Too big to fail.
It was the mantra that defined the GFC. Leading to extraordinary taxpayer-funded bailouts of banks across the world.
The US’ targeted asset relief program (TARP) was by far the most infamous and costly though. With the public paying a far higher price than they were initially told…
US$700 billion was the official cost the taxpayer was told. A one-off cash injection that would ‘save’ the banks for the good of the people.
It was a blatant lie.
The only winners were the bankers and the elite they rubbed shoulders with. Namely other banks, pension funds, and insurance companies.
In other words, the financial industry was bailed out to profit the financial industry.
They socialised the risks in order to privatise the profit.
As for exactly what it cost the American taxpayer, well that isn’t so easy to quantify.
Some estimate that TARP ended up costing just US$498 billion. And I say ‘just’, because the program began with a US$700 billion budget.
Others though, believe the true cost was far greater. Ranging from US$7.7 trillion to US$29 trillion, depending on who you ask. Figures that are astronomically higher than the initial budget.
The reason for this huge disparity is levelled squarely at the Fed. With reports that they obfuscated the true figures from the public eye.
We’ll likely never know the real cost.
What we do know though, is that we probably won’t see it again next time. Because whenever the next banking crisis arrives, be it in a matter of weeks or years, bailouts won’t be on the table.
Instead, we are likely to see ‘bail-ins’.
Forget tax dollars, your money is on the line now
For many Australians the term bail-in might sound totally foreign. After all, it isn’t something you see mentioned all that much by our politicians or the media.
And that doesn’t surprise me. Once you realise what it is, it becomes pretty clear why they’d try to keep quiet about it.
But, if you care about your wealth, it is a term you need to get very familiar with.
See, back in 2014, the G20 held its annual summit in Brisbane. An event that was, for the most part, just like every other summit. Which is to say a lot of posturing and not all that much doing.
However, there was one key change that many overlooked. Because at this summit, the leaders in attendance and the Bank of International Settlements decided on new bail-in provisions. Establishing a new set of rules for when the next crisis rolls around.
It seems the politicians realised that having to foot the bill for bad banks wasn’t all that enjoyable. Because even if it was taxpayer money, they still had to bear some financial burden.
So, they devised a way to screw over the public even more, while shirking any responsibility themselves. Creating a framework that would allow a bad bank to leverage its creditors as a means to save itself.
What does that mean?
It means that if your bank is at risk of going under, it can take the money from your account and use it to capitalise itself.
You don’t get a say in the matter, or a chance to opt out. Your savings are simply turned into a financial hostage.
Granted, what you do get in return is shares in the bank. But these are shares in a bank that has just turned on its own customers. An institution that is admitting it is in financial distress.
Who wants to own shares in a bank like that?
Few people, I imagine.
Which is why the threat of a bail-in cannot be ignored. Especially seeing as APRA (the banking regulator) has had the power to mandate bail-ins since 2018…
A financial recipe for disaster
Now, I do want to be clear, there are still some strict rules around bail-ins.
Currently the only accounts that could be drained are those with over $250,000 in them. Meaning anyone with less funds should be safe.
However, if past bank crises have taught us anything, it is that no one is safe.
If the worst does come to pass, I wouldn’t be hoping that the bank sticks to its rules. Because when they get desperate enough, we’ll be hearing that same old line again: they’re just ‘too big to fail’.
As for you and me, though — well, it’s perfectly fine if we fail apparently.
In fact, some bankers are even brazen enough to justify this absurdity. As Nick Hossack, a former policy director of the Australian Bankers Association, told the ABC:
‘[Banks] have financial incentives to take levels of lending risk that exceed the socially optimal level of risk.’
Apparently, we, as the banks customers, should be expected to bear some of that risk too. Even though no one wants that sort of risk from a deposit account.
If customers wanted to gamble with their money, they can do so on their own.
All of this is to say, it looks as though we’re setting ourselves up for a huge problem.
No one knows when the next banking crisis will happen, but this pandemic has certainly put pressure on the sector. It would not surprise me if this is the beginning of the end for the Big Four.
Because as I (and my colleagues) have discussed numerous times, the future of banking is heading in a new direction. One that will leave the traditional players far behind.
But, don’t expect them to go down without a fight.
These bail-ins might be their last, defiant act. Robbing their customers blind as they themselves implode.
There’s a reason why people buy assets like gold and bitcoin. And it’s because at the end of the day, the banks have never really had your interests at heart.
If you want to protect your money from this looming bail-in disaster, then you too may need to start thinking about alternative assets.
Editor, Money Morning
Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.
PS: Bank Busters! Three Aussie tech plays outsmarting the ‘big four’ banks. Learn more now.