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The Big Banks Secret Oil Play: Why Oil Prices Are So Low

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We grow up being taught a very specific set of principles.

One plus one equals two. I before E, except after C.

As we grow older, the principles become more complex.

Take economics for example.

The law of supply states that the quantity of a good supplied rises as the market price rises, and falls as the price falls. Conversely, the law of demand states that the quantity of a good demanded falls as the price rises, and vice versa.

These basic laws of supply and demand are the fundamental building blocks of how we arrive at a given price for a given product.

At least, that’s how it’s supposed to work.

But what if I told you that the principles you grew up learning is wrong?

With today’s “creative” financial instruments, much of what you learned no longer applies in the real world.

Especially when it comes to oil.

The Law of Oil

Long time readers of this Letter will have read many of my blogs regarding commodities manipulation.

With oil, price manipulation couldn’t be more obvious.

For example, from my Letter, “Covert Connection Between Saudi Arabia and Japan“:

“…While agencies have found innovative ways to explain declining oil demand, the world has never consumed more oil.

In 2010, the world consumed a record 87.4 million barrels per day. This year (2014), the world is expected to consume a new record of 92.7 million barrels per day.

Global oil demand is still expected to climb to new highs.

If the price of oil is a true reflection of supply and demand, as the headlines tell us, it should reflect the discrepancy between supply and demand.

Since we know that demand is actually growing, that can’t be the reason for oil’s dramatic drop.

So does that mean it’s a supply issue? Did the world all of a sudden gain 40% more oil? Obviously not.

So no, the reason behind oil’s fall is not the causality of supply and demand.

The reason is manipulation. The question is why.

I go on to talk about the geopolitical reasons of why the price of oil is manipulated.

Here’s one example:

“On September 11, Saudi Arabia finally inked a deal with the U.S. to drop bombs on Syria.

But why?

Saudi Arabia possesses 18 per cent of the world’s proven petroleum reserves and ranks as the largest exporter of petroleum.

Syria is home to a pipeline route that can bring gas from the great Qatar natural gas fields into Europe, making billions of dollars for Saudi Arabia as the gas moves through while removing Russia’s energy stronghold on Europe.

Could the U.S. have persuaded Saudi Arabia, during their September 11 meeting, to lower the price of oil in order to hurt Russia, while stimulating the American economy?

… On October 1, 2014, shortly after the U.S. dropped bombs on Syria on September 26 as part of the September 11 agreement, Saudi Arabia announced it would be slashing prices to Asian nations in order to “compete” for crude market share. It also slashed prices to Europe and the United States.”

Following Saudi Arabia’s announcement, oil prices have plunged to a level not seen in more than five years.

Is it a “coincidence” that shortly after the Saudi Arabia-U.S. meeting on the coincidental date of 9-11, the two nations inked a deal to drop billions of dollars worth of bombs on Syria? Then just a few days later, Saudi Arabia announces a massive price cut to its oil.

Coincidence?

There are many other factors – and conspiracies – in oil price manipulation, such as geopolitical attacks on Russia and Iran, whose economies rely heavily on oil. Saudi Arabia is also flooding the market with oil – and I would suggest that it’s because they are rushing to trade their oil for weapons to lead an attack or beef up their defense against the next major power in the Middle East, Iran.

However, all of the reasons, strategies or theories of oil price manipulation could only make sense if they were allowed by these two major players: the regulators and the Big Banks.

How Oil is Priced

On any given day, if you were to look at the spot price of oil, you’d likely be looking at a quote from the NYMEX in New York or the ICE Futures in London. Together, these two institutions trade most of the oil that creates the global benchmark for oil prices via oil futures contracts on West Texas Intermediate (WTI) and North Sea Brent (Brent).

What you may not see, however, is who is trading this oil, and how it is being traded.

Up until 2006, the price of oil traded within reason. But all of a sudden, we saw these major price movements. Why?

Because the regulators allowed it to happen.

Here’s a review from a 2006 US Senate Permanent Subcommittee on Investigations report:

“Until recently, U.S. energy futures were traded exclusively on regulated exchanges within the United States, like the NYMEX, which are subject to extensive oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud.

