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Part 7 - New EU Bail-In Agreement Yesterday - What Bail-Ins Would Look Like

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Today’s AM fix was USD 1,243.50, EUR 902.79 and GBP 758.51 per ounce.
Yesterday’s AM fix was USD 1,255.25, EUR 912.05 and GBP 765.49 per ounce.

Gold fell $9.60 or 0.76% yesterday, closing at $1,252.90/oz. Silver slipped $0.09 or 0.44% closing at $20.31/oz. Platinum dropped $3, or 0.2%, to $1,381.75/oz and palladium rose $1.05 or 0.1%, to $736.2/oz.


Gold Prices / Fixes / Rates / Volumes - (Bloomberg)

Gold has found strong technical support at the $1,200/oz level, which the yellow metal reached earlier this week on speculators short-covering and physical demand in China. Premiums in China have risen this week as Chinese New Year approaches and gold on the Shanghai Gold Exchange (SGE) closed at $1,285.09 (see table above) which was a $30 premium over spot gold.

Gold was down in London after retreating from a three week high on speculation that the U.S. Fed will 'taper' and U.S. lawmakers reached a budget agreement that avoided a government shutdown.  This funding expires on January 15.

The deal is actually bullish for gold as it is extremely modest in size.  Republican and Democratic Congressional leaders unveiled an agreement to reduce the federal deficit by $22.5 billion over 10 years while freeing up $63 billion in government spending over the next two years. 

It is important to remember that the Federal Reserve is printing nearly $20 billion every single week. The U.S. National Debt is now over $17.2 trillion and continuing to rise and the U.S. has unfunded liabilities (Social Security, Medicare and Medicaid) of between $100 trillion and $200 trillion.


U.S. Treasury Amount of Outstanding Debt - Price/Billion - (Bloomberg)

Staggering numbers which suggest alas that the U.S. politicians are rearranging chairs on the titanic.

These numbers alone should make people wary of buying into the notion that gold will fall in 2014 as the dollar strengthens due to the "normalisation of the economy." The economy is not normalising and the recovery is completely abnormal, hence it will be wise to again ignore the publicised bearish calls of certain banks.

New EU Bail-In Agreement Yesterday
The EU agreed new rules yesterday for bank bailouts or "bail-ins."

The new system will take effect from 2016 but emergency resolutions can be brought forward in the event of banks failing in the interim period. The "bail-in" will require that shareholders, bondholders and importantly now depositors will all suffer 'haircuts' or be burnt if a financial institution is in trouble.

The European parliament confirmed in a statement overnight that depositors with more than 100,000 euros ($137,000) would be bailed in after shareholders and bondholders. It is important to note that the 100,000 figure is an arbitrary figure and there is a possibility that this figure could be reduced by an insolvent government faced with an imploding banking system.

 

The deal does not exclude the possibility of public money being used "in exceptional circumstances," the parliamentary statement said.

The agreement was spun as a victory for taxpayers, however the risks and ramifications of bailing in savers including families with their life savings and the deposits of already struggling small and medium size enterprises has yet to be appreciated.

Gunnar Hoekmark, who steered the legislation through the European parliament, said: "We now have a strong bail-in system which sends a clear message that bank shareholders and creditors will be the ones to bear the losses on rainy days, not taxpayers."

Gunnar forgets that savers are taxpayers too and have paid taxes - on their income, on goods and services, on capital gains etc - on their hard earned savings already. Indeed, many are already paying punitive deposit interest rate taxes also.

There also appears to be a failure to realise that deposits - including family’s life savings, retirees pension incomes and businesses - are a vital part of the economy. You cannot have consumption without saving. You cannot have business growth and expansion and a consequent growth in much needed employment without capital.

Many countries now accept the principle that if banks get into difficulty, then it will not be the taxpayer but investors and creditors including already hard pressed savers that will suffer losses.

However, the situation regarding some countries - notably the BRICs is less clear. The imposition of bail-ins in western countries and not in BRIC and other nations would likely lead to capital flowing to the non bail-in countries.

Therefore, rather than solving the banking and debt crisis, bail-ins could ultimately compound the problem by further undermining the public’s confidence in our banks and the banking system. 

