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How Dodd-Frank sets up Cyprus-like ‘bail-in’ for US banks

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A 2010 financial-reform law sets up a “bail-in” program that puts U.S. bank depositors at risk, according to a new report.

The Dodd-Frank Act of 2010, among other things, codifies a bail-in. It ensures that the United States can conduct the type of bail-in that we saw in Cyprus in the end of March this year,” said Leandra Bernstein, of LaRouchePAC.

“In the language of the preamble of Dodd-Frank, it claims to protect the American taxpayer by ending bailouts. That is done by implementing bail-in,” she said.

Dodd Frank
Barney Frank & Chris Dodd
photo credit: acus.org

To stave off financial collapse, Cyprus bank deposits exceeding 100,000 Euros were seized by the government. Customers lost roughly half of those overage amounts and were issued non-tradable stock for the remainder.

Title II of Dodd-Frank establishes an “Orderly Liquidation Authority” – a U.S. bank bail-in program patterned after Cyprus’ action.

Instead of repeating the widely unpopular bank bailouts of 2008 and 2009, Dodd-Frank authorizes the Federal Deposit Insurance Corp. to recapitalize failed financial institutions by confiscating customers’ deposits.

“Such a strategy would apply a single receivership at the top-tier holding company, assign losses to shareholders and unsecured creditors of the holding company, and transfer sound operating subsidiaries to a new solvent entity or entities,” Bernstein said.

“Dodd-Frank provides for the creation of a bridge financial company, which is capitalized through the bailing-in of that financial institution — namely, the unsecured creditors, and also anyone who has investments in that company,” she explained Monday.

Bernstein said Dodd-Frank — named after former Sen. Chris Dodd, D-Conn., and former Rep. Barney Frank, D-Mass. — undermines U.S. sovereignty.

“Essentially you’re looking at an international bail-in regime to conduct a cross-border bail-in,” she said, outlining one hypothetical scenario:

“The United States has large exposure to banks in the United Kingdom. If the bail-in mechanism were to be triggered in the United Kingdom, that would directly affect us. If they were to trigger that, as opposed to the United States triggering that, then we would be sucked into bail-in, under the provisions of Dodd-Frank, at the behest of the triggering of the bail-in mechanism by the United Kingdom.”

Bernstein said under the current global financial system, banks that would be subject to cross-border resolutions are “highly leveraged, wildly undercapitalized, and rely on classes of what they call assets, which are in the forms of, for example, derivatives, collateralized debt obligations and other contracts, where the propping up of the value of those contracts amount to the appearance of stability, or in the banks’ case, solvency.”

She said restoring America’s Glass-Steagall banking act is crucial to protecting U.S. depositors by rebuilding the wall of separation between commercial banks and investment banking.

Glass-Steagall was repealed by Congress and President Clinton in 1999 under pressure from Wall Street speculators who needed access to Main Street’s commercial bank deposits. Less than 10 years later, Wall Street suffered a financial collapse that required hundreds of billions in taxpayer bailouts to the country’s largest banks.

Dodd Frank was passed in the aftermath of the crisis, ostensibly to avoid another speculative bubble. But critics liken it to a band-aid over a festering boil.

“If implemented as an act of the United States, an act of the sovereignty of the United States, (Glass-Steagall) would effectively override Dodd-Frank. It would override this bail-in regime as soon as it is implemented,” Bernstein said.

See a full report here.

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