In recent years, however, there has been a tremendous growth in the trading of contracts that look and are structured just like futures contracts, but which are traded on unregulated OTC electronic markets. Because of their similarity to futures contracts they are often called ”futures look-a likes.”

The only practical difference between futures look-alike contracts and futures contracts is that the look-a likes are traded in unregulated markets whereas futures are traded on regulated exchanges.

The trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders into the Commodity Futures Modernization Act of 2000 in the waning hours of the 106th Congress.

The impact on market oversight has been substantial.

NYMEX traders, for example, are required to keep records of all trades and report large trades to the CFTC. These Large Trader Reports (LTR), together with daily trading data providing price and volume information, are the CFTC’s primary tools to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation.

…In contrast to trades conducted on the NYMEX, traders on unregulated OTC electronic exchanges are not required to keep records or file Large Trader Reports with the CFTC, and these trades are exempt from routine CFTC oversight.

In contrast to trades conducted on regulated futures exchanges, there is no limit on the number of contracts a speculator may hold on an unregulated OTC electronic exchange, no monitoring of trading by the exchange itself, and no reporting of the amount of outstanding contracts (”open interest”) at the end of each day.

The CFTC’s ability to monitor the U.S. energy commodity markets was further eroded when, in January of this year (2006), the CFTC permitted the Intercontinental Exchange (ICE), the leading operator of electronic energy exchanges, to use its trading terminals in the United States for the trading of U.S. crude oil futures on the ICE futures exchange in London-called ”ICE Futures.”

Previously, the ICE Futures exchange in London had traded only in European energy commodities-Brent crude oil and United Kingdom natural gas. As a United Kingdom futures market, the ICE Futures exchange is regulated solely by the United Kingdom Financial Services rooority. In 1999, the London exchange obtained the CFTC’s permission to install computer terminals in the United States to permit traders here to trade European energy commodities through that exchange.

Then, in January of this year, ICE Futures in London began trading a futures contract for West Texas Intermediate (WTI) crude oil, a type of crude oil that is produced and delivered in the United States. ICE Futures also notified the CFTC that it would be permitting traders in the United States to use ICE terminals in the United States to trade its new WTI contract on the ICE Futures London exchange.

Beginning in April, ICE Futures similarly allowed traders in the United States to trade U.S. gasoline and heating oil futures on the ICE Futures exchange in London. Despite the use by U.S. traders of trading terminals within the United States to trade U.S. oil, gasoline, and heating oil futures contracts, the CFTC has not asserted any jurisdiction over the trading of these contracts.

Persons within the United States seeking to trade key U.S. energy commodities-U.S. crude oil, gasoline, and heating oil futures-now can avoid all U.S. market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.

As an increasing number of U.S. energy trades occurs on unregulated, OTC electronic exchanges or through foreign exchanges, the CFTC’s large trading reporting system becomes less and less accurate, the trading data becomes less and less useful, and its market oversight program becomes less comprehensive.

The absence of large trader information from the electronic exchanges makes it more difficult for the CFTC to monitor speculative activity and to detect and prevent price manipulation. The absence of this information not only obscures the CFTC’s view of that portion of the energy commodity markets, but it also degrades the quality of information that is reported.

A trader may take a position on an unregulated electronic exchange or on a foreign exchange that is either in addition to or opposite from the positions the trader has taken on the NYMEX, and thereby avoid and distort the large trader reporting system.

Not only can the CFTC be misled by these trading practices, but these trading practices could render the CFTC weekly publication of energy market trading data, intended to be used by the public, as incomplete and misleading.”

Simply put, any one can now speculate and avoid being tagged with illegal price. The more speculative trading that occurs, the less “real” price discovery via true supply and demand become.

With that in mind, you can now see how the big banks have gained control and cornered the oil market.

Continued from the Report:

“…Over the past few years, large financial institutions, hedge funds, pension funds, and other investment funds have been pouring billions of dollars into the energy commodities markets…to try to take advantage of price changes or to hedge against them.