What Bail-Ins Would Look Like
While bank bail-ins have not yet become commonplace, it’s worth examining what a bail-in would look like in practice. Some helpful insight comes from the Bank of England, but more importantly, from the evidence witnessed in Cyprus during its bank bail-ins.

The Bank of England recently extended the Financial Stability Board’s Key Attributes guidelines and added four practical steps to follow when bailing-in a financial firm.

These four steps are Stabilisation, Valuation and Exchange, Relaunch, and Restructuring:

• Step 1 - Stabilisation

Stabilisation is key, in that it reveals that international regulatory authorities are leaning towards the well-used ‘weekend solution’ plan, to which they actually refer as a ‘Resolution Weekend’

However, if the situation requires dramatic intervention, they can even opt for a mid-week bail-in:
“Ideally a firm would enter resolution at close-of-business on a Friday evening, which would provide the authorities approximately 48 hours in which to stabilise the firm outside market hours. But this cannot be guaranteed. If a firm reached the point of non-viability during the middle of the week, it would be necessary to commence resolution proceedings at that point.”

At the time of resolution intervention, the regulatory authorities would suspend stock and bond listing of the bank while making various announcements to the market. These announcements would include details on which securities were being totally wiped out, and which creditors, such as bondholders and depositors, would have their bonds and deposits converted into bank shares. The announcements would also, according to the Bank of England, provide a timeline for the other stages of the bail-in and seek to reassure insured depositors that they were protected while attempting to provide “market counterparties with confidence”.

• Step 2 - Valuation and Exchange
This step would re-value the firm, calculate its losses and capital needs, and then write down creditors (including deposit confiscation where necessary), while converting these creditors to shareholders before embarking on relaunch.

• Step 3 - Relaunch
Relaunch would relist the bank’s shares (and possibly some of the bank’s bonds) and then allow the bank to re-open while implementing restructuring.

• Step 4 - Restructuring
Restructuring would aim to force the bank to appoint new management, change its corporate governance procedures, and force it to operate in a way that prevents subsequent financial market instability.

Although the Bank of England’s four step bail-in approach is quite detailed, it does not address the capital controls that would be needed so as to prevent a bank run. This is where the Cyprus example becomes useful.

Capital controls were widely implemented in Cyprus during a theoretical two week long ‘Resolution Weekend’. Authorities knew that depositors would act rationally and attempt to close their accounts or transfer their funds abroad, thereby causing capital flight. To prevent this happening, draconian capital controls were imposed and banks were kept shut for two weeks.

This was the first time that capital controls had ever been imposed within the Eurozone.
Some of the capital controls included the following: Limits were imposed on bank withdrawals, foreign money transfers, and credit card transactions.

Customers could only withdraw a maximum of €300 per day from branches and ATMs, and could only carry a maximum of €3,000 while travelling out of the country.

In addition bank transfers over €5,000 needed Central Bank of Cyprus approval, and foreign credit card transactions were limited to €5,000 per month.

When capital controls are imposed on economies, they usually remain in place for some time, for example, Icelandic capital controls imposed in 2008 are still in place. Not surprisingly, Cypriot capital controls are still in place and will not likely begin to be lifted (in various stages) until early 2014, according to the Cypriot President, or even longer, according to the finance ministry. Controls on international fund transfers are envisaged as being the final piece of the controls to be lifted.

The lessons from the Bank of England plan and from Cyprus are essentially that depositors will not get any notice that their bank is about to be bailed in. The bail-in would probably happen during a weekend. The bank would probably not re-open on the following Monday. There is also a strong likelihood that capital controls would be imposed on the country’s banks during the bail-in and for a lengthy follow-on period.

Given this lack of warning, depositors need to plan in advance for the day when ATMs do not work and they cannot access cash in their bank accounts.

Download our Bail-In Guide: Protecting your Savings In The Coming Bail-In Era(11 pages)

Download our Bail-In Research: From Bail-Outs to Bail-Ins: Risks and Ramifications -
Including 60 Safest Banks In The World List 
 (51 pages) 

 

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Fri, 12/13/2013 - 03:30 | 4242663 ConfederateH
ConfederateH's picture

My guess is that our neo-aristocratic leaders are planning the bailin in conjunction with a debt jubilee and a new international reserve currency, probably a SDR.

