New Stage in Eurozone Crisis: Cyprus Forced to Cover Bailout from Individual Bank Deposits

Lines formed at ATMs in Cyprus after news of bank levy broke

Lines formed at ATMs in Cyprus after news of bank levy broke

This is a topic on which I know very little, but I thought we should have a thread on it anyway.

On Saturday morning, news broke that the terms of a bailout of banks in Cyprus would require a levy on individual depositors–including those holding small accounts. People immediately rushed to ATMs to withdraw as much cash as possible before the deal was voted on. The most accessible article I found on this is by Edward Harrison of Credit Writedowns blog, posted at Alternet: Hell Breaks Loose in Europe as Banking Crisis Unfolds: Depositors’ Money May Be Seized.

Saturday morning we learned that after hours of tense negotiation, Europe has hammered out a 10bn euro “bailout” of Cyprus. I put the term bailout in quotes because the key feature of this deal is the bail-in of Cypriot depositors to the tune of 5.8bn euros, about a third of Cyprus’ GDP. This means that depositors went to sleep on Friday night and woke up Saturday to find that their money, deposited safely in Cypriot banks, had been seized and used to “bail out” the country. While the bail-in became official EU bank rescue policy during the Spanish crisis last summer, bank depositors were never mentioned at that time. I see this as an extreme measure which, if the European banking crisis continues elsewhere, will have very negative implications for bank depositor confidence in other European periphery countries.

There has since been a revision in the amounts to be deducted–I’ll get to that later on.

Back to Harrison:

Cyprus’ finance minister Michalis Sarris said large deposit withdrawals would be banned. Jörg Asmussen, a German member of the ECB board and a key ally of Angela Merkel, added that the part of the deposit base equivalent to the actual bail-in levies would be frozen immediately so the funds could be used to pay for the “bailout”….

Some of the bailout lenders like the IMF had actually been calling for Cyprus to seize all deposits larger than 100,000 euros. So this falls well short of those demands. Nonetheless, a rubicon has been crossed. Not only are senior bank debt lenders now on the hook before a single penny of European Union loans or guarantees flow to busted eurozone countries, but so are subordinated debt holders and so are even depositors. As an EU citizen, you must now believe that any lending exposure you have to a bank whether as a bond lender or deposit lender can be seized and confiscated by government, no matter how small the exposure. The FT notes that “[e]ven Ireland, whose banking sector was about as large relative to its economy as Cyprus’ when it was forced into a bailout in 2010, never considered such a measure.

Read much more at the Alternet link.

Here’s an FAQ on the crisis published at Fortune earlier tonight. The scary introductory paragraphs after the jump:

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Market Manipulation 101 or How to Rob Fort Knox in front of a Congressional Panel

Every day, as the AIG saga unfolds, I have to wonder if there is any vestige of a functional regulatory scheme left in this country. I’ve already decided that there is no shred of decency left in any one whose hand came close to unraveling the insurance giant and its deals. I know this is an area where eyes glaze over, but really, it’s like solving a crime that even Miss. Marple couldn’t fathom. Ladies and Gentlemen, we’ve been robbed.

It may be too complex for most journalists to report about, but the financial blog realm, full of individual investors, academics and pissed off Americans is keeping the story alive. The headline today from the Atlantic is there are $100 Million More in AIG bonuses. Don’t forget, we basically OWN this company so this is OUR money. Most voters are wise enough to know that this alone does not pass the threshold of decency. You don’t have to have a PHd with an emphasis on corporate governance to figure out that something is very wrong when people can bankrupt a company one year, and still collect bonuses the very next.

In the ongoing AIG bonus saga, the troubled insurer will distribute around $100 million in bonuses today, that’s likely much to the dismay of taxpayers who now own the firm. Despite the fact that AIG is technically under compensation restrictions, many so-called “guaranteed bonuses” that were in place before AIG’s collapse still must be honored by law. This is a regrettable situation, and speaks loudly to the messy problem that bailouts pose.

This is the headline today in many of the mainstream papers. This includes the NY Times that reports those bonuses may have been lowered by$20 million to lessen the blow. This is a mere trifling compared to what was pilfered from the dying AIG by Goldman Sachs as it was in the throes of death. Those Revenuers let Goldman Sachs pick clean the dead body of AIG before we got the bill for the funeral.

