Max Keiser
Financial War Reports
It Can Happen Here: The Confiscation Scheme Planned for US and UK Depositors
2 Replies
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 US Federal Deposit Insurance Corporation and the Bank of England dated December 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.
New Zealand has a similar directive, discussed in my last article here, indicating that this isn’t just an emergency measure for troubled Eurozone countries. New Zealand’s Voxy reported on March 19th:
The National Government [is] pushing a Cyprus-style solution to bank failure in New Zealand which will see small depositors lose some of their savings to fund big bank bailouts . . . .Open Bank Resolution (OBR) is Finance Minister Bill English’s favoured option dealing with a major bank failure. If a bank fails under OBR, all depositors will have their savings reduced overnight to fund the bank’s bail out.
Can They Do That?
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.” It begins by explaining that the 2008 banking crisis has made it clear that some other way besides taxpayer bailouts is needed to maintain “financial stability.” Evidently anticipating that the next financial collapse will be on a grander scale than either the taxpayers or Congress is willing to underwrite, the authors state:
An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company [meaning the depositors] into equity [or stock]. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailed-in creditors would become the owners of the resolved firm. In either country, the new equity holders would take on the corresponding risk of being shareholders in a financial institution.
No exception is indicated for “insured deposits” in the U.S., meaning those under $250,000, the deposits we thought were protected by FDIC insurance. This can hardly be an oversight, since it is the FDIC that is issuing the directive. The FDIC is an insurance company funded by premiums paid by private banks. The directive is called a “resolution process,” defined elsewhere as a plan that “would be triggered in the event of the failure of an insurer . . . .” The only mention of “insured deposits” is in connection with existing UK legislation, which the FDIC-BOE directive goes on to say is inadequate, implying that it needs to be modified or overridden.
An Imminent Risk
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 19th post titled When You Weren’t Looking, Democrat Bank Stooges Launch Bills to Permit Bailouts, Deregulate Derivatives. She writes:
In the US, 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.
One might wonder why the posting of collateral by a derivative counterparty, at some percentage of full exposure, makes the creditor “secured,” while the depositor who puts up 100 cents on the dollar is “unsecured.” But moving on – Smith writes:
Lehman had only two itty bitty banking subsidiaries, and to my knowledge, was not gathering retail deposits. But as readers may recall, Bank of America moved most of its derivatives from its Merrill Lynch operation [to] its depositary in late 2011.
Its “depositary” is the arm of the bank that takes deposits; and at B of A, that means lots and lots of deposits. The deposits are now subject to being wiped out by a major derivatives loss. How bad could that be? Smith quotes Bloomberg:
. . . Bank of America’s holding company . . . held almost $75 trillion of derivatives at the end of June . . . .That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.
$75 trillion and $79 trillion in derivatives! These two mega-banks alone hold more in notional derivatives each than the entire global GDP (at $70 trillion). The “notional value” of derivatives is not the same as cash at risk, but according to a cross-post on Smith’s site:
By at least one estimate, in 2010 there was a total of $12 trillion in cash tied up (at risk) in derivatives . . . .
$12 trillion is close to the US GDP. Smith goes on:
. . . Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. . . . Lehman failed over a weekend after JP Morgan grabbed collateral.But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors.
Perhaps, but Congress has already been burned and is liable to balk a second time. Section 716 of the Dodd-Frank Act specifically prohibits public support for speculative derivatives activities. And in the Eurozone, while the European Stability Mechanism committed Eurozone countries to bail out failed banks, they are apparently having second thoughts there as well. On March 25th, Dutch Finance Minister Jeroen Dijsselbloem, who played a leading role in imposing the deposit confiscation plan on Cyprus, told reporters that it would be the template for any future bank bailouts, and that “the aim is for the ESM never to have to be used.”
That explains the need for the FDIC-BOE resolution. If the anticipated enabling legislation is passed, the FDIC will no longer need to protect depositor funds; it can just confiscate them.
Worse Than a Tax
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 US, 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.
The Swedish Alternative: Nationalize the Banks
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 US 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.
