Fed Governor Stein Warns When A TBTF Bank Fails, Depositors Will Be Cyprus'ed

Tyler Durden's picture

Two months ago, Fed governor Jeremy Stein caused a major stir among the very serious excel-using economists and other wannabe "scientists"-cum-voodoo witchdoctors, when he hinted that it was the Fed's actions that were leading to "overheating" in the markets. It took quite a bit of rhetoric by other very serious people to talk down his comments and give the impression that the S&P is not about 50% overvalued. Today, Stein has managed to stick his foot in his mouth for the second time in a row, and do what virtually nobody in the status quo is capable of: tell the truth.

In a speech titled "Regulating Large Financial Institutions" Stein made something very clear: if and when a TBTF fails, and since this time is not different, and a failure is only a matter of time, depositors will lose everything (courtesy of some $300 trillion in gross unnetted liabilities which once there is a counterparty chain failure, suddenly become very much net and immediately marginable - a drain of cash), which now that Cyprus is the template, is to be expected. Not only that but Stein makes it all too clear that part of the Dodd-Frank resolution authority guidelines, a bailout is no longer an option.

Perhaps more to the point for TBTF, if a SIFI does fail I have little doubt that private investors will in fact bear the losses--even if this leads to an outcome that is messier and more costly to society than we would ideally like. Dodd-Frank is very clear in saying that the Federal Reserve and other regulators cannot use their emergency authorities to bail out an individual failing institution. And as a member of the Board, I am committed to following both the letter and the spirit of the law.

At least he can't say Americans weren't warned when the Cypressing(sic) hammer finally falls.

Oh, and as a reminder...

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
The Juggernaut's picture

I hope ya'll know that since Boston is on lockdown the Fed Reserve will blame this for the economic slow down.  Which is not thhaaaaaaat far from the truth but still... the ecnomoy was shit well before the Boston State Sponsored Terrorism.

redpill's picture

Well they were right about Cyprus not being a template for the EU.



It's a template for the entire planet.

AllThatGlitters's picture

OK fence-sitters.  Time to buy gold. Of the physical bullion kind.

Oh look, they took it down and made it nice and cheap for you, thinking it would scare you away:

Live Price: http://www.pmbull.com/gold-price/

But this article should be scaring you away from the bank.

That page has nice gold bullion bars for only $21 over spot.

Pharming's picture

Does America have an equivalent to Nigel Farage?  

Oh...wait I'll answer that...


kaiserhoff's picture

The Federal Reserve:

Finding ways to outlaw private wealth, for one hundred years and counting.

Tick, tick, tick....

toys for tits's picture


Tick, tick, tick....

That sounds very terroristic.

Stoploss's picture

Yep, this and Carney saying the same.


Better get your fiat out of the bank now before you can't.

Guess what,  it always happens on FRIDAYS.

Kirk2NCC1701's picture

Redpill, we'll need a WTSHTF-Chillpill real soon...

Now you know why Obama called all these Finance execs onto his carpet/office?  How do you spell IEEPA?



Plan/hedge accordingly: This is what I expect from Obama et al, in an IEEPA...

   1. PM price beat-down before the Reset --> PM bullion run --> Phyz squeeze, part of Capital Control (flight of capital) prior to Reset.

   2. Likely nationalization (no literal confiscation) of PM --> Payout of paper-PM in fiat money (at low market price).  With price drops, no windfall profits realized for PM speculators anyway.  PM mines consolidated and nationalized.

   3.  Price & Wage Controls during Emergency/Reset.  Strict supply chain management by TPTB, to prevent panic and hoarding.

   4.  DHS + LEA's there to provide law & order.  Regional Martial Law may be necessary (big cities).  Rioters and militant activists will be treated as Enemy Combatants, and be treated with heavy hand.  Arrested, droned or sent to FEMA camps as appropriate.

