Wednesday, April 3, 2013

The Frightening Truth About The Cyprus "Bail In"

"If there is a risk in a bank, our first question should be: 'Ok, what are you the bank going to do about that? What can you do to recapitalise yourself?' If the bank can't do it, then we'll talk to the shareholders and the bondholders. We'll ask them to contribute in recapitalising the bank. And if necessary the uninsured deposit holders: 'What can you do in order to save your own banks?'" - Jeroen Dijsselbloem, March 26, 2013 (bold edit is mine, I sourced this quote here: LINK )
That statement - and specifically the phrase used in bold - is directly taken from a global banking agreement for bank rescues that was ratified in 2011 by the G20 members (further elaborated below). Although the U.S. media is not reporting this fact, it is extremely important to know so that you can take the necessary pre-cautions to protect your money.

Like everyone else, when I saw the first reports that bank depositors in Cyprus banks where going to take a loss on their bank deposits, I was in shock and disbelief. At first it was all depositors, but as the situation unfolded, the deal - known as a "bail-in," was restructured to protect depositors up to their Government insured deposit amount of 100,000 euros. The amount of loss that will be suffered by deposits in excess of 100k euros has not been solidified, but the latest reports suggest it could be as high as 60%.

What most people do not realize is that when you deposit your money in any bank, from an accounting and legal standpoint, you are loaning the use of that money to the bank. In other words, you become a creditor to that bank. Look at any bank balance sheet and you'll see that "deposits" are listed in the "Liability" section of the balance sheet. Defined as such, it means that as a bank depositor, you are exposing yourself to the ability of the bank to give you back your money when you want it. The bank is your legal counter-party.

The only reason people believe that their money is completely safe in a bank is the existence of Government-sponsored deposit insurance. The only difference between what is happening in Cyprus now and what happened in the U.S. in 2008 is that the U.S. has the ability to print its own currency in order to bailout the banks and fund depositor insurance. Cyprus is dependent on the ECB to make that decision.

In addition to printing money, the big bank bailouts in this country and in Europe were funded by the taxpayers. That's exactly what TARP is and, most people are unaware of this, but the Treasury (i.e. the taxpayers) placed a guarantee on a significant portion of the assets the Fed assumed from banks in exchange for providing immediate liquidity. If these measures were not implemented, it is likely that U.S. bank depositors would have suffered the same fate as their Cypriot counter-parts.

Because the use of taxpayer-funded bailouts would likely no longer be tolerated by the public, a new bank rescue plan was needed. As it turns out, this new "bail-in" model is based on an agreement that was the result of a bank bail-out model that was drafted by a sub-committee of the BIS (Bank for International Settlement) and endorsed at a G20 summit in 2011. For those of you who don't know, the BIS is the global "Central Bank" of Central Banks. As such it is the world's most powerful financial institution. I sourced a copy of this Agreement here: LINK

I read through the Agreement and was quite stunned by the terms of the agreement and also by the implications for any bank depositor in any country. The bank rescue model lays out a complete, systematic procedure for the rescuing and restructuring of any institution that is considered a "SIFI" - a Systematically Important Financial Institution. Here is a link to the Agreement:  LINK

The Preamble specifically states:
The objective of an effective resolution regime is to make feasible the resolution of financial institutions without severe systemic disruption and without exposing taxpayers to loss, while protecting vital economic functions through mechanisms which make it possible for shareholders and unsecured and uninsured creditors to absorb losses in a manner that respects the hierarchy of claims in liquidation.
As you can see the agreement references specifically avoiding more taxpayer bailouts. It also refers to bank deposits in excess of Government insured amounts as "uninsured creditors." This is essentially the standard legal bankruptcy model which uses creditor hierarchy (secured lenders, unsecured lenders, preferred equity, equity) and applies to the rescuing of banks.

This is very important to know about and understand because what is commonly referred to as a "bail-in" in Cyprus is actually a global bank rescue model that was derived and ratified nearly two years ago. It also means that bank deposits in excess of Government insured amounts in any bank in any country will be treated like unsecured debt if the bank goes belly-up and is restructured in some form.

Because this is a legal Central Banking agreement that will be applied globally, it also means that U.S. bank depositors will not be immune to this rescue mechanism. It means that no one should keep any amount in any bank that exceeds the FDIC guarantee. In fact, I would recommend only keeping enough money in the bank to fund your monthly or quarterly bill paying requirements. Any amount in excess of FDIC deposit insurance will be exposed to the risk bankruptcy.


