Dodd-Frank’s Bail-in Provision

Disclaimer: I am not a licensed securities dealer, adviser, or insurance agent. The views here are solely my own and should not be considered or used for investment advice. As always, individuals should determine the suitability for their own situation and perform their own due diligence before making any investment.

The Dodd-Frank Act was passed in the aftermath of the 2008 financial crisis. Its aim was to end alleged corruption and greed, and most importantly, prevent another bailout of the banks. However, Dodd-Frank goes on to help failing banks through bail-ins. Bail-ins is a tool of converting bank liabilities into equity, and using that equity to stabilize the bank. What does that mean exactly? Everyone is familiar with a bank demand deposit if they have a checking account. Money is stored with the bank for safekeeping. In return, the bank gets to use that money to make loans. However, since it is a “demand” deposit, meaning the depositor can withdrawal the money on demand, it is a liability of the bank, according to US banking law. This shouldn’t be a surprise for many, since it is one of the oldest laws in the US, and a basic accounting principle.

Since almost the founding of the the United States, the law has been that once you transfer your money to the bank, the bank has title over your money. Though the bank may be contracted to give title of the money back on demand, there are exceptions to the rule, mainly if there is criminality or bank failure. Dodd-Frank instructs the procedure for bank failures. If a bank fails, the liabilities are converted to equity, meaning that the money deposited cannot be withdrawn because the bank no longer has a liability. The account holder then becomes a shareholder. There is a major problem with becoming a shareholder under this scheme: you no longer have any money in your account. In addition, you are now a proud owner of a failing bank.

If the bank does go through this procedure, then the depositor’s newly received bank shares will likely go down in value, and there is nothing you can do to receive the money you deposited, except what is backed up by the FDIC. If you are living paycheck-to-paycheck that might be a problem since it takes time for the insurance check to come through the mail. However, there is a simple way to avoid this hassle, and it’s a strategy I am implementing for financial stability. It’s one of the oldest methods of investing and cash liquidity there is: life insurance.

Life insurance can be used as your personal bank, a concept that was resurrected by Nelson Nash, which he named the Infinite Banking Concept (IBC). The key is finding an insurance company that is a mutual company, not a corporation, such as Ameritas. The next important step is purchasing a whole life insurance that pay dividends. These policies guarantee a certain rate each year that they are obligated to pay the policy holder. The smart thing to do is to pour that money back into the insurance policy. In addition, it is important to increase the cash value of the policy, not the death benefit.

Why should you not care about the death benefit? Because, as mentioned above, Dodd-Frank will convert deposits into shares if the bank fails, leaving everyone without cash. A policy holder can borrow against the cash value and get cash. The beauty is that you can borrow against the policy at any time for any reason. If you borrow money at the bank, they will want to know why and what you are willing to put up as collateral; if you don’t pay the bank back, your credit score will go down. With life insurance, you can get a loan for any reason, without collateral; no questions asked; the credit score is unaffected if the loan is not paid back. The only drawback is that the loan can go as high as the cash value of the policy, which is why I stressed the cash value should be the focal point, not the size of the death benefit.

Regardless of whether there was bail-in, I think this investment tool is important. It was common prior to the Great Depression, and fell out of favor since the bubble financing of the stock market. However, it is by far the oldest, safest, and most practical investment you’ll every make. That is the reason I am committing to it. You can speak to or find a local practitioner here. In addition, I would suggest reading Becoming Your Own Banker: Unlock the Infinite Banking Concept and How Privatized Banking Really Works – Integrating Austrian Economics with the Infinite Banking Concept (which you can read for free here).

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