The questions are:

1. Who gets their deposits bailed in (ie, depositors over $100k, who's ETF's get liquidated, etc) 

2.  Who gets their debts jubileed (politically sensitive pensions and voting blocks )

3.  Who gets their deposits converted to SDR's

One this is certain though:  middle class whites will get screwed.

Thu, 12/12/2013 - 17:59 | 4241149 TeresaE
TeresaE's picture

Two relatively unknown laws (actually FDIC regulations) that next to no one knows about - outside the banksters - that will serve to do the same thing here without actually declaring the "Bail In" like the Europeans are doing.

1.  A bank can, at any time, ordered by the FDIC, keep all non-interest bearing accounts (read the bulk of checking accounts for the bottom 75% of Americans) from 100% of their funds for a minimum of 30 days.  NO withdrawals/checks will be honored, but I'll go out on a limb and guess that the fees that result from non-payment of those funds will be assessed.

2.  The TBTF banks' deriviatives are now first in line for FDIC "insurance."  I'm feeling lazy, quick, somebody take a guess as to how much $$$$$ will be left for depositers' insurance once the banksters bad gambles are made whole!  I'm guessing that the FDIC hasn't expanded their "fund" to cover the trillions of bad bets.  Hopefully, I'm wrong.

It is obvious to most of the choir here that if you continue to utilize our "modern" financial system, you are gambling with your life savings and livelihoods.   And we worry about "haircuts" and "capital controls" and "bail ins" in Europe?  bwaaaahaaaahaaa.

Good luck all!

Thu, 12/12/2013 - 17:54 | 4241134 RaceToTheBottom
RaceToTheBottom's picture

Isn't a bail-in just a programmed bankruptcy?  I mean you might end up with worthless shares and any amount over the guarantee might be lost. 

But what is to say this could happen bank by bank with the FDIC washing their hands of taking ownership of the bank.  We know they don't have the money to back all banks, this way the shareholders and depositors get shafted while the banksters get rewarded for their complexity creations by keeping their jobs and bonuses.

I therefore can see this happening without taking the currency down?  What am I missing?

Thu, 12/12/2013 - 17:29 | 4241038 Fuh Querada
Fuh Querada's picture

A Bailin is a female Bailiff.

Thu, 12/12/2013 - 17:26 | 4241032 Fuh Querada
Fuh Querada's picture

How many parts does this saga have?

Thu, 12/12/2013 - 17:53 | 4240962 CryptoCoinUser
CryptoCoinUser's picture

Here's the 11-page Bail-in PDF by Goldcore - without having to give your name and email:

http://cdn2.hubspot.net/hub/233034/file-393290406-pdf/Bail_In_Materials/...

If you want to invest in gold and silver for as little as $25 at a time, and have the option to sell 24/7 at 100% of spot price, try https://silversaver.com/share/KZ7XE/

You can take delivery once you accumulated at least 20oz of silver or 1/2 oz of gold.

Great for dollar-cost-averaging too, either schedule purchases  via ACH for $25 or more at a time , OR you can buy manually as little as $0.01 at a time by form a cash account blanace.

Thu, 12/12/2013 - 16:21 | 4240764 Juan Tumene
Juan Tumene's picture

Swapping junk for an entry in an account transfers purchasing power to the banksters.  Obviously TPTB don't have a problem with this per se.  After all they are their retirement fund.  The downside is that it gives them a claim on resources {wealth} that they also need for their other main backers - the electorate. But this is not really a problem because these are not the kind of people who are likely cash in their chips and convert them to bulletz and beanz.

There are already far more claims on the wealth of the nation (present and future) that can ever be met. So a bail-in could be seen as a neat way to reduce claims on resources - making them available for government use. 

Thu, 12/12/2013 - 15:09 | 4240532 lasvegaspersona
lasvegaspersona's picture

I don't believe the reserve currency would survive a bail-in. Sure little countries can claim bank assets but the loss of confidence in the dollar that would occur with deposit loss would probably be the end. Besides, why bail-in, and announce problems, when you can just buy more 'troubled assets', dump a few more trillion of base money and carry on for a bit longer?

