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The General Welfare of Canadians Versus the Crime of Bail-In to Maintain ’Financial Stability’

Printable version / Version imprimable

(CRC)—Larouche Political Action Committee (LPAC) Editor Leandra Bernstein in writing the report Dodd-Frank Kills: How the U.S. joined the international bail-in regime has irrefutably presented the case that American Congressmen, by adopting The Wall Street Reform and Consumer Protection Act of 2010 known popularly as The Dodd-Frank Act, have subjected the United States “ to the premeditated scheme of an international syndicate to establish laws and treaties contrary both to the interests of the United States, and the spirit and the law of the U.S. Constitution.”

Henceforth, American lawmakers will be held accountable: they now know or should have known that their implementation of the Dodd-Frank Act is a crime against the people of the United States. The Bernstein report implicitly also puts on notice members of governments internationally and of international financial institutions who would be so bold as to attempt to implement policies as murderous in intent as the those associated with the Dodd-Frank Act. That latter category would certainly have to include Mark Carney, in his role as chairman of the Basel-based Financial Stability Board, who put out at the behest of the G20 countries the directives for an international bail-in regime.

Under the international bail-in regime, that was test-run recently in Cyprus, household and business depositors are defined as unsecured creditors and/or uninsured depositors. For the case of Canada, this minimally means that deposits over $100,000. (the limit for insured deposits under the Canadian Deposit Insurance Corporation (CDIC)) can be seized and/or coverted into common equity of the failing bank.

The Bernstein report forewarns legislators:

The Dodd-Frank Act, as currently written, has no evident provision that would prevent the overall effect of mass economic deprivation of the targeted subjects, the American citizenry. Such deprivation across the spectrum of economic activity would invariably lead to a sharp increase in the nation’s death rate, as a direct consequence of the enactment of this law. If this Act is not nullified, the result of its enactment will be the mass destruction of U.S. citizens through economic means. The fact that this has not been stated openly, other than in the following report, does not improve the arguments of those who fail to annul this law.“

"Before this law goes into effect, as a result of any among a vast variety of financial crises waiting to happen, Dodd-Frank must be overridden by the passage of Glass-Steagall. The 2010 Dodd-Frank Act must be nullified immediately by its repeal and the simultaneous passage of the Glass-Steagall Act as drafted in Senate Bill 985 and House of Representatives Bill 129.”

The Basel-based Financial Stability Board and the international bail-in regime

In October of 2011, the Financial Stability Board published a document Key Attributes of Effective Resolution Regimes for Financial Institutions reflecting the agreement among the participating bodies of the FSB to conduct cross-border resolutions of financial institutions. That document features extensive discussion of the establishment of cross-border resolution authorities within the law of each participating nation. At the outset of the report it is recommended:

“In order to facilitate the coordinated resolution of firms active in multiple countries, jurisdictions should seek convergence of their resolution regimes through the legislative changes needed to incorporate the tools and powers set out in these Key Attributes into their national regimes.

The report goes on to enumerate the requirements of a domestic, legal and active authority to resolve ‘any financial institution that could be systemically significant if it fails.”

“…What is most significant in the FSB Key Attributes is the strict emphasis on coordinating the bail-in regimes above and beyond national borders.”

The role of Mark Carney in the international bail-in regime and Canadian budget

Is it any surprise that Canada has also already put into law the FSB directive? Not if you consider that Mark Carney, who was appointed November 4, 2011 president of the Financial Stability Board at the Bank for International Settlement (BIS) is the “enforcer” of the policy. Carney came in just a few days after the FSB guidelines were announced in October 2011 under the watch of Mario Draghi who, like Carney, is a former executive at Goldman Sachs. In the meanwhile, Minister of Finance Jim Flaherty has included in his recent budget Economic Action Plan 2013, on pages 144-145, directives to implement a “bail-in regime” for systemically important banks in Canada:

"The Government also recognizes the need to manage the risks associated with systemically important banks—those banks whose distress or failure could cause a disruption to the financial system and, in turn, negative impacts on the economy. This requires strong prudential oversight and a robust set of options for resolving these institutions without the use of taxpayer funds, in the unlikely event that one becomes non-viable.