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http://www.zerohedge.com/news/2013-03-28/russia-next-line-restrict-cash-transactions
( Capital controls in vogue ..... When does the US step up to the plate ? )
Russia Is Next In Line To Restrict Cash Transactions
Submitted by Tyler Durden on 03/28/2013 21:42 -0400
The Russians are taking a page from the Europeans book (and not a positive one for libertarians). Given the substantial criminal activity and illegal entrepreneurship in Russia - the grey and black economies account for 50–65 percent of GDP and estimates that about $50 billion was taken out of Russia illegally in 2012 alone - the great and glorious leaders have decided to impose restrictions on cash transactions. As Russia Beyond The Headlines reports, Russia mayban cash payments for purchases of more than 300,000 rubles (around $10,000) starting in 2015 - starting with a higher ($19,500) restriction in 2014. They will alsoenforce mandatory cash-free salary payments (cash compensation accounts for 15% of GDP currently) in an effort to both bring some of the population's 'grey' income out of the shadow; and increase the volume of cash reserves in the banks. It would appear that wherever we look now, leadership are realizing that the limits of fiscal and monetary policy have been reached and now changing rules, limiting freedom, and outright confiscation are the only way to maintain a status quo. Ironic really, when the enforcement of said rules may just be the catalyst for the end of the status quo as the middle class suffers.
Russia may ban cash payments for purchases of more than 300,000 rubles (around $10,000) starting in 2015. The move is expected to boost banks’ cash reserves and put a damper on Russia’s shadow economy. However, the middle class will most likely end up having to pay the price for the scheme.Moscow is looking to kill two birds with one stone: Firstly, it wants to bring some of the population’s “grey” income out of the shadow; secondly, it wants to increase the volume of cash reserves in the banks. The government’s bill will introduce the new rule to the State Duma. The document was prepared by the Ministry of Finance and approved by the government.The restrictions on cash transactions will develop in two phases. In 2014, a ban on cash payments for purchases worth more than 600,000 rubles (about $19,500) will be introduced; the limit will then be halved to 300,000 rubles in 2015. Furthermore, the document introduces mandatory, cash-free, salary payments....Even now, cash withdrawals on payday account for around 85 percent of all ATM transactions. Moreover, in 2005–2011, cash flows more than quadrupled. According to Bank of Russia estimates, more than 90 percent of all commodity purchases in Russia are paid for in cash.The government is now trying to bring the shadow economy into the light and increase money flows into the treasury, according to Investcafe analyst Yekaterina Kondrashova. In her words, as soon as the new rules come into effect, those using unofficial wage payment schemes will encounter certain difficulties, although there could be some ways to circumvent the law.The Ministry of Internal Affairs and the National Anticorruption Committee estimate the market for money laundering and cash conversions at somewhere between 3.5 and 7 trillion rubles ($113–230 billion) — about 60 percent of the Russian federal budget.Rosstat reports that the volume of the shadow economy (“grey” money from tax evasion, compensations paid as “cash in envelopes” and violations of currency and foreign trade regulations) is at least 15 percent of the GDP, according to Ricom-Trust senior analyst Vladislav Zhukovsky.Given the substantial criminal activity and illegal entrepreneurship, the grey and black economies account for 50–65 percent of GDP. Even former Central Bank Chief Sergey Ignatyev had to admit that about $50 billion was taken out of Russia illegally in 2012 alone.There is another side to the move toward plastic, however. Cash-free payments will result in higher prices for some goods and services. The middle class will suffer the most, because the “risk group” includes property and automobile transactions. The luxury segment will also be affected, including customized tours....
https://hat4uk.wordpress.com/2013/03/28/cyprus-the-mobsters-why-the-descent-into-global-panic-is-now-almost-unavoidable/
CYPRUS & THE MOBSTERS: why the descent into global panic is now almost unavoidable
The Slog plots the course of a deadly global chain reaction
How the rape of Cyprus will torpedo the banking system
I’ve been moving money around over the last few days. I still am, and I don’t know many people in my immediate circle who aren’t. We all seem to have the same aim: to be in the safest place with the safest currency. And the catalyst for all of us busily doing this is specifically, the Cyprus bank heist involving depositor confiscation; and leading on from that, the growing evidence that the political and financial Establishments globally have every intention of applying such glorified State theft in the future.
What I want to do in this piece is posit a hypothesis about just how nasty this could all get – and how quickly. But first let me offer you some evidence thus far that all trust in Sovereigns keeping their fingers out of our tills has disappeared for the majority of those who are awake. As I’ve said before, nothing gets Fritz, Pierre, Tommy or Vladimir off the sofa quicker than a Sovereign with a bad kleptomania habit.
Simply because French President Francois Hollande pushed through a raft of tax rises and stepped up his campaign against the rich – no obvious grand larceny involved – France suffered a surge of capital flight in the second half of 2012. The net loss in just two months was over €50 billion. Six months before that – when the Spanish situation looked dire – €100 billion flew away in ten weeks.
On Tuesday, a German opinion poll showed that only 2 in 5 Germans trust Merkel when she says their money is safe in a bank. That is incredibly significant.
Last weekend, the leader of Britain’s fast-growing anti EU Party UKip advised British expats to put their money in Spain somewhere offshore. Hardly anyone dismissed his comment as scaremongering.
