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IS THE END NIGH?

The simple question is this: During the next several years, what do you believe is the best way to protect your assets while investing for reasonable returns and minimizing risks?

Before answering, picture this: It’s three-day holiday weekend. On Saturday morning you awake and learn that on Friday evening the Feds have closed all banks. All financial accounts are closed. The Feds declares that a ‘portion’ of your frozen accounts will be used to pay down national debts, and used to avoid government bankruptcy. It doesn’t matter that bank deposits are government guaranteed.

A panic occurs. Electronic transfers are frozen, and ATM machines are emptied by Saturday afternoon. On Sunday, the president announces that all banks are to remain closed until the end of the week. He then announces at the end of the week that the bank holiday will continue until further notice. And to protect banking staff from threats of violence, senior management has been relocated to secure, safe locations, while mid-level staff work from home.

But you need access to your money for living expenses, emergency purposes, managing a business, or to pay salaries. You’re worried about how long and how much the government is stealing from your hard-earned savings, and your financial future.

You think the above scenario can’t happen to you? Then read on.

What you do to prevent this nightmare from occurring to you is the topic of today’s newsletter.

Getting Cyprused

The above scenario unfolded in 2012 in the EU countries of Cyprus, following Greece in 2010. Emotions ran high. Peaceful demonstrations turned to violence, as workers, savers, and investors, young and old, mixed together in the streets desperate for access to their money.

In Cyprus it was estimated that authorities confiscated at least 40% of all deposits above EU$100,000 ... and for larger deposits, much more. Nobody ever tallied the total financial carnage. In Greece, 111,000 Greek companies went bankrupt in 2011 alone. Youth unemployment rose to 54.9%, and Greece went into a serious recession for five years. All banks closed for an extended time, and many never reopened. An estimated 44% of Greece fell below the poverty line.

Can’t happen in US? Guess again.

Something very similar has already occurred at least three times in the US, twice during my lifetime: first, during the 1930s (no, I’m not that old), again during the S&L banking crisis beginning in 1986, and during the GFC 2007 / 2008.

The S&L crisis was the failure of 1,043 savings and loan associations in the US. The FSLIC closed (or ‘resolved’ in P.C. terms) 296 failed banks, and the RTC 747 more. And during the GFC the FDIC closed 465 failed banks.

Of course, you remember the Wall Street behemoths, Lehmann Brothers and Blackrock, and of course Countrywide Bank which financed nearly twenty-five percent of all US mortgages. Recall the long lines – and the long faces - and the huge losses to depositors and investors? Getting a ‘hair-cut’ on their savings wasn’t what they had in mind.

But Cyprus is a very special example that deserves special reminder today, as Cyprus became the new model for the US and other countries’ banking systems to resolve the next financial crisis.

You might be surprised to hear that Cyprus' banks passed a rigorous stress test in 2011, one year before they went bust. They were tested specifically to see if they could survive an economic turmoil exactly as occurred one year later, and they passed the test with flying colors. But then they didn’t in 2012. Clearly, bank stress tests are useless.

What did the stress testers miss? If you said a sovereign debt problem, you’d be partially correct. If you throw global financial contagion into the soup, you’d be more correct.

I’m from the government and here to help.

Either the political and financial leaders secretly knew what was going to occur in Cyprus, Greece, and elsewhere, or they were inept. I’ll put my money on the latter. After all, they are no more human than you and me. In any case, do you trust who’s behind the curtain pulling strings today?

Now, these same political and financial leaders in Europe and the US see Cyprus as the model for how depositors will be successfully milked at the next slaughter. It worked in Cyprus, so why not elsewhere?

Bail-Ins are the new Bail-outs.

Responding to taxpayer’s displeasure using their money to bail-out banks too big to fail, the US Congress passed the Dodd-Frank Wall Street Reform and Consumer Act, which eliminated the option of bank bailouts, but opened the door for bank bail-ins.

Both a bail-in and a bail-out are designed to prevent a complete collapse of a failing bank. The difference lies in who bears the financial burden of bailing out the bank. With a bailout, the government injects capital into the banks to enable them to continue to operate. During the GFC, $700 billion – nearly three-quarter trillion dollars - was injected into the too big to fail US banks.

