Posts
Now
It's Getting Real In Cyprus
Karl
Denninger
21
March, 2013
The
latest tidbit is that capital controls are tightening and withdrawl
limits on ATMs are being cranked down materially.
One
of their banks is reported to have just "hours" of
liquidity left (how many hours, may I ask?)
There
were demonstrations that looked a lot like a riot to me, with
attempts to come after members of the Parliament (you're getting
warmer folks.)
There
are also rumors that they're going to try to "haircut"
Russian (mobster) deposits by 40%. How
thick is the kevlar vest you're wearing, and do you have a food
taster? Another way to put this: Do your prefer your poisioning
by high-speed lead or polonium?
Remember
the original claim when Cyprus was admitted to the EU -- that it
would "prevent" shocks to their economy due to various
macro-level events. How's
that working out for 'ya?
Here's
the reality behind all of this: The
various arms of government and its regulatory apparatus, including
the ECB,
is directly, proximately and should be held civilly
and criminally responsible
for this.
Why?
Because
those arms of government put forward a capital structure that looked
like this, as we did here in the United States:
Depositors
======== <<< Government regulatory oversight barrier
Senior Bondholders
Unsecured Bondholders
Equity (stock) holders
======== <<< Government regulatory oversight barrier
Senior Bondholders
Unsecured Bondholders
Equity (stock) holders
And
then they formalized that structure with a published
and formal guarantee that
deposits were safe.
The
claim was predicated on the right to monitor an institution to
guarantee that it could always "cram down" the subordinated
levels in the capital structure, one at a time, and
that the government would step in and close the institution before
any deficit reached the top Depositor level.
They
didn't do their job and that is the proximate reason that there is
now an embedded loss, and worse is that they're trying
to protect some
of the bondholders while screwing people who are senior to them!
We
did that here, incidentally, with GM's bankruptcy. The UAW got
"protected" while bondholders got screwed, despite the fact
that the UAW had no legal standing be first in line. The
government didn't care and you didn't act to stop it.
Having
gotten away with this sort of crap repeatedly it is now being done
again.
I
have no problem, by the way, with a bank system that intentionally
exposes depositors to the risk of loss of their funds as investors.
But in order for that to be the case there
must be explicit disclosure when you open an account and
the capital structure and how it works must
be disclosed and agreed to.
Stop calling things "deposits" (or even worse, demand
deposits) if
they are in fact bonds.
Words
matter and so do what people agree to. If you emblazon deposit
guarantees on your window you better honor it or those responsible
for abrogating that guarantee deserve to hang.
What
ultimately destroys all polite and rational societies is abrogation
of the rule of law. There are many who want to laud people like
Sheila Bair, but in fact she was part of the problem here. How
else can you explain the outrageous haircut that was ultimately taken
on Colonial Bank's assets, a publicly-traded
firm,
when BB&T acquired them after they failed? Either
BB&T robbed the bank or the claimed asset values just a couple of
months previous were fantasy material and thus rank violations of
both civil SEC regulations and the criminal portion of SarBox, and in
addition they document the FDIC's and OCC's failure to do their
respective jobs in regulation.
Yet
nobody went to jail.
We
will never have
financial stability again until that problem is fixed and the rule of
law once again matters. There is only one way to stop people
from behaving badly in this regard, and that is to hit those who do
so with severe criminal penalties -- seeing one of your compatriots
locked in a box with Bubba for a nice long date has a tremendous
impact on focusing your mind on the risk:reward profile of intended
future actions.
With
a formal "drop dead" date of Monday things are going to
heat up a bit over the weekend, I suspect. You might want to
think about protection from a market perspective, although I remain
convinced that this is not the domino that sets off the mess -- we're
playing the "Bear Stearns" game here, and this is the
warning flag that despite the claims of all those pumpers in the
market all
is not well and
the excessive leverage problems are starting to leak to the surface
once again.
With
events in Cyprus attention is abck on economic news. Here is just
one day's worth of economic news – thanks to Rice Farmer
"France’s
top private sector bosses could see their salaries capped under
a Bill being tabled by the Socialist government, in the
latest high-profile move aimed at punishing the rich."
Scenes
From the Cyprus Crisis (gallery)
"Army,
air force and navy struggling with $2 billion cut and braced for more
reductions in Thursday’s federal budget."
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