“A.I.G. has taxpayers over a barrel,” said Senator Charles E. Grassley, an Iowa Republican, in a statement on Tuesday night. “The Obama administration has been outmaneuvered. And the closed-door negotiations just add to the skepticism that the taxpayers will ever get the upper hand.”

A.I.G. first promised the retention bonuses to keep people working at its financial products unit, which traded in the derivatives that imploded in September 2008, leading to the biggest government bailout in history.

The contracts, which were established in December 2007, were intended to keep people from leaving the company and called for the bonuses to be paid in regular installments to more than 400 employees in the unit. The final payment, which was for about $198 million, was due in mid-March, but was accelerated to Wednesday as part of the agreement to reduce its size.

Fearing a firestorm like the one last spring, A.I.G. had been working with the Treasury’s special master for compensation, Kenneth R. Feinberg, on a compromise that would allow it to keep its promise in part, without offending taxpayers.

So, the bonuses plays into the theme of the moment–Populist Outrage–which is driving everything from angry teabots to high ratings for media screamers like Glenn Beck. It hides a bigger problem. What is going on behind the schemes in the books and the deals as we attempt to bailout a group of bad gamblers is far worse. Yves Smith of Naked Capitalism lays out some of the issues on HuffPo as well as a series of thread at her own blog. While we rage at the bonuses, the real crime happened behind the curtains, where you’re not supposed to notice Timothy Geithner, pulling the strings and blowing the steam from the giant talking head of Glenn Beck.

Although the focus of press and public attention has been the decision to pay out “100%”, this issue has not been framed as crisply as it should be. Remember, the underlying transactions were crap CDOs that the banks (or bank customers, a subject we will turn to later) owned, and on which the banks had gotten credit default swaps from AIG. The Fed in fact paid out WELL MORE than 100% on the value of the AIG credit default swaps by virtue of also buying the CDOs.

That is one simple paragraph to describe the scheme behind the bailout of AIG. The facts are nearly beyond belief and as Congressman Dennis Kucinich put it, the testimony provided by Timmy-in-the-Well-again Geithner and among others doesn’t “pass the smell test.” I’m not sure how you miss the smells coming from an open, festering mass grave. But, the majority of Americans, and Congressio Critters, seem to think it could be just a few dead birds in the attic. The evil is the ledger accounts at the New York Fed.

Smith says the details show the FED as either captured regulator exhibiting ‘crony behavior’ or the behavior of Geithner was duplicitous and merits legal action. That is even mild. Her Huffpo article lays out the arguments for both scenarios. Either way, Giethner’s NY Fed comes off badly and Paulson and the Bush Treasury come off as co-conspirators to a heist.

Another article which demonstrates palpable anger at both the ineffective Fed and Congress is written in the financial/investment blog Money Morning by Shah Giliani who is a retired Hedge Manager. Again, the lack of knowledgeable staff could be the reason the pieces to the puzzle are being put together outside of the mainstream media. It could be the story is too complex to be glamorous and deemed beyond the reach of the average 5th grade reading level achieved at most major newspapers. It’s even possible no one wants to take on the financial industry. The deal is what happened as outlined in the testimony–had some one on that Congressional Panel actually had a background in something other than professional politics subsidized by the FIRE lobby and a plethora of worthless law degrees and knew finance–should’ve caused outrage around the country and sent subpoenas flying out of the justice department and the SEC. The central players in this are Goldman Sachs and the New York Fed whose people are so entrenched now in the Treasury and the West Wing that you have to wonder if there ever will be enough justice left in this country to counteract what should be the cries of lynch mobs. Following through with the legal obligations to pay out the bonuses–with the smallish $20 million concession–is just the sprinkles on the cake. Perhaps it’s easier to pay them than to have the AIG financiers talk about the details as the FED and Treasury unwound their deals.

The rationale for what is essentially the breaking of so many laws is the rescue of the U.S. and the world from another Great Depression. There are always ignoble deeds, however, done in the name of the most noble causes. This should go down in the press and in history as The Great U.S. Treasury and Financial Market Heist. The last two secretaries of Treasury-Paulson and Geithner–should be hauled before a government tribunal and stuck in Gitmo with the rest of the terrorists and enemies of the state. The dirty details follow the fold.