Yesterday, credit agency Moody’s issued a strong advisory document to clients opining that the EC/ECB lunacy in Cyprus had set a dangerous precedent for future rescue efforts, and by definition made the region more prone to bank runs if depositors in other debt-strained countries think their money is no longer safe.
“Policymakers appear very confident that market conditions are benign enough and that they have the tools to avoid contagion to other peripheral economies and their banking systems,” Bart Oosterveld, managing director of sovereign risk at Moody’s, told Reuters,”but we think that that confidence may well be misplaced.”
Last night into the early hours, I spoke to five senior manufacturing corporates in the US. Of the five, one was already withdrawing money from Europe, three were actively considering it, and one was due to raise it at a Board meeting this Friday. None of them were doing nothing about it.
As I’ve said previously here at The Slog, the trouble with allowing a piece of Dutch Gouda like Jeroen Dijsselbloem to chair the EC’s FinMin group is that while he might be terrific with red wine and French bread, he knows less than nothing about econo-financial anthropology, and he has never worked in a proper commercial capacity. Neither he – nor Rehn, Schäuble, Asmussen, Moscovici, or the rest making up the numbers – either like or understand genuine free markets and the way they operate. They are just so many Canute courtiers telling the Fuhrerine in Berlin that she can push the waves back…or contain them in a bottle.
But Cyprus taught us how quickly the big, hot and smart money disappears. It happened so fast, in fact, that the Cyprus Bank depositors left behind – the entirely innocent in most cases – will pick up the bill. Not oligarchs, not ESMs, not ECBs, and most definitely not Berlin: just ordinary savers who have amassed €100,000 euros during a lifetime. People like this are not the self-styled élite: they’re you and me and people we know. (And if it’s not you, then you have my genuine sympathy…but it should still concern you).
So: we have some evidence. We know human nature. We see the danger. And we have a situation complicated by the fact that there is, as regards the ECB, only weekly reporting of capital flight from the eurozone. Research and experience show that this isn’t fast enough: a week is a long time in Cyprus.
For Mario Draghi, however, I’d imagine it’s too frequent: what Dracula in his dark underground cave would like is no reporting of it. But there you go: he’s stuck with it…or is he? The past is no guide to the future…especially not in the EU. Go to the ECB website, and you will note there that the Central Bank hasn’t releasedany financial stats for over a week now. You may also spot that the open-request search engine box has disappeared. Monetary, financial markets and balance of payments statistics haven’t been updated at all for over a month.
Yesterday’s EC FinMins document (about which Djisselbomb knew nothing, it seems) contained this rather toxic ‘Emergency Decree’ style paragraph (my emphasis):
‘Member States may introduce restrictions on capital movement, including capital controls, in certain circumstances and under strict conditions on grounds of public policy or public security. In accordance with the case law of the European Court of Justice, measures may also be introduced for overriding reasons of general public interest.’
So then, strict rules…followed by, er, measures. Measures? What kind of measures guys? I suspect they mean “we can do anything we want in the public interest”. Uh-huh.
What we can already see – in the Target2 data – is that the eurozone was severely lopsided long before the Cyprus bank job. Target2, by the way, stands for Trans-European Automated Real-time Gross Settlement System. It is the much-abused payments system that conveniently enables citizens across the euro area to settle electronic transactions in euro. And at just over €500 billion, for example, TARGET2 claims on the Eurosystem are the largest and fastest growing item on the Bundesbank’s balance sheet. Very mind-concentrating if you work in Frankfurt, or rule from Berlin.
Anyway, capital flight data. With its usual prescient accuracy, PIMCO opined recently (my emphasis) that:
- The large TARGET 2 positions developing among national central banks in the eurozone reflect capital flight from the periphery to the core, and de facto introduce transfer and burden sharing elements of a common fiscal policy.
- Monetary policy ends up substituting for fiscal policy without going through the same democratic channels that governments’ expenditure and taxation decisions entail. Taxpayers in the eurozone are contingently liable for eventual losses incurred by the Eurosystem’s monetary policy operations.
And also, of course, they’re the ultimate payees when f**kwits at the top can’t even close a bank competently. But to the above analysis now, we need to add ‘bank depositor’ to the term ‘taxpayer’. It’s the same poor mugs, just being stung twice. The pocket-book is emptying, the salary is standing still, there’s no interest to live on, and there’s that €100K nest egg sitting in RBS. Dear God, what a nightmare thought for anyone: Stephen Hester having direct access to your money.
Nothing – and I mean nothing – directs you to eurozone capital flight data on the ECB website. It is missing from all the usual places: I’m sure it’s there somewhere, but the point is it’s not easy to find. Again, no doubt the Eunatics think this is a smart move, but it isn’t. It will just make depositors in the eurozone more suspicious. Beyond the ECB’s site, Google ‘ECB capital flight data now’ or variations on that theme, and nothing comes up beyond ancient papers or the capital leakage from Spain over a year ago.