Because much of this additional investment has come from financial institutions and investment funds that do not use the commodity as part of their business, it is defined as ”speculation” by the Commodity Futures Trading Commission (CFTC).

…Reports indicate that, in the past couple of years, some speculators have made tens and perhaps hundreds of millions of dollars in profits trading in energy commodities.

This speculative trading has occurred both on the regulated New York Mercantile Exchange (NYMEX) and on the over-the-counter (OTC) markets.

The large purchases of crude oil futures contracts by speculators have, in effect, created an additional demand for oil, driving up the price of oil to be delivered in the future in the same manner that additional demand for the immediate delivery of a physical barrel of oil drives up the price on the spot market.

As far as the market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum.

Although it is difficult to quantify the effect of speculation on prices, there is substantial evidence that the large amount of speculation in the current market has significantly increased prices.

Several analysts have estimated that speculative purchases of oil futures have added as much as $20-$25 per barrel to the current price of crude oil, thereby pushing up the price of oil from $50 to approximately $70 per barrel.”

The biggest banks in the world, such as Goldman Sachs, Morgan Stanley, Citigroup, JP Morgan, are now also the biggest energy traders; together, they not only participate in oil trades, but also fund numerous hedge funds that trade in oil.

Knowing how easy it is to force the price of oil upwards, the same strategies can be done in reverse to force the price of oil down.

All it takes is for some media-conjured “report” to tell us that Saudi Arabia is flooding the market with oil, OPEC is lowering prices, or that China is slowing, for oil to collapse.

Traders would then go short oil, kicking algo-traders into high gear, and immediately sending oil down further. The fact that oil consumption is actually growing really doesn’t matter anymore.

In reality, oil price isn’t dictated by supply and demand – or OPEC, or Russia, or China – it is dictated by the Western financial institutions that trade it.

The Reason is Manipulation, the Question is Why?

Via my past Letter, “Secrets of Bank Involvement in Oil Revealed“:

“For years, I have been talking about how the banks have taken control of our civilization.

…With oil prices are falling, economies around the world are beginning to feel the pain causing a huge wave of panic throughout the financial industry. That’s because the last time oil dropped like this – more than US$40 in less than six months – was during the financial crisis of 2008.

…Let’s look at the energy market to gain a better perspective.

The energy sector represents around 17-18 percent of the high-yield bond market valued at around $2 trillion.

Over the last few years, energy producers have raised more than a whopping half a trillion dollars in new bonds and loans with next to zero borrowing costs – courtesy of the Fed.

This low-borrowing cost environment, along with deregulation, has been the goose that laid the golden egg for every single energy producer. Because of this easy money, however, energy producers have become more leveraged than ever; leveraging themselves at much higher oil prices.

But with oil suddenly dropping so sharply, many of these energy producers are now at serious risk of going under.

In a recent report by Goldman Sachs, nearly $1 trillion of investments in future oil projects are at risk.

…It’s no wonder the costs of borrowing for energy producers have skyrocketed over the last six months.

…many of the companies are already on the brink of default, and unable to make even the interest payments on their loans.

…If oil continues in this low price environment, many producers will have a hard time meeting their debt obligations – meaning many of them could default on their loans. This alone will cause a wave of financial and corporate destruction. Not to mention the loss of hundreds of thousands of jobs across North America.”

You may be thinking, “if oil’s fall is causing a wave of financial disaster, why would the banks push the price of oil down? Wouldn’t they also suffer from the loss?”

Great question. But the banks never lose. Continued from my letter:

“If you control the world’s reserve currency, but slowly losing that status as a result of devaluation and competition from other nations (see When Nations Unite Against the West: The BRICS Development Bank), what would you do to protect yourself?

You buy assets. Because real hard assets protect you from monetary inflation.

With the banks now holding record amounts of highly leveraged paper from the Fed, why would they not use that paper to buy hard assets?

Bankers may be greedy, but they’re not stupid.

The price of hard physical assets is the true representation of inflation.

Therefore, if you control these hard assets in large quantities, you could also control their price.

This, in turn, means you can maintain control of your currency against monetary inflation.

And that is exactly what the banks have done.