  1. Mattress futures. Go long.

  2. Canada Takes Cyprus Model - Bolivar Failing - Global Pigfest

    Even nations are getting in on the action as Venezuela is allowing the financiers to front run its devaluations.

    "Unlike the first devaluation however, the second was done behind closed doors with local financial interests placing bids on dollar exchange transactions ahead of the country’s citizenry...

    The chart shows that when measured against gold, the Venezuelan Bolivar has “collapsed” from Bs. 860 in 2005, to what appears to be over Bs. 20,000 today. This represents an over 23-fold move (2300%) in gold over the last eight years.

    Additionally, the CBC seems to have confirmed that Canada is concerned about bank failures and is adopting the Cyprus model for their own bailout plans.

    It seems a bit dodgy that both NZ and Canada have taken these steps, while reassuring everyone, rather smugly, that their banks cannot fail.

    Are you kidding me? In the event of a major global derivatives event, I would imagine that nothing in the banking system is safe.

    And lastly, I hear from Bloomberg that American Banks with European money market funds intend to deal with their negative returns by quietly 'breaking the buck.' Bail-in, everybody.

  3. Helicopter QE will never be reversed
    Readers of the Daily Telegraph were right all along. Quantitative easing will never be reversed. It is not liquidity management as claimed so vehemently at the outset. It really is the same as printing money.

    Columbia Professor Michael Woodford, the world's most closely followed monetary theorist, says it is time to come clean and state openly that bond purchases are forever, and the sooner people understand this the better.

    "All this talk of exit strategies is deeply negative," he told a London Business School seminar on the merits of Helicopter money, or "overt monetary financing".

    He said the Bank of Japan made the mistake of reversing all its money creation from 2001 to 2006 once it thought the economy was safely out of the woods. But Japan crashed back into deeper deflation as soon the Lehman crisis hit.

    "If we are going to scare the horses, let's scare them properly. Let's go further and eliminate government debt on the bloated balance sheet of central banks," he said. This could done with a flick of the fingers. The debt would vanish.

  4. Dave, now you're getting into the meat, and even down to the bone. But, think about it. What does this mean for gold? You and I both know that the BIS is also the interbank gold broker for it's member central banks across the globe.

    When the BIS desgnates uninsured depositors as "subordinate to systemic debt expansion" it is in fact signaling it's acquiescence to end the current system and to return gold to it's rightful place as a monetary wealth asset.

    It is no coincidence that it's member banks have been furiously accumulating (or so we think) gold ever since, except that they always had it all along, they were just calling in their lease arrangements.

    So paper gold is doing EXACTLY what everyone expects physical gold NOT to do, plunge to zero. But take heart, as the price of physical gold is now COMPLETELY separate from the falling paper price. They have already diverged, in fact years ago, for to move physical discreetly and securely in large amounts was never known to the public. When gold in size truly flowed interbank 14 years ago it traded at a paper dollar price that I pause to cite here as it would mark me a lunatic.

    But be patient my friend. the paper will burn, and holders of physical will survive the inferno.

  5. Vietnam banks to issue only genuine Gold loans

    HANOI(BullionStreet): Vietnam banks are allowed to finance genuine working capital requirements of jewellery traders and manufacturers, but only with the approval of the central state bank.

    According to a statement by country’s central bank, SBV the regulation would strengthen the State's management of gold trading activities.

    The SBV also told credit institutions that they should not turn gold deposits into other currencies, including dong. They also must not use gold deposits as collateral for loans from other credit institutions.

    The central bank has asked credit institutions to carry out measures to collect their loans that are now in gold, or turn these outstanding loans into dong-denominated loans.

    The banks are not allowed to extend terms on any loans in gold.

    Also, according to the SBV document, customers must pay fees to credit institutions that keep their assets, including gold. However, the fees must be fully disclosed.

    In an aim to manage gold services, the SBV will not allow credit institutions to pay interest rates, dividends, fees and other financial forms to depositors of gold.

    The SBV decision is expected to slow down the number of gold deposits and curb the practice of commercial banks liquidising gold deposits for lending or for use as collateral for inter-bank loans.

    The country's gold imports in the first quarter unexpectedly surged seven-fold against the same period last year.

  6. How will we ever know how twisted and conflicted our policy makers really are if they can operate legally in a secret world? They could sell us all out and we would never know.