"The Government intends to implement a comprehensive risk management framework for Canada’s systemically important banks. This framework will be consistent with reforms in other countries and key international standards, such as the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions, and will work alongside the existing Canadian regulatory capital regime. The risk management framework will include the following elements: Systemically important banks will face a higher capital requirement, as determined by the Superintendent of Financial Institutions.

"The Government proposes to implement a ―bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants."

Already in December 2010 the Bank of Canada and the OSFI wrote the bail-in guidelines for Canadian banks!

In the December 2010 Financial System Review of the Bank of Canada, authors Chris d’Souza and Tom Gravelle from the Bank of Canada and Walter Engert and Liane Orsi from the Office of the Superintendent of Financial Institutions (OSFI) wrote a report entitled Contingent Capital and Bail-in Debt: Tools for Bank Resolutions .

In the Introduction to the joint Bank of Canada-(OSFI) Report, the authors write:

In the case of failing large banks, the response typically involved public sector equity investment, together with substantial liquidity support and credit guarantees. As a result, common shareholders of these major international banks generally suffered losses but were not wiped out, and preferred shareholders and creditors were protected. In addition, the managements of these banks, in most cases, stayed in place. Estimates of the amount of public sector capital injections used to directly bail out major banks are well in excess of US$1 trillion; including guarantees and insurance provided by major governments during the recent crisis adds another US$8.5 trillion (Alessandri and Haldane 2009).

These experiences showed that policy-makers around the world were unwilling or unable to allow major financial institutions to fail, particularly in a stressed financial environment. Public sector authorities were worried about exacerbating financial stress, and wished to avoid the adverse consequences that could result from the failure of a large, complex financial institution. Authorities in many countries were concerned that they would not be able to resolve such institutions without causing a disruption in essential financial services and generating significant costs to the real economy. An implication of bailouts, however, is the creation of incentives that promote risk taking behaviour by the private sector—in other words, moral hazard. Over time, such behaviour leads to a greater likelihood of bank failures, instability and future crises, with serious fiscal and social costs.

"This report considers two related approaches to improving the resolution of failing banks: contingent capital and bail-in debt. Various types of contingent capital and bail in debt mechanisms have been discussed in the academic literature and the press, and have been debated in policy circles. This report focuses on the types of contingent instrument that have been the subject of proposals by the Office of the Superintendent of Financial Institutions (OSFI) (Dickson 2010a,b) and, more recently, by the Basel Committee on Banking Supervision (BCBS) (2010), and that have been a focus of banking reform policy discussions more generally."

How Would Gone-Concern Contingent Instruments Help Resolution?

Under this heading, the joint Canadian report says:

The Basel Committee’s recent proposal on gone-concern contingent capital requires that all newly issued regulatory capital instruments that are not common equity include, in their contractual terms, a mechanism that creates common equity at the point of non-viability. Accordingly, these securities would be converted to common equity under two conditions:

(i) When an institution is judged by its regulator to have reached the point of non-viability; or
(ii) When the public sector provides capital or equivalent support to restore the failing bank, without which the bank would not be viable.

However, such gone-concern contingent capital might not by itself generate sufficient capital to effectively support the restoration of viability for a failing bank. Accordingly, bail-in debt, with the same conversion triggers, could increase the amount of private sector capital available at the point of non-viability. Distinct from contingent capital, however, these arrangements could be structured so that only a portion of the senior debt would convert to common equity at the point of non-viability, in recognition of its creditor claim seniority relative to subordinated debt and equity instruments. This partial write-off, or haircut, would mean that most of the senior debt instrument would remain unchanged, even if conversion was triggered.

There is some debate about the scope of the liabilities that should be subject to such bail-in conversion, but a focus on senior, unsecured debt instruments would be relatively straightforward.(*) This particular scope of application would leave secured creditors, insurable depositors, short-term securities holders and a bank’s counterparties unaffected by bail-in provisions.