But enough of this: deliberate bureaucratic obfuscation is not exactly news. My fear this morning is that what we’re going to see is a capital flight chain reaction that goes way beyond either Cyprus or the borders of the EU.
Within the EU itself, The Slog exclusively revealed yesterday that Djisselbloem already has a concerted, worked out process for establishing capital controls right across the eurozone. In the last 24 hours I have spoken with twenty or more opinion leaders in investment, banking and currency controls. There was a unanimity among those people that the entire eurozone will have blanket currency controls within two months at the latest…because without that, the capital flight would be irreversibly disastrous for the region. It is in fact significant that none of those with whom I spoke were even slightly surprised by The Slog’s scoop: the main fear they had was whether the eurogroup would get its act together in time to stem the outflow.
Here’s how it will develop – in my view. Many US corporations will move their eurocash back to the US. Some, however – and millions of richer US citizens – will have been alarmed by Bernanke’s yes-no-maybe-hard-to-tell-panic-not-sure ‘answer’ to a question at his last Fed press conference about Washington thieving from private bank accounts. Throughout the West and the Anglosphere, in fact, evidence built up last week to demonstrate that almost every State in those regions had a Djisselbloem Plan to steal our money, and contingency plans to control money flows.
“Given the current atmosphere,” a senior wealth adviser told me this morning, “Why would you not get your money out?”
My hunch is that the vast majority of the capital flight will go to Asia. Once there, it will do one or more of the following things: buy property, buy gold, or buy dollars. Although we are talking enormous sums of property money here, we aren’t talking about anything beyond perhaps 100,000 people: the Glitz Bricks trend I identified seven months ago will simply heat up. Thus there is unlikely to be a bubble there: but there will, I’m sure, be a rapid advance in the price of goldbullion. And the Dollar must strengthen as millions of private investors in turn see that as the best currency for their liquidity to rest in while they think about it.
Put those two factors together, and you have a major problem for US exports, and a major devaluation of Sterling. The rare (not to say unique) result of those will be a US debt and deficit getting bigger faster, and a run on the Pound coupled with declining UK exports in a depression-spiralling world. If the Fed can no longer fiddle the gold valuations (it’s an expensive process) then there will in turn be a run on America’s stock markets towards bullion, and a knackered US Bonds sector terrified by Washington’s debt trap.
You don’t have to be a rocket scientist to work out what happens next: things will get Draconian, citizens will at last get angry, and politicians everywhere will panic as they realise that citizens with less and less money simply cannot pay more and more tax. Not only will they not pay: they will finally grasp how a few gangsters and incompetents have screwed them royally.
The prow of the Titanic is out of the water. Looking at the situation today in an atmosphere of rural calm here in France, I find it very hard indeed to escape the conclusion that we are reaching the exponential acceleration stage of the econo-fiscal globalist model’s descent to the seabed.
Having so stupidly let the genie out of the bottle, Brussels-am-Berlin have at most a week to lasso the ether and get the bugger back in again. I doubt very much if they can do it.
Any more than I can blend torpedoes, Canutes, Titanics and genies into a consistent metaphor. Stay tuned.
http://www.zerohedge.com/news/2013-03-28/when-will-deposit-haircuts-take-place-other-european-countries-complete-bad-debt-imp
When Will Deposit Haircuts Take Place In Other European Countries?
Submitted by Tyler Durden on 03/28/2013 11:55 -0400
- Belgium
- Credit Suisse
- Eurozone
- Germany
- Greece
- Non-performing assets
- non-performing loans
- Portugal
- Reality
When all is said and done, what happened in Cyprus over the past two weeks, is nothing but the culmination of re-marking the "assets" in the country's financial system (which as noted previously, were a preponderance of worthless Greek bonds and countless other non-performing loans), long priced at assorted "myth" levels, to a long overdue reality.
As a result of delaying resolving the mismatch between non-performing assets and liabilities for years, the resolution was one which saw some €16 billion of the total asset base impaired, which in turn necessitated the impairment of billions of deposits: the primary liability funding the Cypriot financial system.
Furthermore, as a result of the "Freudian Slip" by the Eurogroup's new head earlier this week, we know that Cyprus will be the template for all future bank resolutions, which seek to avoid a democratic popular vote of depositor self-impairment (a vote which is now known will never actually pass) and proceed to restructuring the banking sector a la carte, by liquidating bad banks and impairing liabilities to the point where the balance sheet is once again viable (however briefly).