    Secrecy for Sale: Inside the Global Offshore Money Maze

    1. Leaks reveal secrets of the rich who hide cash offshore

      Millions of internal records have leaked from Britain's offshore financial industry, exposing for the first time the identities of thousands of holders of anonymous wealth from around the world, from presidents to plutocrats, the daughter of a notorious dictator and a British millionaire accused of concealing assets from his ex-wife.

      The leak of 2m emails and other documents, mainly from the offshore haven of the British Virgin Islands (BVI), has the potential to cause a seismic shock worldwide to the booming offshore trade, with a former chief economist at McKinsey estimating that wealthy individuals may have as much as $32tn (£21tn) stashed in overseas havens.

      In France, Jean-Jacques Augier, President François Hollande's campaign co-treasurer and close friend, has been forced to publicly identify his Chinese business partner. It emerges as Hollande is mired in financial scandal because his former budget minister concealed a Swiss bank account for 20 years and repeatedly lied about it.

      In Mongolia, the country's former finance minister and deputy speaker of its parliament says he may have to resign from politics as a result of this investigation.

      But the two can now be named for the first time because of their use of companies in offshore havens, particularly in the British Virgin Islands, where owners' identities normally remain secret.

      The names have been unearthed in a novel project by the Washington-based International Consortium of Investigative Journalists [ICIJ], in collaboration with the Guardian and other international media, who are jointly publishing their research results this week.

      The naming project may be extremely damaging for confidence among the world's wealthiest people, no longer certain that the size of their fortunes remains hidden from governments and from their neighbours.

    2. Senator's husband put $1.7M in offshore tax havens

      "Keep correspondence to a minimum," reads a note placed on his Cook Islands account that warned only to communicate with Merchant by airmail. "Do not fax to client. He will have a stroke."

      Another note discusses Merchant's reaction when told his holdings in Luxembourg would require him to either cough up his identity to officials there, or have all transactions on the mutual funds frozen.

      like he's the only one....?

  7. Dave, it's also interesting to note that depositors are listed as unsecured creditors while derivitive counterparties are listed as secured creditors who move to the front of the feeding trough in the event of a bank failure while the depositors get to fight over the remaining crumbs.


    1. Ya, that pecking order has already been established in this country. It's why BAC and JPM and other TBTF's have moved their derivatives books out of their securities subs and into the bank holding parent shells.

  8. I've been hearing so many stories about jewellery buyers in Toronto and other ways to get quick cash. It all just makes me wonder if its true.

    1. Canada is legislating the BIS bank rescue model right now. Depositors will lose money there.

  9. Washington’s Revolving Door Keeps Spinning

    Mary Schapiro, until recently the chair of the Securities and Exchange Commission, has passed through Washington’s lengendary revolving door to a new job at Promontory Financial Group, a company well-known as a fixer in the nation’s capital. The Wall Street Journal describes Promontory as “a consulting firm that has built a reputation as a shadow regulator by hiring scores of former government officials” who help banks struggling to comply with – or influence — the rules.

    Interviewed by The Wall Street Journal about her new position at Promontory, Schapiro insisted, “In my case, there’s no revolving door… I won’t be going back to government.” But that’s not exactly right.

    “I guess we maybe have a difference in opinion about what the revolving door means,” says Michael Smallberg, an investigator for the government watchdog group Project on Government Oversight.
    Schapiro has spent most of her career as a regulator, and has led three of the major agencies that oversee Wall Street: the government’s SEC and Commodity Futures Trading Commission, as well as FINRA, the Financial Industry Regulatory Authority, which independently monitors securities trading.
    Schapiro has sworn not to appear before the SEC on behalf of her new clients at Promontory. But, Smallberg says, “she can still do what’s referred to as ‘behind-the-scenes lobbying’ where perhaps she won’t personally be going to the SEC, but she’ll be telling her clients, ‘these are the people to contact and the types of calls you can make to be most effective.’”

  10. Auto Lending Bubble Inflates, And the Fed May Be Responsible

    Thanks largely to the U.S. Federal Reserve, Jeffrey Nelson was able to put up a shotgun as down payment on a car.

    Money was tight last year for the school-bus driver and neighborhood constable in Jasper, Alabama, a beaten-down town of 14,000 people. One car had already been repossessed. Medical bills were piling up.

    And still, though Nelson's credit history was an unhappy one, local car dealer Maloy Chrysler Dodge Jeep had no problem arranging a $10,294 loan from Wall Street-backed subprime lender Exeter Finance so Nelson and his wife could buy a charcoal gray 2007 Suzuki Grand Vitara.