Conceptually, conversion of contingent instruments could occur on a “par-to-market value” basis. For example, at conversion, holders of a contingent security could receive, in exchange for the security, common shares with a total value equal to the par value of the contingent instrument. For example, assuming a par value of $100 for a preferred share subject to conversion, and a market value of $2 for common equity at the time of conversion, the investor would receive 50 common shares. (The conversion terms for more senior contingent instruments could provide more beneficial arrangements.)

With the conversion of contingent instruments to common equity, the original equity would be heavily diluted, and converted preferred stock and subordinated debt would be subject to loss as common equity. Converted bail-in senior debt would also be exposed to loss as common equity. This process also implies that the value of the bank’s liabilities would decline. The bank would therefore be recapitalized, with somewhat less leverage. Such restructuring could help to attract new private investment and liquidity for the bank, thus supporting resolution and the restoration of viability. (New private investment could be in the form of subordinated debt or preferred shares with warrants to provide scope for new investors to capture the potential upside.)

Together, contingent capital and bail-in senior debt should be seen as one of several tools that authorities could use to help resolve a failing bank. Others include taking control, the replacement of management, CDIC -assisted transactions, the establishment of a bridge bank and winding-up powers. These other tools could be applied in combination with the conversion of contingent instruments, which could involve losses for a wider range of uninsured creditors and counterparties.

Putting Financial Stability First or People First?

The very definition of what is meant by financial stability has been codified by those whose present and future positions of power and authority depend upon that definition. Moreover, what is established through this legislation will result in the mass destruction of the citizens of the United States through economic deprivation, through the collection and extraction of funds done in such a way as to leave the targeted subjects of the law desperate to the point of extermination. [Bernstein report].

Canada is not different from the United States in this regard. Fundamentally, deregulated banking systems worldwide vary little and only in unimportant degrees when measured according to a rigorous metric. Insuring “Financial Stability” as the main priority is certainly not one such metric. One single human life is worth more than the “stability” of any given bank. Banks become unstable because unstable minds have deregulated the banking system to the point that these ‘too-big-to-fail’ financial institutions have made a mockery of the concept of sovereign nation-states.

The only remedy against this murderous situation is to adopt a rigorous scientific metric that can insure the conditions for mankind’s continuous development: an accelerating increase in the energy-flux density throughput of society. That requires the annulment of the Dodd-Frank Act and any similar banker’s scheme to be replaced by an FDR-inspired global Glass-Steagall system.

The ultimate measurement for a banks’ viability is to insure that it is set up in such a way that it does not threaten life. Legitimate banks must be instruments that play a role in the healthy physical economic growth of the nation, where life is considered as an inalienable right and not a commodity. The right to life, liberty and the pursuit of happiness, while it is associated with the United States Declaration of Independence, is originally a European Leibnizian universal concept, which therefore ought to apply to Canada and all countries.

J’accuse, the open letter to the Aurore newspaper by French author Émile Zola represented a powerful intervention in the Dreyfus Affair that had polarized France and a better part of Europe in 1898.

In his letter Zola writes that without truth and justice in the highest spheres of government, nations will not survive:

I repeat with the most vehement conviction: truth is on the march, and nothing will stop it. Today is only the beginning, for it is only today that the positions have become clear: on one side, those who are guilty, who do not want the light to shine forth, on the other, those who seek justice and who will give their lives to attain it. I said it before and I repeat it now: when truth is buried underground, it grows and it builds up so much force that the day it explodes it blasts everything with it. We shall see whether we have been setting ourselves up for the most resounding of disasters, yet to come.

Zola’s statement remains undeniably true today. The time has come to choose sides and shed a powerfull beam of light on the British Empire and its genocidal attempt to salvage its collapsing world monetarist system by reducing the world’s population from seven billion people to one billion! [GG]

Notes: (*) It could be technically or legally difficult to extend bail-in provisions beyond this class of liabilities. Doing so could have adverse implications regarding the management of risk and liquidity, particularly under unfavourable circumstances.