The True World Power

Last month, the U.S. Senate’s Permanent Subcommittee on Investigations published a 403-page report on how Wall Street’s biggest banks, such as Goldman Sachs, Morgan Stanley, and JP Morgan, have gained ownership of a massive amount of commodities, food, and energy resources.

The report stated that “the current level of bank involvement with critical raw materials, power generation, and the food supply appears to be unprecedented in U.S. history.”

For example:

“…Until recently, Morgan Stanley controlled over 55 million barrels of oil storage capacity, 100 oil tankers, and 6,000 miles of pipeline. JPMorgan built a copper inventory that peaked at $2.7 billion, and, at one point, included at least 213,000 metric tons of copper, comprising nearly 60% of the available physical copper on the world’s premier copper trading exchange, the LME.

In 2012, Goldman owned 1.5 million metric tons of aluminum worth $3 billion, about 25% of the entire U.S. annual consumption. Goldman also owned warehouses which, in 2014, controlled 85% of the LME aluminum storage business in the United States.” – Wall Street Bank Involvement with Physical Commodities, United States Senate Permanent Subcommittee on Investigations

From pipelines to power plants, from agriculture to jet fuel, these too-big-to-fail banks have amassed – and may have manipulated the prices – of some of the world’s most important resources.

The above examples clearly show just how much influence the Big Banks have over our commodities through a “wide range of risky physical commodity activities which included, at times, producing, transporting, storing, processing, supplying, or trading energy, industrial metals, or agricultural commodities.”

With practically an unlimited supply of cheap capital from the Federal Reserve, the Big Banks have turned into much more than lenders and facilitators. They have become direct commerce competitors with an unfair monetary advantage: free money from the Fed.

Of course, that’s not their only advantage.

According to the report, the Big Banks are engaging in risky activities (such as ownership in power plants and coal mining), mixing banking and commerce, affecting prices, and gaining significant trading advantages.

Just think about how easily it would be for JP Morgan to manipulate the price of copper when they – at one point – controlled 60% of the available physical copper on the world’s premier copper trading exchange, the LME.

How easy would it be for Goldman to control the price of aluminum when they owned warehouses – at one point – that controlled 85% of the LME aluminum storage business in the United States?

And if they could so easily control such vast quantities of hard assets, how easy would it be for them to profit from going either short or long on these commodities?

Always a Winner

But if, for some reason, the bankers’ bets didn’t work out, they still wouldn’t lose.

That’s because these banks are holders of trillions of dollars in FDIC insured deposits.

In other words, if any of the banks’ pipelines rupture, power plants explode, oil tankers spill, or coal mines collapse, taxpayers may once again be on the hook for yet another too-big-to-fail bailout.

If you think that there’s no way that the government or the Fed would allow this to happen again after 2008, think again.

Via the Guardian:

“In a small provision in the budget bill, Congress agreed to allow banks to house their trading of swaps and derivatives alongside customer deposits, which are insured by the federal government against losses.

The budget move repeals a portion of the Dodd-Frank financial reform act and, some say, lays the groundwork for future bailouts of banks who make irresponsibly risky trades.”

Recall from my past letters where I said that the Fed wants to engulf you in their dollars. If yet another bailout is required, then the Fed would once again be the lender of last resort, and Americans will pile on the debt it owes to the Fed.

It’s no wonder that in the report, it actually notes that the Fed was the facilitator of this sprawl by the banks:

“Without the complementary orders and letters issued by the Federal Reserve, many of those physical commodity activities would not otherwise have been permissible ‘financial’ activities under federal banking law. By issuing those complementary orders, the Federal Reserve directly facilitated the expansion of financial holding companies into new physical commodity activities.”

The Big Banks have risked tons of cash lending and facilitating in oil business. But in reality they haven’t risked anything. They get free money from the Fed, and since they aren’t supposed to be directly involved in natural resources, they obtain control in other ways.

Remember, the big banks – and ultimately the Fed who controls them – are the ones who truly control the world. Their monetary actions are the cause of many of the world’s issues and have been used for many years to maintain control of other nations and the world’s resources.

But they can’t simply go into a country, put troops on the ground and take over. No, that would be inhumane.

