• These rules of both the ECB and the Fed seem like exactly the kinds of revisions we want. Ultimately, if a bank fails, someone has got to lose money. It is only fair that the first to lose would be stockholders, who should lose every penny of the value of their stocks. Exactly how that happens, I don’t know since the stock of a failing bank isn’t worth much, and if you sell those stocks to others to raise money, you now just have a new set of stockholders. Typically, those who have loaned money to an institution would be the next to lose; but who loans money to a bank, other than the central banks. (If you go after them, isn’t that just another bailout with fiat money created out of thin air?) Maybe some banks have mortgages from other banks for their buildings? The depositors’ money is, to me, a much different class than a loan. Next the uninsured deposits should lose, and finally the insured deposits, with whatever losses that happen there being covered by the FDIC. The taxpayer who didn’t have any money in that bank should never lose a cent.

    To me, these are rules that say, 1) No more BAILOUTS, which is something that should never have happened in the first place; and 2) This is the order of an orderly bankruptcy that you shall all follow. So, it’s all good news.

    I would do it differently to protect all depositors: I’d mandate that any bank that goes down that far have all of its assets merged into a much smaller, healthy bank (properties sold off, etc.) to form new accounts opened in the name of the failing bank’s depositors at the small, healthy bank. The bankrupt bank’s remaining liabilities are, then cancelled, as often happens in bankruptcy, and the bank ceases to exist with its stockholders winding up with nothing (unless there was more than enough in assets to fully cover all depositors, in which case, you’d first pay off any other liabilities before giving anything to stockholders).

    Basically, if you go bankrupt as a bank, you would lose everything, and all your assets would be used to strengthen a good, much smaller bank. Knowing that all accounts are being transferred to healthy banks should stave off the run. From there, if the Fed has to create money out of thin air to save depositors from the rules above, the Fed should do it in the new accounts. The beauty of guaranteeing the dissolution of any bank that needs to declare bankruptcy is that it guarantees the CEO and other top execs lose the entire value of their stock options. To make sure existing stock holders take the losses, since they are the owners, I’d create a legal locking mechanism whereby the Fed can freeze those stocks on the market. At that point, since the bank will soon no longer exists, you’re basically just saying, the first people to lose everything are the owners. All they’ll ever get for their stocks is their share of what is left over from the parting out IF anything is left over, which the Fed will manage so that they are the last to be paid.

    –David Haggith
    The Great Recession Blog