The bottom line is that at its core, it is all simply a bad-debt problem, and the more the bad debt, the greater the ultimate liability impairments become, including deposits. Which means that the real question in Europe is: how much impairment capacity is there in the various European nations before deposits have to be haircut? Thanks to Credit Suisse we now know the answer.
The chart below shows the liability breakdown for various Eurozone nations, of which the key line item is the Total Deposits, and which in Europe comprises the bulk of bank funding. It becomes obvious why Cyprus had no choice but to crush depositors: they make up a whopping 84% of all liabilities (the highest in Europe and matched only by Greece), so assuming all other liabilities are liquidated, there still would be impairments if the total bad assets (assuming all bank assets are loans which in Europe, unlike the US, is more or less the case) pushed above 16% which in Cyprus they did.
So applying some simple balance sheet equality math, one can quickly calculate how much of a "Bad-Debt Impairment" assorted European financial systems can withstand before they too have no choice but to follow in Cyprus' footsteps and begin crushing depositors, who in bankruptcy court are known by a different, less friendly term:General Unsecured Claims.
The resulting chart is below:
Not surprisingly, in first place is Cyprus which underwent precisely the deposit haircut exercise that would have befallen Greece as well (at the same bad debt capacity), if only Greece had an easily expendable, for political reasons, deposit class - Russian Oligarchs. However, as more and more bad-debt accumulates within the system, the ability to provide a liquidity buffer, instead of resolving what is fundamentally a solvency issue, evaporates, and soon Greece, then Belgium, the Slovenia, then Spain, then Portugal, and so on, will have to address which, as Cyprus clearly demonstrated, is a solvency problem, not liquidity!
When will such days of reckoning happen? Ask the Cypriots: they had no idea they would wake up one day with virtually all of their deposits over €100,000 wiped out. Point being - nobody knows, or more specifically, fundamentally this is a political decision, usually one which is taken ahead of elections (i.e., those in Germany this September), and which has nothing to do with actual finances.
The reality however is that all of Europe's banks have a soaring bad-asset overhang, and sooner or later it will have to be resolved.
It is now common knowledge that such resolution will not take place via additional liquidity injections, but through impairment of the various liability classes as per the reverse waterfall of seniority: first equity, then capital and reserves then junior debt, and finally, senior debt and deposits (with secured senior debt last).
The lesson here is: do your homework, and know your bank. If one's deposits are in a bank that has, or is rumored to have, many bad loans, then pull your money and either put it in a safe bank, put it offshore, or just keep it under the mattress.
Because what happened in Cyprus is now, despite all promises to the contrary, the template for what will happen to all the countries to the right of Cyprus on the chart above.
It's only a matter of "when."
Next up Slovenia ?
http://www.zerohedge.com/news/2013-03-28/when-unique-template-bailout-not-bailout-when-its-slovenia
When Is A "Unique Template" Bailout Not A Bailout? When It's In Slovenia
Submitted by Tyler Durden on 03/28/2013 12:17 -0400
As we noted yesterday, Slovenia appears the inevitable next player set to experience the non-template of uninsured depositor bail-ins and the good-bank-bad-bank solution that was uniquely applied to Cyprus. However, global investors should rest assured as this miracle of modern financial engineering will not be a detriment to the nations as the Slovenian banks will be internally recapitalized (in the latest proposal) by a government guarantee. Simply put, in the world of European accounting idiocy, Reuters reports "this would not result in an immediate spike in the government's debt level, because the authorities would initially provide banks with guarantees rather than newly issued securities." Which leaves us asking, just how much is a one-week-old Slovenian government's guarantee worth in real money? And why didn't the Cypriot government just 'promise' to do 'whatever it takes' to support their banks' bad assets? Of course the chance of the bailout happening just surged:
- *SLOVENIA WON'T NEED BAILOUT, ECB'S KRANJEC SAYS
Slovenia has been thrown into the spotlight as the next eurozone country likely to seek an international bailout, given the fragile state of its banking sector....While the government insists that Slovenia will be able to get through the crisis under its own steam, a deal with international lenders could provide a key backstop to fears of contagion, say analysts."Slovenia is now inevitably heading to a bailout, the eurozone shot itself completely in the foot following the Cyprus issue," said Tim Ash, head of EM research ex-Africa at Standard Bank...."There is a pocket of interest [among investors], so an international bond issue could work, but they would have to pay up massively," said an origination official. "They would need some tailwind as well."The government might also need to target US dollars, rather than euros. "In euros no way," said a second banker. "US dollar investors are used to volatility. They definitely still have access to US dollars."..."Market momentum is moving against Slovenia, and quick," said Ash. "It will be tough and expensive for them to put a new issue to bed without significant backstopping from the Troika."...Part of the uncertainty still surrounding the country is due to adjustments that the new governing coalition - led by Prime Minister Alenka Bratusek - has pledged to make to the original 'bad bank' proposal put forward by the previous Janez Jansa administration.One of the key tweaks now under consideration, according to RBS, is the creation of internal bad banks within each of the country's largest financial lenders, postponing any transfer of toxic assets to an external bank asset management company to a later date."Initially, bad assets would be transferred to the internal bad banks and backed simply by government guarantees," said Abbas Ameli-Renani, an emerging market strategist at RBS.Under the original proposal, assets would have been transferred immediately to the BAMC in exchange for newly-issued government bonds.While there will be a simultaneous recapitalisation of banks under both arrangements, the new version would not result in an immediate spike in the government's debt level, because the authorities would initially provide banks with guarantees rather than newly issued securities.One of the downsides, however, is that the plan will keep bad assets on banks' balance sheets and under the same management.