By comparison, with bail-ins the bank freezes the money of its bank depositors and bondholders and are used to restructure and stay afloat. In effect, the bank converts your deposits into stocks. For all depositors, there is a huge risk of losing some or all of their deposits, with or without deposit insurance.

So even though you have the protection of the US FDIC US$250,000 (or Australia deposit insurance AU$250,000), those deposits are still at risk. Above those amounts there is no insurance.

The enormity of the problem is knowing that the 25 largest banks hold more than $247 trillion in derivatives. This poses a tremendous amount of risk to the financial system. The passage of the Dodd-Frank Act gives preference to derivative claims. For simplicity, a derivative is nothing more than a financial contract with the value based upon an underlying asset, like a security, or set of assets, like an index. Common instruments include bonds, commodities, currencies, interest rates, market indexes, and stocks.

And the Dodd-Frank Act was largely mirrored after the Basel III international reforms. This created the statutory framework for bail-ins in the US and across the world. Banks too big to fail will no longer be bailed out by taxpayer dollars, and instead your bank deposits will turn into stocks of the failed bank.

Governments across the globe have been implementing programs to give haircuts to depositors, even in little ole New Zealand. Following the GFC, the RBNZ regulatory authorities quietly dropped their $1 million depositor’s guarantee, and implemented the new Open Bank Resolution (OBR). OBR is nothing more than a depositor’s haircut scheme. It allows banks to reopen the following day, but treats bank depositors as mere creditors and stock owners.

Doesn't that have a nice ring to it? I'm stealing your money and we’ll call it a haircut. Or a levy. Whatever it’s called, it still theft.

Know Your Bank?

This means that with the new bail-in model that depositors are responsible for knowing their bank’s investing profile and risks. But when’s the last time you’ve been able to obtain a full and timely disclosure from your bank to learn about its true investing and risk profile? And when disclosures are available, they look through the rear window. If regulators and rating agencies can’t sort it out, then how is it that depositors are better suited?

If bail-ins don’t keep you awake at night, then consider that currency controls are another form of government theft. This, too, has happened throughout recent history, and is happening right now in numerous countries.

In Cyprus, when the president proposes a law it must then be approved by the parliament (the U.S. Congress equivalent). To the contrary, in the U.S., the president can simply sign an executive order, and it’s a done deal. From that standpoint, your bank deposits are better protected in Cyprus since you have the safety valve of an accountable parliament to keep control over presidential orders.

President FD Roosevelt issued the executive order that closed US banks in 1933. In all, over 9,000 banks failed in the 1930s. In one year alone, 4,000 failed in 1933, and $140 billion disappeared from bank failures.  

Executive orders are common. Since 1900, the average for all presidents is 44 executive orders per year. Democrats on average passed 59 per year, and Republicans averaged 34 per year. Harry Truman had the highest number at 113. Gerald Ford averaged 84, Dwight Eisenhower 60, Richard Nixon 58, Ronald Reagan 48, and George H.W. Bush 41 per year. During Bill Clinton’s tenure he signed 363 executive orders, George W. Bush 290, Barack Obama 275, and Donald Trump 117 and counting after only eighteen months in office through mid-2019.

And if bail-ins, currency controls, and executive orders don’t give you insomnia, then consider the zero-interest rate policy thrifty savers and pension programs are forced to accept to bail out the governments that bailed out the banks. With the inflation rate higher than your savings rate, you are already effectively being charged to keep your money in the bank. Each day, your money is worth less than the day before.

What’s worse, today, globally, there are over $13 trillion of negative-yielding bonds sending a clear message of financial distress. This means for every $1 deposited you get back less money when – and if – it is returned. Is Deutsche Bank the next Lehmann Brothers?

Smart money and large investors are concerned. They are concerned about the strength of the economy. Concerned about the US-China trade war. Concerned about geopolitics. Concerned about persistent low inflation. As a result, investors are rushing in record numbers to get their hands on the safest of safe assets available, such as government bonds. There is so much demand that it results in negative yields, meaning they know they will get less money back than they paid, but something is better than nothing. This has never occurred throughout history.