Buy+store stuff for at least 3-6 months:  Water, Food, G+A, Key Consumables (TP...), Medicine, Gasoline, Cash, Bullion.  Be a 'Dr. Prepper'!  Be a true friend, and have quality friends --> Safety + Lifestyle in (manageable) numbers.

One to beam up.  Wait... make that 5 to beam up.

Silver Bug's picture

They have shown their hand. They will steal from US citizens when the time arises. Why keep more than you have to in the banking system? Keep stacking.



gwar5's picture

I was thinking about that today. 


Boston is completely locked down trying to flush out one wounded 19 year old who is surrounded in an urban setting by thousands of militarized police and para-military who can't find him (yet). 

So how are they going to deal with 80 million pissed-off, armed Americans when TPTB go Somali Pirate and financially wipe them all out?  They do not have the man power to take over the country from it's rightful owners. Unpossible.

ArkansasAngie's picture

Rumor I heard said July 11th is the day the ATF wants our guns
Surely tis only a rumor

natty light's picture

Thousands of cops running around:like a scene out of Blues Brothers.

Winston Churchill's picture

More Keystone cops meets Charlie Chaplin IMO.

EscapeKey's picture

oh i thought the FDIC was there to protect the depositor in that case.

after all, they're so liquid and well-funded, right?

Canadian Dirtlump's picture

they are just using a little leverage. LOL!

101 years and counting's picture

1.15% of GUARANTEED deposits are actually insured.  The FDIC has approximately 45-50B in funds and the amount of insured deposits is just south of $5 trillion.  and anything over 250K?  fuhgettaboutit!

sun tzu's picture

Unless you're a Warren Buffett type, in which case you'll get a heads up to move your funds before the bank holiday

knukles's picture


He said private investors.
Not depositors.
Means equity holders, preferreds, debt holders, unsecured debt holders and depositors OVER the insurance limit.

So what's wrong with that?
That's the way its supposed to be, FFS
You're insured, you get your money back

Fuck the other stakeholders...
Bond and stock holders are supposed to do their own due diligence and invest accordingly.

What this means(supposedly) is no next time around bailout for a GS or AIG, etc.

And that's good

But then again, there are no laws anymore, are there?

Now, announcing it at a time like this is a whole nother story...
great time to start a run on the banks

And don't forget them Jumbo CD's held in you MMMF

Bearwagon's picture

"And don't forget them Jumbo CD's held in you MMMF"
You nailed it.

knukles's picture

Yep... and therein is the systemic risk they (all f the regulators and folks like us) are worried about.
For if the jumbo CDs take a bath, the MMMF industry either breaks the buck or kick in capital (buying the bad paper) as some did last time.
This is exactly why the SEC wants a floating NAV structure... so in bad times breaking the buck is not an exception.

Tapeworm's picture

knukles I plussed you for your first comment above as I completely agree.

BUT, do the derivative counterparties rank above the insured depositors anyway?

knukles's picture

Good question and I do not have the particular regulatory and legal background to give a decisive answer.
However, my understanding is that regardless as to a claim on the banks estate in liquidation, the insurance kicks in in the event of a shortfall and thus in that sense, is separate therefrom

Mordenkainen's picture

You're assuming that they won't consider having a deposit account a form of investment in the bank. After all, they do collect interest (if you look hard enough with an electron microscope).

knukles's picture

It's not an "investment" in that sense, but it is a liability of the bank.
And as to secured or unsecured, it is unsecured by the bank but remains "guaranteed by the FDIC which FUll Faith and Credit of the US.
Beats Corzine's charity and good will.

I'd bet the insured gets paid off.
And, BTW, the way it's set up is exactly the standard Ch11 procedure up the balance sheet capital structure.  It just stops with the insured portions of deposits.

LasVegasDave's picture

Hey knuckles



Dr. Engali's picture

That is the way it should be.The problem to me is the fact the government gets to decide who stays and who goes.

knukles's picture

Yes, the potential for unequal treatment of like stakeholders.
Aka General Motors where the seniors should have had priority over the unsecured unions.