So what do they do?

Via my past Letter, The Real Reason for War in Syria:

“Currency manipulation allows developed countries to print and lend to other developing countries at will.

A rich nation might go into a developing nation and lend them millions of dollars to build bridges, schools, housing, and expand their military efforts. The rich nation convinces the developing nation that by borrowing money, their nation will grow and prosper.

However, these deals are often negotiated at a very specific and hefty cost; the lending nation might demand resources or military and political access. Of course, developing nations often take the loans, but never really have the chance to pay it back.

When the developing nations realize they can’t pay back the loans, they’re at the mercy of the lending nations.

The trick here is that the lending nations can print as much money as they want, and in turn, control the resources of developing nations. In other words, the loans come at a hefty cost to the borrower, but at no cost to the lender.”

This brings us back to oil.

We know that oil’s crash has put a heavy burden on many debt facilities that are associated with oil. We also know that the big banks are all heavily leveraged within the sector.

If that is the case, why are the big banks so calm?

The answer is simple.

Asset-Backed Lending

Most of the loans associated with oil are done through asset-backed loans, or reserve-based financing.

It means that the loans are backed by the underlying asset itself: the oil reserves.

So if the loans go south, guess who ends up with the oil?

According to Reuters, JP Morgan is the number one U.S. bank by assets. And despite its energy exposure assumed at only 1.6 percent of total loans, the bank could own reserves of up to $750 million!

Via Reuters:

“If oil reaches $30 a barrel – and here we are – and stayed there for, call it, 18 months, you could expect to see (JPMorgan’s) reserve builds of up to $750 million.”

No wonder the banks aren’t worried about a oil financial contagion – especially not Jamie Dimon, JP Morgan’s Chairman, CEO and President:

“…Remember, these are asset-backed loans, so a bankruptcy doesn’t necessarily mean your loan is bad.” – Jamie Dimon

As oil collapses and defaults arise, the banks have not only traded dollars for assets on the cheap, but gained massive oil reserves for pennies on the dollar to back the underlying contracts of the oil that they so heavily trade.

The argument to this would be that many emerging markets have laws in place that prevent their national resources from being turned over to foreign entities in the case of corporate defaults.

Which, of course, the U.S. and its banks have already prepared for.

Via my Letter, How to Seize Assets Without War:

“…If the Fed raises interest rates, many emerging market economies will suffer the consequence of debt defaults. Which, historically means that asset fire sales – often commodity-based assets such as oil and gas – are next.

Historically, if you wanted to seize the assets of another country, you would have to go to war and fight for territory. But today, there are other less bloody ways to do that.

Take, for example, Petrobras – a semi-public Brazilian multinational energy corporation.

…Brazil is in one of the worst debt positions in the world with much of its debt denominated in US dollars.

Earlier this year (2015), Petrobras announced that it is attempting to sell $58 billion of assets – an unprecedented number in the oil industry.

Guess who will likely be leading the sale of Petrobras assets? Yup, American banks.

Via Reuters:

“…JPMorgan would be tasked with wooing the largest number of bidders possible for the assets and then structure the sales.”

As history has shown, emerging market fire sales due to debt defaults are often won by the US or its allies. Thus far, it appears the Petrobras fire sale may be headed that way.

Via WSJ:

‘Brazilian state-run oil company Petróleo Brasileiro SA said Tuesday (September 22, 2015) it is closing a deal to sell natural-gas distribution assets to a local subsidiary of Japan’s Mitsui & Co.’

The combination of monetary policy and commodities manipulation allows Western banks and allies to accumulate hard assets at the expense of emerging markets. And this has been exactly the plan since day one.

As the Fed hints of raising rates, financial risks among emerging markets will continue to build. This will trigger a reappraisal of sovereign and corporate risks leading to big swings in capital flows.”

Not only are many of the big banks’ practices protected by government and Fed policies, but they’re also protected by the underlying asset itself. If things go south, the bank could end up owning a lot of oil reserves.

No wonder they’re not worried.

And since the banks ultimately control the price of oil anyway, it could easily bring the price back up when they’re ready.