I swear I’m an optimist to the bone. But I’m also a realist. And the reality is that protecting assets going forward isn’t a pretty site. The government keeps using the same solution of cheap, easy money that creates the financial problem in the first place. What’s more, Reserve Banks in global coordination are trying to macro-manage the economy without allowing for healthy corrections. But the Ponzi scheme is bound to end in another unhappy ending.

Why aren’t savers and pensioners marching in streets? Rebellions have occurred throughout history for far less reasons. The only surprise is how our generation has accepted levels of government interference and taxation far greater than our forefathers would have ever tolerated.

What more can you do to protect your assets?

Diversify, Diversify, Diversify?

It sounds too simple. But if one bank, or one asset class, or one country fails, then all eggs are in one risk basket. And if diversifying between two banks is better than one, then two, three, or more, in multiple countries, is better still.

We’ve written extensively in compliemtary past newsletters about the importance of diversifying assets, both onshore and offshore. And when the GFC was unfolding, we also provided examples of how to structure assets within a banking system to keep them safe and avoid losing them at this link. The same principals apply today. In another newsletter, Protecting Assets in a Changing World, found here, we discussed how quickly financial systems can change, and how an international trust can help avoid these losses. And lookhere and here to see how to manage assets through an international trust.  

You can never reduce your risk to zero. But you can certainly mitigate your risks, depending on how you structure your assets through an international trust.

Protecting assets from all systemic risks can be a challenge. But there are an overwhelming number of good choices available outside your backyard, allowing you to accomplish a higher level of protection by diversifying assets internationally.

And truth be told, there are actually superior banking options located around the globe. You just need to know where to look.

Diversification is nothing more than managing assets to mitigate various types and levels of risk.

The main investment risk is often not being able to cash in your investments at full value when you need them. Some assets are subject to a loss of purchasing power due to inflation and the income they produce is heavily taxed. While common stocks, real estate, gold and other natural resource investments sometimes provide a better hedge against inflation - and even some tax deferral - they are always subject to risk of illiquidity and a deflationary cycle.

There will always be ‘liquidity risks’, that is, risk associated with not being able to gain immediate access to your money, or obtain its reasonable value. Therefore, never have more than a small portion of assets in any one bank or financial institution, or in any one country. Multiple countries, different banks, and different asset classes, is always a better structure.

At the end of the day, asset protection should include access to offshore banking diversification.

If you’re interested in learning more, How to Legally Protect Your Assets, 2nd edition, andOffshore Living & Investing, 2nd edition, are two great books to help getting started at thislink.

If you’d like to conduct a confidential review of your personal situation and see for yourself how international planning can fit into your future, contact me here.

Until next time…..

David

David A Tanzer, Esq.
JD, BSc, Ph.D (Hon)
 
For more information visit www.DavidTanzer.com or email to Datlegal@aol.com. David is the author of “How to Legally Protect Your Assets” and “Offshore Living and Investing.”

David A Tanzer & Assoc., PC.
Datlegal@aol.com
DAT@DavidTanzer.com
www.DavidTanzer.com

Vail, CO USA:
Tel. (970) 476-6100
Fax (720) 293-2272

Auckland, New Zealand:
Tel. (64) 9 353-1328
Fax (64) 9 353-1328

Brisbane, Australia:
Tel. (61) 7 3319 6999
Fax (61) 7 3319 6999

(Licensed to Practice Law in U.S. States & Federal Courts; Assoc. Member Auckland, N.Z. District Law Society - Foreign Lawyer; & Assoc. Member Queensland Law Society, AU - Foreign Lawyer)

The comments herein are not intended to constitute a legal or tax opinion regarding any specific legal or tax issue as additional issues may exist; does not reach a conclusion with respect to any specific legal or tax issue addressed herein or any additional issues not included; and cannot be used for the purpose of avoiding legal or tax obligations or penalties with respect to issues in or outside the scope of matters discussed herein.

(c) Copyright by David A. Tanzer & Associates, P.C. All rights reserved. Except as permitted under the United States Copyright Act of 1976, as amended, and pursuant to the laws of all countries, no part hereof may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, electronic or otherwise, without the prior written permission of David A. Tanzer & Associates, P.C. Reprint in whole or part strictly prohibited unless prior written permission is granted. International Copyright protected under the Berne Convention, Universal Copyright Convention  and laws of all other Copyright protected countries, and consistent with the World Trade Organization TRIPS.

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