Thu, 12/12/2013 - 14:56 | 4240480 honestann
honestann's picture

1:  Pay executives astronomical salaries, bonuses, perks.
2:  Go broke, invoke bail-in to restore balance sheet.
3:  Repeat endlessly.

Gotta wonder how unbelievably STUPID are human beings to do business with any bank or financial company.  I mean, SERIOUSLY folks!

And the banksters actually have the nerve to deny the entire system is designed for their benefit.  Sure.  Right.  Uh, huh.  Gimme a break.

Thu, 12/12/2013 - 13:52 | 4240244 MSimon
MSimon's picture

Use baluns for matching loads.

Thu, 12/12/2013 - 13:37 | 4240186 no more banksters
no more banksters's picture

"It is almost certain that, the banksters will laugh this time, with the European Economic and Financial Affairs Council's (ECOFIN) decision, taken about a month ago, concerning the participation of shareholders and depositors in future possible damages of the banks, what they called "bail in". And this because, in such deregulation conditions, banksters will have the opportunity, not only to get away without paying a cent, in a potential banking crisis, but on the contrary, to gain from such a situation according various possible scenarios."

http://failedevolution.blogspot.gr/2013/07/why-banksters-laugh-with-rece...

Thu, 12/12/2013 - 13:35 | 4240161 theprofromdover
theprofromdover's picture

It would be interesting to know, in the case of Cyprus, whether certain people whose loyalty was required, did not suffer the massive haircut on their savings.

Of course the usual suspects in politics, law, banking, organised crime, big business would be untouched, but were the rank and file police looked after? And if not, how do the streets of Cyprus look today.

Thu, 12/12/2013 - 13:35 | 4240174 Colonel Klink
Colonel Klink's picture

Those of any consequence were warned in advance and moved their money before the lockdown happened.  SSDD, the country may vary.

Thu, 12/12/2013 - 13:25 | 4240107 Peter Pan
Peter Pan's picture

Who will they bail out as a result of any bail in?

The banks or the borrowers who are over indebted?

If it's the former then nothing has been gained.

Will interest rates nrmalise?

If not then the market's pricing mechanisms will continue to be distorted.

Thu, 12/12/2013 - 14:59 | 4240495 Diogenes
Diogenes's picture

It is a measure to protect crooked and incompetent bankers from their own folly, by robbing innocent depositors.

 

Thu, 12/12/2013 - 13:34 | 4240169 Colonel Klink
Colonel Klink's picture

Yep, the Peter Pan banking system run by the never-never-land wizard.

Thu, 12/12/2013 - 13:20 | 4240083 Colonel Klink
Colonel Klink's picture

Unpossible, it could NEVAH happen here.  This is the USSA!

EDIT:  Oh wait, it has before.  Now resume your original brainwashing.

Thu, 12/12/2013 - 13:24 | 4240099 SMG
SMG's picture

If you like your bank account, you can keep it.....well 30-50% of it.......for now.

Thu, 12/12/2013 - 13:34 | 4240158 Colonel Klink
Colonel Klink's picture

Hope they enjoy those few hundred dollars of mine.  I've stopped using the traditional banking system for the most part until this whole farce stops.

Fri, 12/13/2013 - 15:23 | 4244197 BigJim
BigJim's picture

 The European parliament confirmed in a statement overnight that depositors with more than 100,000 euros ($137,000) would be bailed in after shareholders and bondholders. It is important to note that the 100,000 figure is an arbitrary figure and there is a possibility that this figure could be reduced by an insolvent government faced with an imploding banking system.

I find it hard to believe that there are enough depositors with €100,000 in the bank to make this work, unless they're companies/corporates, in which case, if they get bailed-in - how do they pay their employees/suppliers/taxes/bribes? So I'm guessing they'll be exempt, and the authorities will have to lower the figure to capture the upper end of the non-corporate depositor base.

Either that or they'll have to do some more QE... maybe both.

In any case, keeping more than a few thousand in your account seems like folly. No wonder BTC is so high... and gold/silver so manipulated.

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