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Yesterday, Teabagging, Today Sandbagging

nancy-pI can’t tell you how disappointed I am that America’s first woman Speaker of the House has turned into a player for all seasons.  First, we find out exactly how much she knew about the torture methods of the Bush Administration and when she knew about it.  Then she tells a big lie about it.  Rumors still abound that she was wanted Obama as POTUS because she could be the Queen Bee of Capitol Hill.  His lack of knowledge and experience was certain to put her in a position of power.  Too bad she is more of a demagogue than a democrat because if there was ever a chance to be the Queen of the Hill, it would’ve been with reform of the financial system.

Instead, we’re seeing her go after yet another woman who has tried to champion the voters/taxpayers over big party money.  A head line from Yves Smith at Naked Capitalism says it all for you: “On Pelosi’s Duplicity and Apparent Sandbagging of Elizabeth Warren, watch dog of the TARP”.  It’s a typical Capitol Hill soap opera if there ever was pelosiboarding01-copyone.  As appears customary with everything economic coming out of the democratic wing of our congressional whores,  Pelosi is siding with the financial services industry over the voters/taxpayers. Yves first reminds us of the strange dance surrounding the birth of TARP.  Remember, life was supposed to be different once the Democrats retook the Congress.

Recall how instrumental Pelosi was in getting the TARP passed. The widely mentioned gambit of Paulson getting on bended knee to plead for her support was a nice bit of theater to cover how readily she fell into line. The other justification for the Democratic leadership support was the claim that Treasury had given a closed door briefing to Senate and House leadership telling them the world would end if the TARP was not passed yesterday.

Some have suggested that Treasury provided data on the potentially disastrous money market fund withdrawals around the time of the Lehman failure (recall the death of Lehman led Reserve to break the buck). but that problem had already been addressed in September in part via the Fed providing non-recourse loans to purchase asset backed commercial paper, and more fully in October via yet another Fed facility. In other words, if the money market fund panic was indeed the scare tactic, the TARP was not the remedy.

But even if we give the devil its due, the performance of the Democratic leadership was pathetic. The most heinous aspect of the bill, putting the Treasury secretary outside the reach of law, was never cut back. The first draft, a doodle on a napkin, was offensive to democratic processes, the second draft added a lot more words but was still way too thin on basics, like objectives, criteria, procedures, and the final draft loaded tons of pork in to assure passage. And the ironies kept multiplying. The bill was wildly unpopular even with the media falling into line (and in the later stages, a clearly orchestrated campaign to have financial services industry employees contact legislators to counter the groundswell of opposition). And it was Senate Republicans who were the last holdouts.

Here’s the soap opera, errr, money line.

So why are we pointing a finger at Pelosi in particular? The next chapter is her appointment of one Richard Nieman to the Congressional Oversight Panel. Under the TARP rules, the House Majority leader selects one of the oversight panel members, so this choice was completely under her control.

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Is this ANY way to run an Economy?

bank-holidayThe US economy is in a fragile state right now which begs the question: Why do our policy makers seem oblivious to lessons from the great meltdowns of the past?  Adam Posner of the Daily Beast asks the question out right: Does Obama Have a Plan B? Posner asserts that the administration appears to be hellbent on recreating the Japanese Lost Decade.  This is something that I’ve been harping on for months as has Paul Krugman and Joseph Stiglitz–two big brained economists with Nobel prizes.

So it is with some irony if not humility that we should approach Treasury Secretary Geithner’s Public Private Investment Plan presented on March 23. A number of major American banks have lost huge amounts of money, and clearly have insufficient capital if they are not literally insolvent. Why else would they be pushing so hard to change the accounting rules to avoid showing what they really have on their books instead of raising private capital? Why else is the U.S. government taking so long to perform “stress tests” and trying to get expectations of overpayment for some of the bad assets on the banks’ books before the test results are out? In short, the U.S. government is looking to shovel capital into the banks without sufficient conditions, hiding rather than confronting the actual situation.

That is just like the Japanese government in their lost decade, or the U.S. officials during the 1980s before they really tackled the savings-and-loan crisis. In those cases, the delay simply made the problem worse over time and in the end the government had to put more money into the troubled banks directly, taking over or shutting down the weakest of them. Whatever the political culture, it would seem we have not learned from experience. Or perhaps we cannot act on our learning. The universal barrier would appear to be the political difficulty of recapitalizing banks. That seems obvious, but the constraint it puts on good policy is enormous.

