The confiscation of money by Cyprus banks has some people scratching their heads wondering if such a thing could happen in the United States. If a bank suddenly can't pay back its loans to the Federal Reserve or other bigger banks, could it just take and use your money? The answer might be yes, because it's not yours once its on deposit.
The US Federal Deposit Insurance Corporation and the Bank of England just this past December discussed the issue in a joint paper. What most depositors probably do not know is that when you put your money in a bank account (checking too) it becomes the bank's money. All you have is a promise by the bank to pay you back. And of course, this is an "unsecured" debt of the bank so it is the lowest category of debt in bankruptcy and you could end up a total loser.
Although few depositors realize it, legally the bank owns the depositor’s funds as soon as they are put in the bank. Our money becomes the bank’s, and we become unsecured creditors holding IOUs or promises to pay. (See here and here.) But until now the bank has been obligated to pay the money back on demand in the form of cash. Under the FDIC-BOE plan, our IOUs will be converted into “bank equity.” The bank will get the money and we will get stock in the bank. With any luck we may be able to sell the stock to someone else, but when and at what price? Most people keep a deposit account so they can have ready cash to pay the bills.
The 15-page FDIC-BOE document is called “Resolving Globally Active, Systemically Important, Financial Institutions.” It begins by explaining that the 2008 banking crisis has made it clear that some other way besides taxpayer bailouts is needed to maintain “financial stability.”
If our IOUs are converted to bank stock, they will no longer be subject to insurance protection but will be “at risk” and vulnerable to being wiped out, just as the Lehman Brothers shareholders were in 2008.
[Nation of Change]
Remember when I told you about the MASSIVE withdrawal of money from banks which took place just this past January? Might this first and early run on the banks have had something to do with this?
You might want to think about how you pay your bills and where you keep your money. I've been warning you about this for a long time.
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