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...

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maskone909's picture

dayman

fighter of the nightman

champion of the .... sun

your a master of karate and friendship

for everyone

AldoHux_IV's picture

Well if it weren't for accounting gimmickery then these institutions would already be failed. How anybody keeps their "money" at these firms is beyond me, but then again what a lot of people do and say is beyond me.

SDRII's picture

must be why equity is closing on the high and gold settling under 1400

SmallerGovNow2's picture

gold finished 1400 even.  everyone is green Friday, everyone go home, drink, and be merry for the weekend...  except if you live in BOSTON and are under house arrest...

Mordenkainen's picture

How easily they forego their 4th amendment rights. The impending subjugation of the citizenry will be a cake walk.

NotApplicable's picture

OBEY!

Reminds me of my last jury "summons." Out of 50 people I was the only one who would not swear in advance to obey any arbitrary command the judge might give the jurors.

Oh well, I bet they don't ever invite me back. Ms. Judge wasn't too pleased at my lack of boot-licking worship.

HD's picture

Is this in the US? They wanted you to swear before you were even selected a juror?

What did she do?

August's picture

I personally would swear whatever the assholes told me to swear...

... and then, as the case (e.g. against your local pot dealer, Mr. von Nothaus or whomever) progressed, have a truly anguishing change of heart that compels - yes compels! - you to judge both the facts and the law.  As is your right.

Winston Churchill's picture

Same here.Gave a spiel on the history of nullifcation, and all the potential

jurors who heard it were excused, along with myself.

Must be on some subversive  list, never had a summons for jury  duty again.

waterwitch's picture

Americans might be warned, but how many will actually have heard or seen the message?

(Not everyone sees ZH, for instance).

WTFx10's picture

Oh the main stream media will report on it over and over and over again. Just like the Gun control journalism that we have been bombarded with for fucking months.

Why do they want us unarmed again?

Think of the children, the ones running the country?

Forgiven's picture

No, no, no.  Say it with more expression.  Like this.

"Do you want fries with that?"

 

 

 

 

That's the kind of job the Fed is good at 'creating.'

knukles's picture

Yes. 
Cheese and chili fries

And a 40 oz refillable soda.

sun tzu's picture

Except in NYC where 16oz is the maximum size or else you will be thrown in jail for drinking from an oversized cup

Agent P's picture

Isn't that the way it's supposed to work (past the FDIC insured amount at least)?  Stock holders, then bond holders, then uninsured depositors?  What's wrong with this?

NoDebt's picture

Nothing is wrong with it.  But imagine you're a small-medium business that has to keep a mil or two in the kitty just to do payroll and buy inventory, etc.  If you need 2 mil running capital that's 8 banks to stay under the insured minimum. 

What happened in Cyprus is so much worse than just what happened to individuals.  They probably sank half their viable businesses in that fiasco, too.  They went into instant depression.  They didn't just take the wealth, they destroyed a significant part of the productive capacity to make more in the future.

It's like a planet-killer asteroid.  Doesn't matter where it hits.  If a bank like Citi went down it wouldn't matter what bank you had your money in- the whole planetary banking system would fail in a matter of days.

Hence the term "Too Big To Fail."

Agent P's picture

No argument there.  And I don't think it would reach the depositors in reality.  The stock would get wiped, the bonds would get the #4 on the haircut chart, and the deposits and loans would be dealt out via the FDIC to a syndicate of other institutions to prevent the planet killer bank run...the derivative counterparty waterfall on the other hand would be the real doozy, which likely leads to nationalization (sorry, "put into conservatorship").  Still, I hate to think the only answer is TBTF can't be fixed because it's TBTF.

Real Estate Geek's picture

I'm not so sure that any depositors would be spared. Nowhere in this speech or in the FDIC/BOE paper on G-SIFI's was there any mention of depositors; insured or not. But it was made clear that unsecured creditors would incur losses. And it's my understanding that depositors are a subset of unsecured creditors.

NoDebt's picture

I can tell you that if I was in charge the first thing I'd do is BREAK THOSE MOTHERFUCKERS UP.  Get rid of the most obvious aspect of them being "planet killers".  The other problem is that they all do the same fucking thing, so if you have one of them up to their eyeballs in derivatives you can bet all of them are (simply breaking them up does not fix this problem, it only takes the edge off the blade).  So you have to start leaning on them to unwind the derivatives soon after.  There's ways that can be done without the dreaded "new regulation" button being pushed.  Especially if each of the smaller banks holds less sway.

TBTF is a problem of having a bank basically hold you hostage by pointing a gun at it's own head.  If you take that "hostage tactic" away by making them smaller at the outset you get rid of a lot of their negotiating leverage.  Stop letting the tail wag the dog.

The crazy thing is most of those banks are worth more in pieces RIGHT NOW TODAY than they are as a whole.  Shareholders should be SUPPORTING this idea.  Like I say around here from time to time "where's Gordon Gekko when you need him?"

solidus's picture

Try this one on for size....I am a small business that typically uses a business line of credit.  In order to pay my bills to my suppliers for inventory I request a disbursement on my line of credit which the bank then credits to my checking account.  If we then get Cyprus'ed with this liability to the bank sitting in my account but before I pay my creditors, I'm thinking that the cash would disappear to the FDIC limit but that we would still owe the full balance to the bank and, oh yeah, I'd have no way to pay my suppliers.  Bullish!!

solidus's picture

Try this one on for size....I am a small business that typically uses a business line of credit.  In order to pay my bills to my suppliers for inventory I request a disbursement on my line of credit which the bank then credits to my checking account.  If we then get Cyprus'ed with this liability to the bank sitting in my account but before I pay my creditors, I'm thinking that the cash would disappear to the FDIC limit but that we would still owe the full balance to the bank and, oh yeah, I'd have no way to pay my suppliers.  Bullish!!