Controlling the price of oil gives U.S. and its banks many advantages.

For example, the U.S. could tell the Iranians, the Saudis, or other OPEC nations, whose economies heavily rely on oil, “Hey, if you want higher oil prices, we can make that happen. But first, you have to do this…”

You see how much control the U.S., and its big banks, actually have?

At least, for now anyway.

Don’t think for one second that nations around the world don’t understand this.

Just ask Venezuela, and many of the other countries that have succumbed to the power of the U.S. Many of these countries are now turning to China because they feel they have been screwed.

The World Shift

The diversification away from the U.S. dollar is the first step in the uprising against the U.S. by other nations.

As the power of the U.S. dollar diminishes, through international currency swaps and loans, other trading platforms that control the price of commodities (such as the new Shanghai Oil Exchange) will become more prominent in global trade; thus, bringing some price equilibrium back to the market.

And this is happening much faster than you expect.

Via Xinhuanet:

Chinese President Xi Jinping returned home Sunday after wrapping up a historic trip to Saudi Arabia, Egypt, and Iran with a broad consensus and 52 cooperation agreements set to deepen Beijing’s constructive engagement with the struggling yet promising region.

During Xi’s trip, China upgraded its relationship with both Saudi Arabia and Iran to a comprehensive strategic partnership and vowed to work together with Egypt to add more values to their comprehensive strategic partnership.

Regional organizations, including the Organization of Islamic Cooperation (OIC), the Cooperation Council for the Arab States of the Gulf (GCC) and the Arab League (AL), also applauded Xi’s visit and voiced their readiness to cement mutual trust and broaden win-win cooperation with China.

AL Secretary General Nabil al-Arabi said China has always stood with the developing world, adding that the Arab world is willing to work closely with China in political, economic as well as other sectors for mutual benefit.

The Belt and Road Initiative, an ambitious vision Xi put forward in 2013 to boost inter-connectivity and common development along the ancient land and maritime Silk Roads, has gained more support and popularity during Xi’s trip.

…Xi and leaders of the three nations agreed to align their countries’ development blueprints and pursue mutually beneficial cooperation under the framework of the Belt and Road Initiative, which comprises the Silk Road Economic Belt and the 21st Century Maritime Silk Road.

The initiative, reiterated the Chinese president, is by no means China’s solo, but a symphony of all countries along the routes, including half of the OIC members.

During Xi’s stay in Saudi Arabia, China, and the GCC resumed their free trade talks and “substantively concluded in principle the negotiations on trade in goods.” A comprehensive deal will be made within this year.”

In other words, the big power players in the Middle East – who produce the majority of the world’s oil – are now moving closer to cooperation with China, and away from the U.S.

As this progresses, it means the role of the U.S. dollar, and its value in world trade, will diminish.

And the big banks, which hold trillions of dollars in U.S. assets, aren’t concerned.

They’d much rather own the underlying assets.

Seek the truth,

by Ivan Lo for The Equedia Letter

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The New European Bank Bail-in System Goes Into Effect January 1st, 2016

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If you have a bank account anywhere in Europe, you need to read this article.  On January 1st, 2016, a new bail-in system will go into effect for all European banks.  This new system is based on the Cyprus bank bail-ins that we witnessed a few years ago.  If you will remember, money was grabbed from anyone that had more than 100,000 euros in their bank accounts in order to bail out the banks.  Now the exact same principles that were used in Cyprus are going to apply to all of Europe.  And with the entire global financial system teetering on the brink of chaos, that is not good news for those that have large amounts of money stashed in shaky European banks.

Below, I have shared part of an announcement about this new bail-in system that comes directly from the official website of the European Parliament.  I want you to notice that they explicitly say that “unsecured depositors would be affected last”.  What they really mean is that any time a bank in Europe fails, they are going to come after private bank accounts once the shareholders and bond holders have been wiped out.  So if you have more than 100,000 euros in a European bank right now, you are potentially on the hook when that bank goes under…

The directive establishes a bail-in system which will ensure that taxpayers will be last in the line to the pay the bills of a struggling bank. In a bail-in, creditors, according to a pre-defined hierarchy, forfeit some or all of their holdings to keep the bank alive. The bail-in system will apply from 1 January 2016.