http://www.zerohedge.com/news/2013-03-28/italys-bersani-fails-form-government
Italy's Bersani Fails To Form Government
Submitted by Tyler Durden on 03/28/2013 14:22 -0400
Surprise!
- *BERSANI TOLD ITALY PRESIDENT HE CAN'T FORM GOVT
- *BERSANI SAYS HE FACED UNACCEPTABLE PRECONDITIONS FROM PARTIES
and so,
- *BERSANI: NAPOLITANO WILL CONTINUE TO EVALUATE POSSIBLE OPTIONS
Leaving the door open for the possibility of a 'caretaker' or technocrat government but most likely - new elections (and given the increased support for Grillo, this could be yet another storm in a teacup for the US markets to shrug off).
While this scenario was an absolutely certain outcome, here are the possible next steps viaOpenEurope:
Bersani throws in the towel and hands his mandate back to President NapolitanoThis wouldn't automatically mean new elections - which, in any case, can only be called by the new Italian President when he enters office in mid-May. Napolitano would have to start a new round of talks and then decide what to do. As we explained in previous blog posts, the most likely outcome would be the Italian President proposing a temporary 'national unity government'.The new cabinet would be led by someone from outside of 'traditional' party politics (the word 'technocrat' seems to have gone out of favour in Italy these days) - but the ministers could indeed come from political parties. It is unclear whether Berlusconi's party would grant its support, but this solution may have some chances of winning the Five-Star Movement's backing. This 'national unity government' would pursue a clearly limited agenda, and pave the way for early elections - perhaps as early as next year, but with a new electoral law.It's all very much up in the air in Italy at the moment, but in case of a definitive breakdown of talks everyone will suddenly be reminded of which country should be the eurozone's real concern.
Sadly, not with GETCO's no-volume levitation algos now left in charge of the "market", "everyone" is more likely "no one."
http://www.acting-man.com/?p=22378
( Think what happened in Cyprus can't happen here in the US ? Just check the chart of deposits versus reserves ! Then consider what happens in the event of a serious bank run.... )
Cyprus Forced Into Bailout Deal
Do you think that depositors in Cyprus are being taxed? That their money is being taken from them to go to the government in Cyprus or to Europe? Most analysis of the Cyprus bailout is wrong on this point.
Cypriot banks are like all banks in one respect. They raise capital to buy assets that earn a yield, keeping the difference between what they must pay for the money and what they earn on it. Like all banks, they raise money first from equity investors. Equity investors get to keep all of the gains on the upside and therefore are first exposed to losses on the downside.
Banking uses leverage, which multiplies gains when assets rise and losses when they fall. Imagine using 20:1 leverage. You buy a house for $100,000 using $5,000 of your own money (equity) and $95,000 of borrowed money. If the house rises to $110,000 you have tripled your $5,000 of initial equity to $15,000. If the house falls to $94,000 you have negative equity. That may be fine for a homeowner so long as he can pay the interest and principal when due. It’s not fine for a bank.
Banks raise money next from junior, unsecured creditors. Equity capital is expensive capital. Borrowing money is cheaper than selling a stake in the business. Next on the capital hierarchy are senior, secured creditors. Borrowing at this tier is cheaper because the risk of loss is lower. Not only would the shareholders have to be wiped out first, but also the junior creditors. Additionally, secured creditors can take the assets pledged as collateral.
Finally, banks raise money from depositors. Depositors get the lowest rate of interest, which is the tradeoff for having the strongest position in case of bankruptcy. In addition to not suffering any losses until all other classes of capital are zeroed out, depositors also enjoy a government guarantee today, at least up to a certain amount (€100,000 in the case of Cyprus)—so long as the government can pay. It is important to note that while the government maintains the fiction of a “fund” to cover such losses, in a bank crisis the losses are imposed on the taxpayers. Today in the US, for example, the FDIC has a tiny reserve to cover an enormous deposit base.
