I have spoken many times about the "bail-in" rules that are in place as more fallout continues from the 2008 financial meltdown that has merely been postponed and not resolved. The latest example of the "bail-in" is in Austria.
In the FDIC/Bank of England paper that was published on December 10, 2012 describing our bail-in rules, it described how solvent assets would be placed into a "good bank" that would continue functioning and prevent a meltdown of other similar entities and a "bad bank" would be established for the non-performing assets.
The bank I am speaking about in Austria is Hypo Alpe Adria bad bank (Heta Asset Resolution). This is the bad bank that was established in 2009. Following a report in Austria's Standard last week that there was a 5 Billion euro hole in Heta's books the Austrian Finance Ministry came out and called the story "pure speculation" and noted the bank was in good health.
The reasons cited by the Standard article for the resurgence of bad loans were a plunge in collateral due to the plunging value of real estate in Southern Europe including shopping centers and tourism projects, and a re-pricing higher of the Swiss Franc.
By Sunday March 8th. The bank was insolvent and a bail-in is now in order. These were rules put in to have stock and bondholders pay for losses so that taxpayers would no longer be on the hook.
Another piece of information from the FDIC paper is that, as depositors in a bank that fails, you are an unsecured creditor of that institution. This means that it is likely you would be "bailed in" also.
This paper states "The unsecured debt holders can expect that their claims would be written down to reflect any losses that shareholders cannot cover, with some converted partly into equity in order to provide sufficient capital to return the sound businesses of the G-SIFI to private sector operation". In English, in exchange for your "deposit" you would likely receive some cash and stock in the bank. Personally, I don't know anyone who accepts shares as payment for bills. Buyer Beware!
Of course, when I speak about this issue I always refer to page 1 of the report, which, in my opinion, basically says that we'll let you know the rules as we make them up. If anyone has any other ideas about what this statement means please let me know: "This predictability cannot, however, be absolute as the resolution authorities must not be constrained in exercising discretion in pursuit of their statutory objectives in how best to resolve a firm".
The stated shortfall at Heta is around 7.6 billion euros (8.51 billion dollars). This is hardly any reason for anyone to get worked up since the numbers are small right? Maybe not.
Of course, anyone paying attention to mainstream media in this country has likely never heard of this bank. If it weren't for some of the collateral damage it is causing I probably wouldn't pay attention either.
According to an article by Bloomberg this decision by Austria to wind down Heta Resolution AG has caused Moody's investors Service to cut the rating of Carinthia Province from A2 to Baa3 and threaten to downgrade Dexia SA's German unit, Deutsche Pfandbriefbank AG and NRW Bank.
Moody's had a couple of quotes worth noting:
" Notwithstanding the intention of the central government to protect taxpayers under the new banking resolution regime Moody's sees the steps taken so far as adding higher uncertainty to developments".
" Susceptibility to an adverse scenario has increased as a result".
In my opinion, in fighting the last war against insolvent institutions the central banks have once again proven that there could be many unintended consequences of their actions that just may lead to the next crisis.
In another note that was forwarded to me there is information from Paul H Kupiec. If anyone thinks Mr. Kupiec isn't qualified he is a resident scholar at the American Enterprise Institute, former director of the Center for Financial Research at the Federal Deposit Insurance Corp. (FDIC) and former chairman of the Research Task Force of the Basel Committee on Banking Supervision.
In this note it explains why central planning cannot possibly take all of the market actions into account.
" Banks are now charging big institutional customers to keep money on deposit- and these so called negative interest rates are forcing liquidity out of the banking system". This is the exact opposite effect that was planned. "JP Morgan Chase recently announced it may charge institutional clients as much as 5.5% on certain deposits, in an effort to push as much as $100 billion of these deposits out the door. Other US banks already charge institutions negative interest to hold euro deposits".
When have we EVER heard of a bank looking to divest of deposits? The reasons are that the bank is charged between .2% and .45% for insurance on the deposits. Add that to normal operating costs and the deposit costs the bank money!
These new rules were put into place under the Basel 3 rules. "The Basel committee apparently never considered the possibility that interest rates would remain at or near zero for many years and that, in a zero-rate environment, the new liquidity rule would make it uneconomic for banks to hold large institutional deposits unless it charged these customers negative interest rates. The Basel liquidity rule was supposed to ensure that banks have adequate liquidity, but instead it is encouraging banks to reject liquid deposits". -Kupiec
They also probably didn't envision another $50 Trillion in additional debt being created in a few short years so that any increase in rates could have negative implications for nearly all developed and developing economies. Things that seem "normal" today were not even contemplated as recently as 2009- nobody could even conceive where this road has led to just 6 years ago!
So let's get this straight. The same folks that had our back in 2000 and 2008 are assuring us that all is well and that we will reach "escape velocity" in the economy for the fourth year in a row. In addition, wholesale prices and sales have dropped for three months in a row. I believe this goes much deeper than low oil prices. It goes right to the idea that you can spout that the unemployment rate is 5.5% all day but when, in reality, it is estimated to be 23% (Shadow Govt Statistics) when the 80 million or so people who aren't counted are added back in (labor participation at a 37 year low!) they can't spend income they don't have.
Just think if you were able to make up numbers like this. You could add a zero to your net worth and go from $500,000.00 and make it $5,000,000.00. Hey that's great! You're now considered rich! Just one problem- since you really don't have the extra $4.5 million you can't spend it!
People will have a different perception of you if you advance the idea that you are ten times more wealthy than you actually are but your lifestyle won't change unless you go DEEPLY into debt. Of course, today governments count debt as growth and it also adds to GDP! Happy Days are here again!
Now you understand the 24 hour per day propaganda that is force fed to us by the mainstream media, massaged numbers by almost every agency under the sun and the docile acceptance of the numbers by paint-by-the-numbers "economists" that spout the party line.
There is a growing sense among everyone I know that the fairytales are becoming harder and harder to believe as we see our living standards and morals being destroyed before our very eyes. This is certainly no time to bury your head in the sand but it is a time to do your research and Be Prepared!
Mike Savage, ChFC Financial Advisor