If You Have Money In A U.S. Bank Account Be Aware

The Wall Street Reform and Consumer Protection Act of 2010 is better known as “The Dodd-Frank Act” to the American public.  What the American public does not know about, is that it codifies a “bail-in” provision that ensures that the United States can conduct the type of bail-in that we saw in Cyprus.

The bank bailouts of 2008 and 2009 will now be history as Dodd-Frank authorizes the Federal Deposit Insurance Corp. to recapitalize failed financial institutions by confiscating customers’ deposits.

A bail-in takes place before a bankruptcy under current regulations, regulators would have the power to impose losses on bank depositors while leaving other creditors of similar stature, such as derivatives counter-parties untouched.  If your bank goes bust then your deposits/savings will be taken from you and turned into shares of the bank. You have no say in the matter because in legal terms, as a bank depositor, you are just an unsecured creditor of the bank.

A derivative is a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by the use of high leverage. Smart investors like Warren Buffet view derivatives as “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”  At this point in time, I certainly agree with him 100%. I blame derivative instruments like collateralized debt obligations (CDOs) and credit default swaps (CDSs) for the financial crisis in 2008.

The name “derivative” reflects a sense that derivatives somehow derive value at one or more future points in time based on observable events such as prices, interest rates, exchange rates, indexes, events of default.

The real problem with derivatives has to do with overexposure by the banks and “uninformed investors. I believe derivatives can add value to companies as long as the corporate leaders at those companies use restraint and hold a limited amount.

Derivatives may not be a financial instrument that the average investor wants to try on their own, but derivatives can add value to society when used appropriately and in moderation.

A bail out is when the government steps in so that the financial institution can  avoid bankruptcy or insolvency and is not able to continue operations  It may take the form of a direct transfer of capital. In September of 2008 the insurance conglomerate AIG found itself in serious financial problems the Federal Reserve bailed it out by extending $85 billion (and eventually $182 billion) in credit to the company. Proponents of bailouts say that they keep an economy afloat when an industry thought too big to fail otherwise would collapse.  Many opponents contend that bailouts are inefficient and non-competitive companies ought to fail.