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Friday, March 29, 2013

Who says it's time to break up Banks too big to fail ?

For our convenience and edification Barry Ritholz lists them in his Big Picture article "Top Economists, Financial Experts and Bankers Say We Must Break Up the Giant Banks".

Plan to Cyprusize U.S. Depositors ?


Has the kleptocracy has already made plans to do to American savers pretty much what the EU wants to do to our Cypriot counterparts ?  Ellen Brown argues just that in her recent Seeking Alpha post, "It Can Happen Here: The Confiscation Scheme Planned For U.S. And U.K. Depositors", which is liberally excerpted below. 

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Confiscating the customer deposits in Cyprus banks, it seems, was not a one-off, desperate idea of a few eurozone "troika" officials scrambling to salvage their balance sheets. A joint paper by the U.S. Federal Deposit Insurance Corporation and the Bank of England dated Dec. 10, 2012, shows that these plans have been long in the making; that they originated with the G20 Financial Stability Board in Basel, Switzerland (discussed earlier here); and that the result will be to deliver clear title to the banks of depositor funds...

Although few depositors realize it, legally the bank owns the depositor's funds as soon as they are put in the bank. Our money becomes the bank's, and we become unsecured creditors holding IOUs or promises to pay (see here and here). But until now the bank has been obligated to pay the money back on demand in the form of cash. Under the FDIC-BOE plan, our IOUs will be converted into "bank equity." The bank will get the money and we will get stock in the bank. With any luck we may be able to sell the stock to someone else, but when and at what price? Most people keep a deposit account so they can have ready cash to pay the bills...

The 15-page FDIC-BOE document is called "Resolving Globally Active, Systemically Important, Financial Institutions."

If our IOUs are converted to bank stock, they will no longer be subject to insurance protection but will be "at risk" and vulnerable to being wiped out, just as the Lehman Brothers shareholders were in 2008. That this dire scenario could actually materialize was underscored by Yves Smith in a March 19 post titled "When You Weren't Looking, Democrat Bank Stooges Launch Bills to Permit Bailouts, Deregulate Derivatives." She writes:

In the U.S., depositors have actually been put in a worse position than Cyprus deposit-holders, at least if they are at the big banks that play in the derivatives casino. The regulators have turned a blind eye as banks use their depositaries to fund derivatives exposures. And as bad as that is, the depositors, unlike their Cypriot confreres, aren't even senior creditors. Remember Lehman? When the investment bank failed, unsecured creditors (and remember, depositors are unsecured creditors) got eight cents on the dollar. One big reason was that derivatives counterparties require collateral for any exposures, meaning they are secured creditors. The 2005 bankruptcy reforms made derivatives counterparties senior to unsecured lenders.

An FDIC confiscation of deposits to recapitalize the banks is far different from a simple tax on taxpayers to pay government expenses. The government's debt is at least arguably the people's debt, since the government is there to provide services for the people. But when the banks get into trouble with their derivative schemes, they are not serving depositors, who are not getting a cut of the profits. Taking depositor funds is simply theft.

What should be done is to raise FDIC insurance premiums and make the banks pay to keep their depositors whole, but premiums are already high; and the FDIC, like other government regulatory agencies, is subject to regulatory capture. Deposit insurance has failed, and so has the private banking system that has depended on it for the trust that makes banking work.

The Cyprus haircut on depositors was called a "wealth tax" and was written off by commentators as "deserved," because much of the money in Cypriot accounts belongs to foreign oligarchs, tax dodgers and money launderers. But if that template is applied in the U.S., it will be a tax on the poor and middle class. Wealthy Americans don't keep most of their money in bank accounts. They keep it in the stock market, in real estate, in over-the-counter derivatives, in gold and silver, and so forth.

Are you safe, then, if your money is in gold and silver? Apparently not -- if it's stored in a safety deposit box in the bank. Homeland Security has reportedly told banks that it has authority to seize the contents of safety deposit boxes without a warrant when it’s a matter of "national security," which a major bank crisis no doubt will be...