That is why the Geithner plan is so complex and jury-rigged, to avoid the need for public requests for more money for banks. Unfortunately, it is unlikely to succeed absent additional public money and more-intrusive government action. The plan will buy some time and certainly some appreciation in bank share prices. Current shareholders will be getting a new lease on life with subsidies from taxpayers. For that reason alone, the plan certainly will cost the taxpayer more in the end than a more direct recapitalization with public control would have.

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Punch Drunk on Tax Funded Bailouts

While the Right Wing is off having tea parties and screaming class war, there appears to be some legitimate soul searching going on  in left Blogistan about our “punch drunk” POTUS and his continual campaign like appearances.  A lot of the discussion is focused on his dogged support of Turbo Tax Timmy and his bailout of the Suckers who created this bad economy for the rest of us.  We’ve been overwhelmed with “heckuva-job-Timmy moments and distasteful ‘gallows humor’.  When is enough enough?

Meanwhile, those of us that can’t avoid our jobs by taking a permanent vacation in TVLand are watching the economy unwind in spasms of agony and ecstasy. The market, starved for specific plans and information, provided a big thumbs southparkup on a bail out program that at best reheats Dubya’s.  If any one was punch drunk, it was the equity markets today.  The leaders were the  financials, of course, who will continue to provide profits to the market while writing their costs off to the taxpayer.  If you were looking for the fresh cold breath of reality, it wasn’t on Wall Street or on Pennsylvania Avenue.

Lucidity, however,  is on the rise in other places.   I’m finding it in interesting places like the second episode of South Park where the lampoon on the Dark Knight included this little back ground gem;  a satire of the famous Obama picutre with a deer-in-the-headlights appearing  Obama and the change mantra tagged by a bright red WHEN?

My answer to the when question is probably never.

Most left wing angst appears to be directed at Tim Geithner since the Light Bringer is still too new to the job to blame.  We continue to learn how involved both he and his staff at the NY Fed were in the AIG Bonuses.  In fact, the Obama administration is trying to scuttle the Excise tax on the bonuses while verbally denouncing executive greed on TV. We’ve also found out that Citibank has managed to insert similar language to protect its executive bonuses. Let’s see how much change we get on that one too.

Not only are right wing shrills like Fox’s Sean Hannity calling for the head of Timmy Geithner but Progressive Diva Arianna Huffington front paged the call on HuffPo today. When Hannity and Huffington carry the same headline, it’s time for more than a few campaign appearances on Leno and 60 minutes.  I’m not sure where all this shock and angst is coming from because it’s been rather obvious to some of us for some time that Obama represented rather narrow interests (not ours).  How can every Obama supporter be calling the AIG Bailout a travesty while knowing that the architects and enablers of AIG are continuing the task with the Light Bringer’s blessings and attaboys?  Well, Obama just mustn’t realize that it’s all Timmy’s fault and we need his head on a limited edition Obama inaugural platter.  But, wait, isn’t Obama the one with that great judgement ?  C’mon folks reconcile all this in your mental ledger. It really isn’t that hard.

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13. The next industry (not including finance and auto) to beg for and get a bail out will be:

the porn industry.

I have to say that your resident dakini did NOT see that one coming when she did the Dakini Office Pool.  Okay, they haven’t GOTTEN it yet so it technically doesn’t count, but it’s still good for a laugh.

January 7, 2009
Posted: 05:27 PM ET
Larry Flynt is asking for a bailout.
Larry Flynt is asking for a bailout.

WASHINGTON (CNN) — Another major American industry is asking for assistance as the global financial crisis continues: Hustler publisher Larry Flynt and Girls Gone Wild CEO Joe Francis said Wednesday they will request that Congress allocate $5 billion for a bailout of the adult entertainment industry.

“The take here is that everyone and their mother want to be bailed out from the banks to the big three,” said Owen Moogan, spokesman for Larry Flynt. “The porn industry has been hurt by the downturn like everyone else and they are going to ask for the $5 billion. Is it the most serious thing in the world? Is it going to make the lives of Americans better if it happens? It is not for them to determine.”

Francis said in a statement that “the US government should actively support the adult industry’s survival and growth, just as it feels the need to support any other industry cherished by the American people.”

