The New Banking Paradigm: A Modified Bail In?

A few years back, in 2002 to be exact, a film came out titled Minority Report.  The entire premise behind this futuristic science fiction thriller was that the police of the future could predict crime before it even happened using a group of what could be described as a group of psychics kept in a state of suspended animation, in a swimming pool no less.  Using the precognitive information produced by the psychics, the lead police detective in this film of course then had the opportunity to close in and arrest the perpetrators before they committed a crime, thus saving the potential future victims from loss of life or property as well.  While the film was just typical fantasy Hollywood kitsch, we do of course basically have a guilty until proven innocent paradigm at work today in America when it comes to being relieved of your cash and possessions (all due to the assumption such a person might have engaged in criminal activity, not that it was proven in a court of law).  In other words, involuntary asset forfeiture that has made it's way into standard policing practice inside the United States – a form of precognitive policing.  And good luck getting it back even after a lengthy and costly battle to prove your own innocence. 

The confiscation paradigm has now gone mainstream, and has been granted de facto license to the financial sector by the courts . Banks can now do what seemingly was only the purview of police departments, which is to say take away your money for their own use or benefit.


Legalized Government Confiscation As Policy

The original premise, origin and supposed legality of these asset forfeitures was the thinking that US law enforcement should have the capacity to seize property, assets and of course cash from someone involved in the sale or distribution of illegal pharmaceuticals.  All this to punish the bad guys directly and up front by both figuratively and literally taking their wallet (and various other possessions supposedly acquired with funds derived from ill gotten gains).  But with some cash strapped police departments taking this to the extreme, and after becoming a very lucrative money maker for such departments, it has now crossed over to effect everyone and anyone to the point of almost having become an extortion racket.  Someone stopped for a routine check or traffic violation can find themselves relieved of cash they have on hand, irrespective of the amount and irrespective of any proof that those funds were derived from an illegal activity.  Even an amount as small as US$5,000 in cash on someone's person is considered suspect and potentially criminal these days.

Involuntary Asset Confiscation Gone Commercial

However, this is not meant to be a diatribe against current police practices inside the US and the theme of this article is of course banking (which we will make the connection in a moment).  But the point to be made here is that the idea and concept of having your assets or money taken away from you even though it has not been proven you have committed a crime nor that you might be responsible for any other kind of malfeasance has been now codified into the American psyche as acceptable daily practice.  In other words, it is now considered acceptable legally, morally, ethically and otherwise for law enforcement and other governmental entities to seize what is yours even though you may not have been declared guilty beforehand via due process.  But while you think this to be a criticism about loss of civil liberties and loss of personal possessions without due process (which it is), the more very disturbing point is that this trend has now crossed over into the commercial world.  With this said, we are of course speaking of banking and financial institutions that are now granted the legal blessing to take your money when they get themselves into financial difficulties.  This was an idea or concept that was considered strictly taboo in the past, with the financial firm or banking institution acting as an absolute trust worthy custodian of customer funds.  In other words, sanctioned robbery by previously trusted society participants of one kind (policemen and banks) or another has now gone mainstream, and has crossed over from government to the private sector as standard policy.

The New Banking Paradigm

To highlight this change in paradigm, Mr. Greg Hunter (usawatchdog.com) recently has called attention in his October 15, 2015 news video regarding the fairly new (July 2015) customer account agreement now used by the BB&T bank and financial services institution headquartered in Winston-Salem, North Carolina.  With 1,800 branches or offices in 15 US states and close to US$200 Billion in assets, this is not some small obscure under the radar financial institution.  This is a considerably sized US bank.  And what is the new contract language or clauses being presented to potential customers that want to open a savings or checking account with said institution?  In summary, they want to inform you that:

  1. Your relationship with the bank is one of creditor \ debtor
  2. You should clearly understand that the bank is NOT acting as a fiduciary or custodian in the classical sense on your behalf
  3. They can refuse to give you your own money back IF they deem it unfavorable to their own financial situation to do so

Think about that for a minute and let it sink in.  Also, keep in mind that legally speaking, the debtor \ creditor nature of the customer – banking entity relationship was always the case, but seemingly banks never wanted to highlight or make the customer acutely aware of this before.  After all, to do so would blatantly alter the perception that retail banking customers held previously.