The bail-in tool set out in the directive would require shareholders and bond holders to take the first big hits. Unsecured depositors (over €100,000) would be affected last, in many cases even after the bank-financed resolution fund and the national deposit guarantee fund in the country where it is located have stepped in to help stabilize the bank. Smaller depositors would in any case be explicitly excluded from any bail-in.

And as we have seen in the past, these rules can change overnight in the midst of a major crisis.

So they may be promising that those with under 100,000 euros will be safe right now, but that doesn’t necessarily mean that it will be true.

It is also important to note that there has been a really big hurry to get all of this in place by January 1.  In fact, at the end of October the European Commission actually sued six nations that had not yet passed legislation adopting the new bail-in rules…

The European Commission is taking legal action against member states including the Netherlands and Luxembourg, after they failed to implement rules protecting European taxpayers from funding billions in bank rescues.

Six countries will be referred to the European Court of Justice (ECJ) for their continued failure to transpose the EU’s “bail-in” laws into national legislation, the European Commission said on Thursday.

So why was the European Commission in such a rush?

Is there some particular reason why January 1 is so important?

This is something that I will be watching.

Meanwhile, there have been major changes in the U.S. as well.  The Federal Reserve recently adopted a new rule that limits what it can do to bail out the “too big to fail” banks.  The following comes from CNN

The Federal Reserve is cutting its lifeline to big banks in financial trouble.

The Fed officially adopted a new rule Monday that limits its ability to lend emergency money to banks.

In theory, the new rule should quash the notion that Wall Street banks are “too big to fail.”

If this new rule had been in effect during the last financial crisis, the Federal Reserve would not have been able to bail out AIG or Bear Stearns.  As a result, the final outcome of the last crisis may have been far different.  Here is more from CNN

Under the new rule, banks that are going bankrupt — or appear to be going bankrupt — can no longer receive emergency funds from the Fed under any circumstances.

If the rule had been in place during the financial crisis, it would have prevented the Fed from lending to insurance giant AIG (AIG) and Bear Stearns, Fed chair Janet Yellen points out.

So if the Federal Reserve does not bail out these big financial institutions during the next crisis, what is going to happen?

Will we see European-style “bail-ins” when large banks start failing?

And exactly what would such a “bail-in” look like?

Earlier this year, I discussed the concept of a “bail-in”…

Essentially, what happens is that wealth is transferred from the “stakeholders” in the bank to the bank itself in order to keep it solvent.  That means that creditors and shareholders could potentially lose everything if a major bank in Europe fails.  And if their “contributions” are not enough to save the bank, those holding private bank accounts will have to take “haircuts” just like we saw in Cyprus.  In fact, the travesty that we witnessed in Cyprus is being used as a “template” for much of the new legislation that is being enacted all over Europe.

Many Americans assume that when they put money in the bank that they have a right to go back and get “their money” whenever they want.  But if we all went to the bank at the same time, there wouldn’t be nearly enough money for all of us.  The reason for this is that the banks only keep a small fraction of our money on hand to satisfy the demands of those that conduct withdrawals on a day to day basis.  The banks take the rest of the money that we have deposited and use it however they think is best.

If you have money at a bank that goes under, that bank will still be obligated to pay you back, but it may not be able to do so.  This is where the FDIC comes in.  The FDIC supposedly guarantees the safety of deposits in member banks, but at any given time it only has a very, very small amount of money on hand.

If some major crisis comes along that causes banks all over the United States to start falling like dominoes, the FDIC will be in panic mode.  During such a scenario, the FDIC would be forced to ask Congress for a massive amount of money, and since we already run a giant deficit every year the government would have to borrow whatever funds would be required.

Personally, I find it very interesting that we have seen major rule changes in Europe and at the Federal Reserve just as we are entering a new global financial crisis.

Do they know something that the rest of us do not?

Be very careful with your money, because I am convinced that “bank bail-ins” will soon be making front page headlines all over the world.

by Michael Snyder in The Economic Collapse