Another alternative was considered but rejected by President Obama in 2009: nationalize mega-banks that fail. In a February 2009 article titled "Are Uninsured Bank Depositors in Danger?" Felix Salmon discussed a newsletter by Asia-based investment strategist Christopher Wood, in which Wood wrote:
It is...amazing that Obama does not understand the political appeal of the nationalization option...[D]espite this latest setback nationalization of the banks is coming sooner or later because the realities of the situation will demand it. The result will be shareholders wiped out and bondholders forced to take debt-for-equity swaps, if not hopefully depositors.
On whether depositors could indeed be forced to become equity holders, Salmon commented:
It's worth remembering that depositors are unsecured creditors of any bank; usually, indeed, they're by far the largest class of unsecured creditors.
 
President Obama acknowledged that bank nationalization had worked in Sweden, and that the course pursued by the U.S. Fed had not worked in Japan, which wound up instead in a "lost decade." But Obama opted for the Japanese approach because, according to Ed Harrison, "Americans will not tolerate nationalization."

But that was four years ago. When Americans realize that the alternative is to have their ready cash transformed into "bank stock" of questionable marketability, moving failed mega-banks into the public sector may start to have more appeal.


Thursday, March 21, 2013

Tonight's Blogger DJ Song


... is A Remark You Made, from Weather Report's 1977 album Heavy Weather.  Enjoy !

Today it's Cyprus, tomorrow...?

Courtesy of Phil Davis' Stock World.
Just when you thought the World's money-men were only going to loot your savings indirectly, by having their government buds run paper-money printing-presses non-stop AND taxing the crap out of you to bail them out because they're too big to jail, the Euro Kleptocrats are trying out a new scheme to roll their fellow citizens more directly, by taxing their supposedly guaranteed savings deposits.

In his Seeking Alpha post, "A Better Alternative for Cyprus", Felix Salmon effectively skewers one attempt to justify this blatant act of robbery :
Andrew Ross Sorkin defends the Cyprus deal today, on the grounds that (a) Cyprus is "tiny", and "largely irrelevant to the global economy"; (b) Cyprus is a genuinely unique case; (c) it would be grossly unfair not to bail in Russian depositors, who are generally losing less than they've made in interest over the past few years; and (d) the Greek alternative "will not work in Cyprus", and that therefore (this last bit is only implied, never stated outright) the current plan is really the only option.
Notably, Sorkin doesn't attempt to defend the most indefensible part of the plan - the confiscation of wealth from depositors with sovereign deposit guarantees. While hedge-fund bondholders will get paid their full $1.4 billion on June 3, the date of Cyprus's next coupon payment, small depositors with just a few hundred or a few thousand euros in savings will lose money which the Cypriot government had promised them was safe. Why is the government's promise to foreign hedge funds more important than its promise to its own citizens? Sorkin never attempts an answer to that one.
David Zervos, quoted in the Business Insider, goes further, describing the attack by the Troika -- the EC, ECB, and IMF - on Cypriot savers as nothing less than waging a "Nuclear War On Savings And Wealth":
All of us should really take a moment to consider what the governments of Europe have done. To be clear, they initiated a surprise assault on the precautionary savings of their own people. Such a move should send shock waves across the entire population of the developed world. This was not a Bernanke style slow moving financial repression against risk free savings that is meant to stir up animal spirits and force risk taking. This is a nuclear war on savings and wealth - something that will likely crush animal spirits. This is a policy move you expect from a dictatorial regime in sub-Saharan Africa, not in an EMU member state. If the European governments can clandestinely expropriate 7 to 10 percent of their hard working citizen's precautionary savings after the close of business on a Friday night, what else are they capable of doing? Why even hold money in a bank account? Are they trying to start a bank run? 
 And Nicole Gelinas offers this assessment in City Journal:
In voting down an arbitrary, confiscatory tax, Cypriot lawmakers stuck up not only for their constituents but also for the principle of investor discipline. Merkel and the rest of European officialdom should start doing the same.
It's hard to imagine Angela Merkel instructing the Troika to take its collective foot off Cyprus' throat until AFTER she's triumphed in the upcoming German elections...


UPDATE

For other views of the Cyprus Financial Crisis and its wider implications, check out these links to The Economist (from which the above illustration was derived), Financial Sense, CNBC, and Der Speigel.