FDIC : Bank deposits – chart source unknown.
In the modern world, government bonds are the key security in the financial system. They are defined as the “risk free asset” by theory and regulatory practice. They are used as collateral for numerous other credit transactions. And banks hold them as core assets. Let’s focus on that. A bank borrows from depositors and buys a government bond (and not entirely by choice). There are two problems with this.
First is duration mismatch. The bank is borrowing from depositors, perhaps via demand deposits, and then buying multiyear bonds. Read the link to see why this will sooner or later blow up.
Second, the government bond is counterfeit credit. Governments are borrowing to pay the ever-expanding costs of their welfare programs and the interest on their ever-expanding debt (it is no help that they lower the rate of interest to keep down the interest expense—this increases their burden of debt and destroys capital). Governments have neither the means nor intent to ever repay the debt. They just endlessly “roll” the liability, selling new bonds to pay the principal and interest on old bonds at maturity. This would be like taking out a new credit card to pay off the old one. It “works” for a while, until it abruptly stops working. It has stopped working in Greece; it will stop working everywhere else at some point.
The Cypriot banks bought lots of government bonds, including the defaulted bonds of bankrupt Greece. They lost the euros that were invested by their shareholders, bondholders, and a majority of what was lent to them by depositors. In a way it is accurate to say that the government took it. However, his taking did not occur this week. It occurred when governments sold them fraudulent bonds over many years.
The money is now long gone.
Call it what you will, the government, central bank, and commercial banks of Cyprus are bankrupt; they needed a bailout—new credit from outside the country to postpone collapse. In a week of drama, posturing, demands, reversals, and a vote in parliament, a deal was struck. No one is likely to be happy. Here are the key points so far as we can glean them:
· A fresh tranche of €10B will be lent to Cyprus
· Funds to come from (presumably?) the “Troika”: ECB, EC, and IMF
· Shareholders and bondholders in Laiki (2nd biggest bank) will be wiped out
· Laiki deposits under €100,000 will be transferred to Bank of Cyprus
· Larger deposits will bear big losses (not specified at this time)
· No bailout funds will go to Bank of Cyprus (presumably to government?)
· 50% or more of large deposits in Bank of Cyprus converted to equity
· “Temporary” capital controls will remain when banks reopen Thursday
· CEO of Bank of Cyprus just resigned, fueling rumors it too will collapse
The Europowers have a big dilemma. If they allow euro backwardation to persist much longer, or they open a schism in the euro where Cyprus euros are not fungible, they risk the collapse of the euro. On the other hand, if they do not impose capital controls then depositors would run on the Bank of Cyprus and it will collapse (acting man has inter alia been covering the story that large Russian depositors have found ways to make withdrawals even though the banks have been closed, using branches located outside the country).
We hope that if the reader gets nothing else from this article, at least he now understands that the Cyprus banks lost their depositors’ money over a long period of time. They used leverage to buy assets that collapsed and now they are insolvent. External parties are providing a bailout (which Cyprus will never be able to repay). For the first time in this crisis, the bailout does not cover depositors in full. Losses are to be suffered by not only shareholders and bondholders, but even by depositors. We expect future bailouts to incorporate this feature.
It is good that Eurozone leaders are beginning to assert that banks should fix themselves. In a free market, there is no such thing as a bailout that takes money from taxpayers to give to those who made a mistake. Hopefully they will take this to the next logical step and realize that bank solvency is impossible under the regime of irredeemable paper currency wherein the government bond is defined as the “risk free asset”. Gold is the risk free asset. Everything else has a non-zero risk of default.
We will continue to monitor and publish the gold basis to see when world markets begin to shift away from trusting the banking system, when people are willing to forego a yield to avoid having to trust a counterparty. When this happens, we expect gold to move more significantly towards gold backwardation.
Compared to the first proposal last week, this bailout is less unfair (we can hardly call any bailout fair)—at least shareholders go first, then bondholders then depositors.
and.....
http://www.zerohedge.com/news/2013-03-27/marc-faber-i-am-sure-governments-will-one-day-take-away-20-30-my-wealth
Marc Faber: "I Am Sure Governments Will One Day Take Away 20-30% Of My Wealth"
Submitted by Tyler Durden on 03/27/2013 21:03 -0400
We cautioned readers in 2011 that in a broke world in which the ridiculously named "muddle-through" has miserably failed, a global wealth tax seeking to expropriate some 30% of all financial assets is coming. As a reminder, back then we said that "all attempts to eliminate the excess debt have failed, and for now even the Fed's relentless pursuit of inflating our way out this insurmountable debt load have been for nothing.... The only way to resolve the massive debt load is through a global coordinated debt restructuring (which would, among other things, push all global banks into bankruptcy) which, when all is said and done, will have to be funded by the world's financial asset holders: the middle-and upper-class, which, if BCS is right, have a ~30% one-time tax on all their assets to look forward to as the great mean reversion finally arrives and the world is set back on a viable path."
