The Greek Bail-In and American Entitlement Programs.

So Alex Pollack poses an interesting hypothetical. “Would you take a guaranteed $0.77/$1.00 of your projected Social Security account in cash, today?” In other words, Sam’s Government sets up a barbershop and administers a 23% haircut in return for buying all the default risk that may or may not exist in the Social Security Program. Pollack suggested back in 2012 that a lot of people would give the offer a serious look-see.


As in 2012, large numbers of the creditors of Social Security, especially young people, do not believe they will ever collect on Social Security’s debt at par-and they are right. Nothing is more classic in finance than to settle the debts of an insolvent debtor at a discount-so why not with Social Security? I think this possibility should be offered to the American public on a purely voluntary basis. It is perfectly possible to set up a method to do this. Its mechanics are described at the end of this article. Every time some prudent people took a sure 77 cents instead of a dubious future dollar, not only would they be better off on a risk-adjusted basis, but the deficit of Social Security would shrink. This is because its liabilities would do down by a dollar, while its assets only went down by 77 cents. The government’s finances would thereby improve with every such transaction.

Of course Greeks who hold bonds in their local savings banks are getting a very similar opportunity to participate in the same sort of a deal. And it’s totally voluntary! Oh, wait… Plus, the Greeks are going one step further than the evil Troika. They are preparing to bail-in *depositors* as well.

But citing bankers and businesspeople with knowledge of the measures, the Financial Times reported: “The plans, which call for a ‘haircut’ of at least 30 percent on deposits above 8,000 euros, sketch out an increasingly likely scenario for at least one bank. The report quoted a source as saying: It (the haircut) would take place in the context of an overall restructuring of the bank sector once Greece is back in a bailout programme.”


Can you guess who else gives its banking institutions bail-in authority? I’ll offer up a hint. It was back when this country was passing Dodd-Frank Legislation to really stick it to Wall Street good this time.*

The US has already put in place bail-in-like powers as part of the Dodd-Frank financial reform act passed last year. The law includes a resolution scheme that gives regulators the ability to impose losses on bondholders while ensuring the critical parts of the bank can keep running. Employees would be paid, the lights would stay on and derivatives contracts would not have to be instantly unwound, one of the areas that caused market confusion when Lehman Brothers collapsed in September 2008.

But none of that could happen here.** Even if the banksters went after depositors as well as bond holders, the FDIC prevents them from defenestrating anyone holding less than $250K in a particular bank. Silly, silly American. Greece had a similar deal on all deposits up to 100K Euros. First they locked down the banks. Then they lowered the loss limits to 8K Euros after they had limited withdrawals to 60 Euros/ Day, and then finally they announced the chainsaw haircuts after the money was locked down and the government had conveniently stepped out of the way. It really could happen here. It could happen in the exact same way.

So that brings up an interesting point. Just who does money belong to once you stick it in a savings bank. What you’ve just done by opening that pass-book savings account, is start making a series of unsecured loans to your local banker. You have no collateral in the event that your wonderful and respectable institute of higher finance decides that possession is 9/10 of the law. All they need is a good excuse, I mean crisis to make in 10/10 of the law and send you on your merry way without all the problems attendant to managing your personal fortune anymore.


This brings us full-circle to Alex Pollack. Do you really believe you’ll get that Social Security check? I mean the government *promised.* They also made that same promise in Greece. Up to 100K Euros. With the duplicitous betrayal of the Greek savers ongoing, and the same mechanism on the law books right here in the Good ‘Ole US of A; it wouldn’t surprise me if Alex Pollack’s idea wouldn’t attract adherents if it were actually offered here. As Cassandra famously told Priam and Hector. “Beware the government promising to bear gifts.”

*-Sorry, lost track of the html sarcasm tags again…
**-HT: Sinclair Lewis


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