Individuals and businesses open savings and or checking accounts (what are called current accounts in Europe), accepting lower interest rates and even various forms of banking fees to manage such accounts for an implied returned guarantee of safety of their funds.  Which is to say that most investors clearly understand the higher returns and also higher risks when they place money into various kinds of managed investment relationships, such as mutual funds, hedge funds, and similar kinds of money management relationships.  And of course investments do not always pan out as the fund manager intends, and or so-called black swan events can stymie the intended investment result.  Because of this, language from the managed account customer agreement often cautions investors that redemption requests could be temporarily suspended if market conditions make it unwise to sell when there are temporary paper losses, which the fund manager does not want to turn into actual real cash losses.  So, in such a case, investors plying money into such accounts are looking for double digit returns but also understand the risks as well.  Which is why most people only place money intended for long term investment and NOT daily or monthly operating funds into such accounts.  The so-called safe money, the funds that you need to pay your bills, pay your employees, pay your suppliers and so on would historically go into what in the past was deemed an account of safety with a bank, accepting the much lower interest rates (close to zero with USD bank deposits these days) as trade off.  But now, the banks themselves are indicating that that previous paradigm has ended.  Rather and instead they are putting customers of the bank on notice that they have the same mindset and relationship as a hedge fund.

What person in their right mind would willingly deposit money into such a bank whereby the said bank was telling potential new account holders that they reserve the right to not give the depositor his money back?  Never mind an actual receivership scenario whereby the bank was declared insolvent by regulators and taken over by the governmental banking insurance entity. Rather, what they are saying is that if they made some foolish loans that went bad or had some derivatives that blew up on them, but were still in business and not declared insolvent by the regulators, that they have the legal right NOT to allow you access to your own cash.  Again, such can be expected from a hedge fund or even a mutual fund, but a bank?

And while you think this is something that just came out of the blue, it has a legal precedence that has been building for a few years now that in essence does away with the previous paradigm of the financial institution as honest fiduciary of their client's funds.  We are speaking of course about the US Federal Appeals Court ruling from 2012 regarding the 2007 failure of futures brokerage Sentinel Management Group.  The ruling of that case basically sanctions the co-mingling of financial institution operating funds with what is supposed to segregated (and protected) customer account funds.

An article dated Thursday August 9, 2012 from Reuters quotes Mr. Fred Grede, the trustee of the liquidation of Sentinel Management Group, as saying that: this ruling suggests that brokerages can use customer funds to pay off other creditors.  In addition, Mr. Grede is also quoted as saying: the ruling suggests that a brokerage that allows customer money to be mixed with its own is not necessarily committing fraud.  It does not bode well for the protection of customer funds.  U.S. Circuit Judge John D. Tinder who presided over the case wrote in the ruling:  That Sentinel failed to keep client funds properly segregated is not, on its own, sufficient to rule as a matter of law that Sentinel acted with actual intent to hinder, delay, or defraud' its customers.  Also included in the ruling with respect to any alleged misconduct (there was nothing alleged as they did violate the sanctity of their clients) regarding segregation of funds issues is the comment: such a lack of care does not rise to the level of the egregious misconduct.  In short, there you have it from a 2012 US Federal Appeals Court Case, US financial institutions are not committing fraud when they take segregated customer funds for other purposes, including bolstering the financial institution's financial position or paying off the firm's creditors.  God Bless America – eh?

What then is the answer?  In our opinion, when any government sanctions the confiscation of the personal property of it's citizenry by any governmental authority without the rule of law or proof of any wrong doing beforehand, it is time to get the heck out of there.  Likewise, when any government sanctions a private financial institution to also sequester, confiscate or let us say outright steal customer funds deposited with the understanding by the customer that the financial firm is acting as a honest and reliable fiduciary, then it is time to get your money out of there as well.  There are still some financial institutions in the world that clearly understand and operate under this old paradigm, and some respective governments as well – and it is those jurisdictions that you may want to consider for yourself personally and in the least, your money.  While this argument may sound like conspiracy theory quackery, we would ask some simple questions:  What is the end game?  How bad is the national balance sheet really?  How bad are the potential derivative losses really?  Why would a government take the position that seemingly condones or opens the door to future confiscation of the assets of it's citizenry?  What do they know about the future that you do not?