Bank Failures

[elchivito]

Cyprus banks seized depositors' funds. Can't happen here, right?

Wrong. The funds we've put into banks don't belong to us. We are "unsecured creditors" and our bank records are simply IOUs.

An interesting document put together by the Bank of England and the FDIC outlines exactly the kind of scenarios that just happened in Cyprus when they occur in our countries. It's a long read. Here's a brief clip, just insert yourself and your cash wherever you see the terms "unsecured creditors" or "original creditors". The scheme is to convert your money into "bank equity". Oh boy, stock in a worthless company!

12 Under the strategies currently being developed by the U.S. and the U.K., the resolution authority could intervene at the top of the group. Culpable senior management of the parent and operating businesses would be removed, and losses would be apportioned to shareholders and unsecured creditors. In all likelihood, shareholders would lose all value and unsecured creditors should thus expect that their claims would be written down to reflect any losses that shareholders did not cover. Under both the U.S. and U.K. approaches, legal safeguards ensure that creditors recover no less than they would under insolvency.
13 An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company into equity. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailed-in creditors would become the owners of the resolved firm. In either country, the new equity holders would take on the corresponding risk of being shareholders in a financial institution. Throughout, subsidiaries (domestic and foreign) carrying out critical activities would be kept open and operating, thereby limiting contagion effects. Such a resolution strategy would ensure market discipline and maintain financial stability without cost to taxpayers.

The mattress is looking more and more like the safest place to keep money.
http://www.fdic.gov/about/srac/2012/gsifi.pdf