Can too big to fail banks really take your money if things go sour and leave you screwed without access to your cash?
The short answer: without the proper regulation in place (which is currently not in place), is: YES.
A bank rescue scheme that led to one man killing himself after losing over $100,000 is already testament to it. In his suicide note, the man explained that after being a customer of the bank for 50 years, and investing in bank-issued bonds, he was relieved of his investments thanks to a hidden clause that saw him and 130,000 shareholders and bondholders left hung out to dry so the bank could stay afloat.
The bank in question was already in rescue mode, and in order to tap into a specially created rescue fund, it had to meet the requirements of the wealthier banks that would be providing the funds. However, before these funds can be accessed, the bonds are first tapped, at the loss of any said bond or shareholder.
BBC explained this method as a "bail-in." In plain English, that means that bondholders got screwed because the bank they trusted failed. Newer EU laws basically say that losses must be forced on bondholders and depositors who have more than €100,000 on tap.
In a worst case scenario, banks that fail in the EU, under the proposed laws that take effect this year, mean that over a million savers could be stiffed.
Your Money Becomes The Bank's
A catchall exists, too. Once you drop that money into your account, the banks now actually legally owns it. Furthermore, it becomes an unsecured debt that the bank owes you. But if the bank fails and needs to tap into a rescue fund, your money is the first thing that goes out the window before they are allowed to access any bail-in funds.
The scary aspect is that too big to fail banks have trillions of dollars in derivatives that they do not declare on the balance sheet. In essence, this means that these debts are not recorded in the GAAP sheets, and they are the first to be paid off before any depositors can reclaim their cash.
But the 10,000-page 2010 Dodd-Frank law that was supposed to prevent this kind of mishmash was influenced by too big to fail banks, who managed to get cryptic language added that protects them and screws the depositor.
What Dodd-Frank does is prevent these bailouts from encumbering the taxpayer by forcing the banks to liquidate anything and everything to pay off bad debts. This includes your money in a deposit account or bond.
Specifically, Title II is aimed at "ensuring that payout to claimants is at least as much as the claimants would have received under bankruptcy liquidation."
Interestingly enough, according to the Dodd Frank Act and the 2005 Bankruptcy Act, derivative claims have super-priority over all other claims, secured and unsecured, insured and uninsured.
But the (OTC) derivative market is comprised of banks and hedge funds, and allows these high rollers to make risky bets, often against one another on mutually secured collateral.
Yet, in lieu of all of this, your deposited money is somehow not tied to this collateral and is seen as an unsecured debt to the bank instead. How convenient.
Experts say that you can slowly withdraw your money from the bank and stash it somewhere safer, but then you'd still have all of this money on hand. The safer bet would be to simply move your money into a smaller credit union with an insurance plan, but it's still not the most secure.
Either way, there's risk. Just know that when you put money in the bank, it's a lot harder to get it back out and if the bank fails, you get screwed first.
How's that for having a cash cow?