'nuff said

NoDebt's picture

Nailed it.  That's what happens when you throw rule of law out the window.  Nothing means anything after that.  It's just the strong preying on the weak after that.  Welcome to hell.

Urban Redneck's picture

With the caveat that, if they let one TBTF fail, they ALL will fail from the ensuing deposit flight.

kaiserhoff's picture

Disintermediation on steroids.

If you wanted to make banks not only useless, but dangerous, this is the way to do it...

But the same applies to all lawful and productive commerce.  Welcome to the big casino.

knukles's picture

Exacamundo, as you and I have already commiserated in earlier threads.
This is a bad sounding item to the general public.

Isn't my deposit guaranteed, still?

Must needs be publicly addressed by the FDIC to put the risk to rest or its off to the mattresses, especially when the yield on deposits is effectively 0

fonzannoon's picture

Knukles isn't fdic 250k per person? If you have Mom and Dad JTWROS in trust for little jimmy and jane....is that not 1 mil in fdic coverage?

I don't know man. If a bank goes I just see Cyprus. and by that I mean everyone above fdic get's corzined and everyone within the limits has full blown capital controls and is told everything is fine but never sees that principal again. Just my 2 cents.

knukles's picture

Fonz... It's quite complex, actually.
For example, you can have the 250 k at each of a dozen different FDIC members so you're iInsured at each for a total of 1.5 mm...
Iras etc and joint accounts are counted separately, brand large but not as a blanket statement
INO, FBO etc, are other twists

Gotta research it per case to get comfortable
You must do the research yourself, the due diligence to make sure you're not in excess from numerous accounts

And BTW some years ago the FDIC website was an easier read than now...I find it terribly clumsy, but can get the info.

klockwerks's picture

Knuck, I read the other day that if that 250K is in the same name, no matter what the total, it only insures the 250K

Hulk's picture

Yes indeed. I checked with my bank manager. $250k is an "umbrella" figure.

Go fish...

Caggge's picture

Do you think when the shit hits the fan that the rules will mean anything anyways?

Marco's picture

To a certain extent yes ... TPTB will be out of dollar denominated assets any way by that time, they don't really care if the printing press takes care of the problem at that point. Which is thus what will happen, either the FDIC assets get shuffled to the FED for money or government simply runs a larger deficit.

Ham-bone's picture

Are folks who put their money in the bank getting a "return"?  Regardless how minute the interest rate, that now makes them classifed as an "investor" and as such granny, your business acct, etc. are part of the capital structure.  This is exactly the differentiation that was used in Cyprus.

gwar5's picture

Depositing your money in a bank is no longer considered an unsecured loan to the bank. They never obfuscate or lie.

gwar5's picture

Depositing your money in a bank is no longer considered an unsecured loan to the bank. They never obfuscate or lie.

WillyGroper's picture

>>>>>> "Regulating Large Financial Institutions" Stein made something very clear: if and when a TBTF fails, and since this time is not different, and a failure is only a matter of time, depositors will lose everything

Whiner's picture

What makes you, Mr. Depositor, insured by FDIC, think your claim as a creditor of your bank is going to be elevated to other creditors like bond holders and a trillion or so derivative claimants? Oh, "you're insured anyway"? Well think about that in a systemic collapse. When will you get your money and what per cent. Why you think BoA dropped their big claims down from the holding company to the Bank? Get your operating capital out of them big banks and deploy to top rated smaller banks. When it happens, nobody is gonna move a dime and you will never even get a hint-other than this-that it is coming. Up yours Bernanke &Co.

Marco's picture

FDIC has full faith and credit, it is backed by the printing press ... the dollars you get might not be worth much, but FDIC guarantueed deposits you will get back.

fonzannoon's picture

He did not stick his foot in his mouth. Seer is right. they are locking the exit doors