Racer's picture

I am committed to following both the letter and the spirit of the law.

Pass me the sickbucket

And how about following stable as in NO inflation mandate?. That is the ONLY definition of stable.

 

nonclaim's picture

I am committed to following both the letter and the spin of the law.

Translated into reality...

Dr. Engali's picture

There are no accidents. The jig is up. If you're not out you're screwed.

kushmere's picture

When this happens again, either in the United States or Elsewhere in the world, it will be another catalyst to drive the price of Bitcoin.

http://bestbitcoinsites.wordpress.com

The Master's picture

Translation:  Guh guh GOLD BITCHEZZZZZZZZ

venturen's picture

Where is the best place to keep my gold, wine cellar, mattress, or as a statue in the front yard?

toys for tits's picture

Around your neck.

The Mr. T look is coming back.

Parrotile's picture

Depending on the amount of phyzz you have "on hand", you might need to be built like Mr T! At current market centre rates ($1,406 per Troy Oz.), if you've got $50k in gold, that's a 1 kilo brick, which is quite a weight to have around the neck, 24/7!!

rubiconsolutions's picture

Since when is a depositor an investor? If these clowns can view bank deposits as investments then we are all screwed. Oh hell, I just answered my own question.

debtor of last resort's picture

A depositor is not an investor. It's a speculator. And should be punished accordingly.

css1971's picture

Since 1811.

You've been investing all your money in banks but didn't know it? WTF?

 

Google "Carr vs Carr 1811"

silver surfer's picture

Carr vs Carr 1811

 

The Lord Chancellor Cottenham said the following in judgement

Money, when paid into a bank, ceases altogether to be the money of the principal; it is by then the money of the banker, who is bound to return an equivalent by paying a similar sum to that deposited with him when he is asked for it. The money paid into a banker’s is money known by the principal to be placed there for the purpose of being under the control of the banker; it is then the banker’s money; he is known to deal with it as his own; he makes what profit of it he can, which profit he retains to himself, paying back only the principal, according to the custom of bankers in some places, or the principal and a small rate of interest, according to the custom of bankers in other places. The money placed in custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal; but he is, of course, answerable for the amount, because he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hands.

That has been the subject of discussion in various cases, and that has been established to be the relative situation of banker and customer. That being established to be the relative situations of banker and customer, the banker is not an agent or factor, but he is a debtor.

 

css1971's picture

That's the one. Banking works the same way everywhere, why change a winning formula.

That being the case, why would you deposit money in a bank when the rate of interest is so poor? The risk/reward doesn't make sense.

gwar5's picture

I'm only surprised they are kindly telling us before they wipe us out. The usual MO is to deny it right up to Friday 5 pm before a long weekend. Beware Memorial Day.

DosZap's picture

Since when is a depositor an investor? If these clowns can view bank deposits as investments then we are all screwed. Oh hell, I just answered my own question

 

When you deposit your money in the bank your LOANING them the money.

That's how ALL will get Cypressed.

Yen Cross's picture

     It feels like the world is headed towards one big 'TBTF-athon'. Everyone gets Corzined, and the C/Bs get to vaporize all the worthless paper they have printed and start over.

gwar5's picture

UR right Yen. TBTF are so interconnected there will be few places to hide. Even a 'safe' bank that does overnight interbank loans will be caught up and the money snatched away. And Jim Willie said in an interview the other day Morgan Stanley is teetering and only weeks/months away from going down like Lehman. 

polo007's picture

http://articles.marketwatch.com/2013-04-18/economy/38630953_1_federal-re...

Fed's Kocherlakota: Low rates may last 5-10 years

April 18, 2013

WASHINGTON (MarketWatch) - Financial market conditions requiring the Federal Reserve to keep rates unusually low may persist for the next five to 10 years, said Narayana Kocherlakota, the president of the Minneapolis Fed Bank on Thursday. This low-rate environment, and Fed policy, in turn, can be expected to "be associated with financial market phenomena that are seen as signifying instability," such as inflated asset prices, high asset return volatility and heightened merger activity, Kocherlakota said, in a speech at the Levy Economics Institute of Bard College. This instability is best addressed through effective supervision and regulation, Kocherlakota said. However, the Fed may have to confront the dilemma of whether to raise rates to reduce the risks of a financial crisis with the certainty that any tightening would lead to lower employment and prices, he said. The Fed is in a better position to address this challenge than it was in 2007, he said.

Abi Normal's picture

So if I read this correctly:

The Fed is in a dilemma, or painted into a corner, yet...

"The Fed is in a better position to address this challenge than it was in 2007, he said."

These are the types of things that makes one go hmmmm

Tighten and up the instability, via higher unemployment, or loosen (keep it loose) and equity market volatility, if not outright crash,

Sounds me it is a lose lose situation, no? None of this is making sense???

SillySalesmanQuestion's picture

You've been Cypzined... Or maybe Corprused

venturen's picture

They take my money...I am going to exerciser my 2nd amendment right! 

Canadian Dirtlump's picture

Following the letter and spirit of the law, unless it involves one of your devil worshipping, gay sex loving, paedophile party going to, drug sucking uniformly evil boyfriends

ParkAveFlasher's picture

That last picture ... I used to bullseye womprats in my t16 in Beggar's Canyon back home, they aren't that much bigger!!!!

Joe Davola's picture

OK it says 'an individually failing', what if there are several at once?

Bunga Bunga's picture

So Governor Stein finally admits, that the TBTF banks are walking deads?

debtor of last resort's picture

I think even the Black Swans are rehypothicated in this statement.