    All the Nelsons had to do was cover the $1,000 down payment. For most of that amount, Maloy accepted Jeffrey's 12-gauge Mossberg & Sons shotgun, valued at about $700 online.

    here's your recovery...

  11. A Ton Of Gold Bricks: What Capital Flight Looks Like In Italy

    Curious why so little has been said about cash flowing out of Italy's banks, especially when even UniCredit's CEO today proudly warned everyone he is all for confiscating uninsured deposits as long as "everyone else is doing it" - and no, he is not kidding, so when it does happen, nobody will be able to say they weren't warned. Maybe it is because Italian cash is actually not leaving the country at all. Instead, real "wealth" is departing the boot-shaped nation, quietly and under the radar, as fast as it can in another form: gold. As the clip below from Bloomberg shows, a car was intercepted at the Italy-Switzerland border, with a very special cargo: numerous bars of gold weighing a whopping one ton, worth $6 million. Furthermore, one can be absolutely certain that for every car that is caught at the border with a ton of "golden" cargo, there are 99 that pass through undisturbed and undetected. Which makes perfect sense: what better way to circumvent shadow capital controls such as those virtually everywhere in Europe, than to convert one's paper money within country A so it stays in country A, into a far more valuable, anonymous and transportable store of wealth, such as gold, and quietly move it to country B, the one where the risk of deposit confiscation is (for now at least) far less?

    Oh, did we mention the confiscated product was gold: not euros, not Cypriot euros, not dollars, not palladium, not bitcoin... gold?

  12. Could you define what are considered "bank deposits" in danger of expropriation? Are shares or bonds deposited in a bank account? Saving accounts? What is safe to have in a bank?

    1. They'll let you know soon enough:

      Global Deposit Confiscation Called For By Influential CEO Of Italy's Largest Bank

      He called for “a common solution in Europe” saying that the “EU should pass laws identical and shared in different member states”. Indeed he went a step further and called for a global coordination of deposit confiscations to rescue failing banks.

      Including deposits “is acceptable if it becomes a European solution,” said Ghizzoni, 57.

      “What we cannot accept is differentiation country by country inside the same area. I would strongly suggest to make this decision not only within Europe but within the Basel Committee, where all countries are represented.

      Ghizzoni is also a Member of the Board of Directors of Institute of International Finance in Washington, Member of the International Monetary Conference in Washington and Member of the Institut International d'Etudes Bancaires in Brussels. He attended the powerful Bilderberg Group meeting in Spain in 2010 and he a frequent attendee at Davos.

      It is important to realise that the Cypriot deposit confiscation was not a "haircut" rather this is a confiscation of people's deposits - 60% of individual and companies hard earned cash saved in a bank.

    2. Thursday, April 4, 2013
      Handelsblatt survey shows Germany suffering further erosion in trust in deposit insurance
      The fallout from the Cyprus bail-in continues as a Handelsblatt survey shows Germany is suffering further erosion in trust in deposit insurance.

      Less than a third of Germans think the passbook yet for a reliable investment. ...

      Accordingly, the use of private savings to combat the financial crisis has diminished confidence in Cyprus Germans clearly in the security of their assets.

      59 percent of respondents do not believe anymore that German Chancellor Angela Merkel (CDU), its promise to German savings are safe, can be hold.

      Especially among the 18 - to 29-year olds, the uncertainty is large. 65 percent of them do not trust the Chancellor's word.

  13. (Quinn, Littleton)

    Dave: Do you follow the COT report. If so, the one that was released today amazing. The silver commercial net short ratio is down to 1.31 to 1. This is the lowest I can ever remember seeing and I have followed the COT every week for years. One more big washout in silver and we might actually see the commercials go long!

  14. The frightening idea behind the crisis is spreading ... suggests that depositor funds could be used to bail out banks there too. If there is a risk in a bank, our first question should be Ok, what are you the bank going to do abo.

  15. According to a statement by country’s central bank, SBV the regulation would strengthen the State's management of gold trading activities.

    Astana Economic forum

  16. this question from a stone surfer dude novice, does it make sense to take my money out of my credit union or will inflation cause it to be virtually worthless anyway?

  17. First Deposit insurance contributes to the stability of the online financial system by dealing with scheme members and reimbursing depositors as soon as possible when depositors making loss.
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