Few took it seriously, and why should they - after all the market has been blissfully rising before and ever since then, which implies everything was ok, right? Wrong, as those who are lining up right now in the Cyprus late of night not to buy a shiny new iTrinket, but to access a measly €300 of their own money would promptly admit. Naturally, if more of our Cypriot readers had paid attention, they would have far more of their own money at their disposal right now, instead of having to beg Merkel's emissaries for a €300 handout tomorrow.
Now, a year and a half later, the realization that the global wealth tax is not only coming but is inevitable in practically every developed country, is finally sinking in, as this interview with Marc Faber confirms: "Until now, the bailouts in Europe and the U.S. were at the expense of the taxpayer. And from now onwards, in my view, the bailouts will also be at the expense of the asset holders, the well-to-do people. So if you have money I am sure the governments will one day take away 20-30% of my wealth."
He is correct, but probably optimistic.
The interview highlights:
Faber on whether he's participated in the equity rise in the U.S.:
"I think that I was relatively positive about U.S. stocks since March 2009. I haven't been shorting any stocks since 2009. The U.S. march is up and consumer confidence is down. Emerging markets are performing badly relative to the U.S., the dollar is strong, indicating a tightening of international liquidity. I do not think the U.S. market will go up a lot from here. I rather think there is now considerable downside risk."
On whether Europe can repair its house:
"They can repair it and actually Europe now has a current account surplus, which is positive. But obviously the economy is contracting. We are in recession in Europe. This will have an impact on the corporate profits of U.S. corporations as well because 40% of S&P earnings come from overseas, but the bulk actually comes from Europe and not emerging countries. I think that corporate profits in the U.S. will continue to contract as they have actually -- according to S&P -- contracted in the first quarter of 2012."
On why gold hasn't held up as a safe haven:
"When you print money, the money does not flow evenly into the economic system. It stays essentially in the financial service industry and among people that have access to these funds, mostly well-to-do people. It does not go to the worker. I just mentioned that it doesn't flow evenly into the system. Now from time to time it will lift the NASDAQ like between 1997 and March 2000. Then it lifted home prices in the U.S. until 2007. Then it lifted the commodity prices in 2008 until July 2008 when the global economy was already in recession. More recently it has lifted selected emerging economies, stock markets in Indonesia, Philippines, Thailand, up four times from 2009 lows and now the U.S. So we are creating bubbles and bubbles and bubbles. This bubble will come to an end. My concern is that we are going to have a systemic crisis where it is going to be very difficult to hide. Even in gold, it will be difficult to hide."
On whether the raiding of bank accounts in Cyprus set a precedent for Europe:
"MF Global, the depositors were also raided. It is nothing unusual. Philosophically I believe that we shouldn't have deposit insurances, blanketed insurances by governments because it would force savers to be very careful with which bank they would deposit the money. The good banks would pay very low interest and take low risks and the banks that take high risks would have high interest. By the way, in Cyrus, banks were paying very high interest like in Lebanon at the present time I can get 6% on my deposits. So the depositors should have known that something is dangerous, but I would say that the principal now is very important to understand. Until now, the bailouts in Europe and the U.S. were at the expense of the taxpayer. And from now onwards, in my view, the bailouts will also be at the expense of the asset holders, the well-to-do people. So if you have money -- like I am concerned -- I am sure the governments will one day take away 20-30% of my wealth."
http://openeuropeblog.blogspot.com/2013/03/when-months-turn-into-years.html
Wednesday, March 27, 2013
When months turn into years...
About those "temporary" Cypriot capital controls:
From Iceland’s letter of intent to the IMF dated November 2008, highlighting the intention to remove capital controls “as soon as possible” (click to enlarge):
From Iceland’s letter of intent to the IMF dated November 2008, highlighting the intention to remove capital controls “as soon as possible” (click to enlarge):
A statement by the Central Bank of Iceland dated July 2009:
Yet four years on, capital controls are still going strong....“In order to remove the capital controls in a gradual, sequenced manner without inducing instability, it is necessary to reduce uncertainty about and create sufficient confidence in the economic programme. Many important steps have been taken in this direction in the recent term. These should make it possible to begin lifting the controls in the next few months.”
http://www.silverdoctors.com/canada-includes-bail-in-provision-for-systemically-important-banks-in-2013-budget/