payers bailing them out as they did before. IT’S THE SAME THING! Almost all of us are taxpayers and almost all of us have bank accounts. To infer that a bail-in is somehow better than a bail-out is ridiculous. We, the people, are paying for it no matter what.

In fact, psychologically, a bail-in would be much worse because everyone will feel like the banks personally stole their money, whereas, people don’t really feel that way about paying taxes. It is, if you think about it, but most people don’t see it like that. We pay reasonable taxes accepting it as a cost of living in a civilized society.

But to lock the bank doors or declare a bank holiday so people can’t get their money, that will immediately lead to anger, loss of confidence in financial institutions, and possibly violence.

I have another example involving the whole world, just to demonstrate how insidious this plan is.

In 2014, according to Mark Moss who reported on this, the Bank of International Settlements (BIS) and the Financial Stability Board (FSB), the financial arm of the G20 countries, signed a “supranational law” that would average bank depositors world wide and use bail-ins to settle accounts in the event of a world wide financial crisis. This will, in effect, take depositor’s money from the richest countries, which is all of the G20 countries, and give it to the poor countries of the world. It’s unclear what kind of binding authority the BIS and FSB have to pull that off, but they are definitely trying. It’s a world wide socialist-style transfer of wealth, making the 1% (the Western world) pay their fair share.

The Cyprus Lesson:

So far, from the documents I’ve mentioned, this only seems like something in the future. However, we do have a recent real-life example of a bail-in taking place.

In 2008, the island country of Cyprus was the third smallest economy in the European Union, but they were borrowing and spending like they were Germany. When the financial crisis came calling, euro-bankers decided (without asking the people of Cyprus) to allow a bail-in of up to 10% on citizen’s saving accounts. [The term “bail-in” had not yet been invented by Economics Magazine, so it was called a “Bailout Levy,” but it’s a bail-in if you read the article.] It was either that or a disorderly bankruptcy for the entire country.

The people, however, didn’t take it so well. One woman expressed the people’s sentiments, even if it was only 10% or less, “Why should they take our money? We’ve worked our whole lives to save a bit on the side. It’s really unfair.” Taking that to the extreme, another guy threatened to bulldoze his way into the bank to withdrawal his money.

The compensation for the theft was stock ownership of the banks that were failing, but very few felt good about that trade. People will not take this sitting down no matter what the officials say, no matter how necessary it might be, even if it will save the country?

So, it has been done. Governments have taken people’s money with little or no compensation.

What about the FDIC Insurance?

In America, each account is insured up to $250,000 dollars, right? If a bank goes under, the government will step in to rescue depositors, so we believe.

Here’s the problem with that. The FDIC Fund only has about 25 billion dollars on hand. The top 5 US banks are holding $9.3 trillion dollars. If just one of those top 5 banks fail, the FDIC could not cover the losses of those depositors. They might try to borrow or print more checks to cover people’s losses, but that just adds more fuel to the fire. Printing and borrowing money is the reason we have our debt problems. It’s foolish to think we can borrow more to insure people’s losses without more failures.

So, what are we to do?

How can we mitigate possible losses in the next financial crisis?

1. Diversify your deposits. Don’t hold all your money in one bank. Maybe, don’t hold all your money in one country.
2. Transfer your money to small banks and credit unions who have less than $50 billion in assets. This is not a fail safe, as my own credit union failed in the 2008 crash, but then, it was small enough that nobody lost their money. And perhaps it would be less likely that a smaller bank would not be over extended and therefore not collapse, depending on the crisis.
3. Don’t keep large sums of money in banks. Instead, purchase things that will hold their value. Think about what people would value if the world went nuts due to financial calamity. This might include real estate, precious metals, food, energy generation, lots of things. But as one of Wall Street’s biggest fund managers, Ray Dalio, recently said, “Cash is Trash.”
4. Maybe buy a safe for your home. (Tip: safe deposit boxes are usually behind bank doors and those assets could possibly be confiscated too.)
5. No matter the crisis, stock markets will fall sharply, so don’t hold all your investments there. Don’t just diversify your stocks and funds, diversify your holdings into other investments, like those listed in #3, and maybe collectible rarities, historical items, or revenue-generating businesses. Everyone has to decide for themselves what may or may not be good investments.

A side note on Bitcoin (BTC): Some would recommend investing in BTC. I am not one of those. I’m writing this the day after China announced a ban on Bitcoin, causing BTC to fall 37% in 2 days. The nature of governments is to control, and since governments can’t control BTC, they will eventually ban it just like China did. They will label it as “counterfeit” because eventually, when the financial markets reset, the new currencies will be government issued crypto currencies and BTC is a competitor. They’re only allowing it now so that people get used to the idea that crypto is valid. Technically, banning BTC won’t get rid of it necessarily, perhaps it will live on the black market, but banking institutions will only be allowed to work in the new government cryptos, eventually making BTC worthless. That’s my view on the future of Bitcoin.

The thing that led to the crash of 2008 was the belief that the housing market could never crash, because it never had. The same is true for the dollar. Most Americans, and actually the whole world, is oblivious to the hazards that our extreme debt and money printing are creating.

We must be like Dr. Burry and the other characters in The Big Short, who were able to see reality where most people could not. Most people are too busy watching shallow TV, inventing reasons to cancel Mr. Potato Head, and being distracted by the latest UFO news, and yes, that whole thing is a distraction.

Take the above suggestions seriously. Tell your friends and family about the reality of what might happen when interest rates rise too high, or the dollar loses it’s world currency status, or the DOW falls 50%, or some other crisis. All of these could possibly trigger the legal authority of the Dodd-Frank Act, mandating they invoke bail-ins, and send our world into chaos.

It is certain that a bank robber will go to jail, but when banks rob their depositors, well, that is now quite legal. It’s not right, but it’s legal. We must take heed of Benjamin Franklin when he said, “Failing to prepare is preparing to fail.”