“We should be delivering [the request] by the end of today to our congressmen and [Secretary of the Treasury Henry] Paulson asking for this $5 billion dollar bailout,” he told CNN Wednesday.

The Bailout: More Oversight or More Overlook?

More bailout news today as the Fed pledges $540 billion to shore up mutual funds.  The New York Times outlined the proposed plan to help provide short term debt that many money market mutual funds use to finance their investments.  When the Treasury refused to bail out Lehman brothers, shares of its Reserve Fund fell below $1.  This caused problems in many money market mutual funds as the investors realized their money may not be safe.

Since then, many funds have experienced redemption requests.  This has caused fund managers to move to safer and more liquid sources to shore up their funds.  Many fund managers no longer look to commercial paper and have switched strictly to Treasuries and other investments considered highly safe.  This has squeezed lending to companies looking for bridge loans and working capital sources.  The details have not been finalized, but the Fed is hoping to negoitiate the deal and is looking to JP Morgan Chase to carry out many of the required actions.  This basically expands the lines of businees that taxpayers are now shoring up for financial companies.

While the Fed and Treasury have been forthcoming with plans and money, it is still uncertain when we will actually see them get around to solving the problems instead of doing triage.  We are experiencing more and more situations where taxpayer money is being used to supplement private investments and loans to corporations (including the very financial corporations responsible for this mess).  What we are not seeing is the increased oversight that must go along with the flow of funds into the financial sector.  It is really time for Congress to act now before more money flows to these players who will not be held to account.

Corporate Governance is one of those things that should not be overlooked.  The Treasury’s bailout seems to have more to do with a short term shore up of markets, than rooting out the bad players and ensuring these funds are not abused.  It appears that some of the corporate governance and executive compensation rules originally part of the bail out plan have been watered down.  Many in congress and the Treasury itself stated earlier that any of these financial institutions benefiting from government funds must adapt stricter corporate governance rules and executive compensation limits.  Corporate Governance is a broad set of that basically protect shareholders from executive malfeasance.

The first concern with corporate governance discussed in the bailout was that executive pay should not encourage unnecessary and excessive risk.  In other words, the pay should not INCENT the managers to go after short term profits that endanager the safety of the firm.  Market Report states a very important point here.

The Treasury’s interim final rule requires that the compensation committee of a company’s board of directors review executive pay to make sure it doesn’t encourage management to take too many risks.

The committee has to meet at least once a year with the bank’s chief risk officer to check the relationship between the institution’s risk management and executive pay and incentives, according to the rule.
But the Treasury isn’t replacing any of the directors on the boards of the banks it’s investing in, or adding new directors to represent taxpayer interests. That means there’s no way for the Treasury to check if executive compensation is encouraging too much risk-taking.
If none of the original players have been held accountable and are still in place, how exactly does this change anything?  Remember the old adage, if nothing changes, nothing changes?  Just as before, the
oversight and enforcement will be left to the same folks.  Most of these folks (the board of directors) were in charage of all these big banks and brokerage firms when they were incurring the risky things that led to this melt down.  Most boards were clueless back then. They took the advice of the executives that put their organizations at risk.  So, how are they supposed to suddenly develop knowledge now and do the right thing?  Plus, these folks are supposed to protect the shareholder.  Will they treat the public money with similar weight?
There are a few other rules that were stuck in the bail out terms. One such rule is that banks will not be allowed to deduct executive compensation above $500,000 against taxes.  However, there is nothing saying that they won’t just skip the deduction and pay the executives what they want to any way. Since many executives can go other places, the banks may just pony up the money to retain them.
Also, the original bailout banned golden parachutes.  Now, however,  the Treasury’s interim final rules defined golden parachutes as payments equal to or exceeding three times an executive’s annual salary and bonus.  That means as long as these packages fall under these guidelines, the golden parachutes can remain.
So in conclusion, I’d like to quote from the letter of that 37 year old hedge fund manager that retired with ALL that money betting against the folks that led us down the path to this financial crisis.  Now, not on Mr. Lahde’s plea for legalizing marijuana, but the other one.  The one that says Congress just keeps looking the other way.

On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government.

In short, Congress needs to get with it and start protecting the taxpayer’s money with much more tenacity than the protected investor’s money.  Write them and tell them to strengthen the oversight of the bailout plan.