Gyroscopic Investing

I might buy an argument that depositers should bail out a bank, or banking industry, before taxpayers if that argument explicitly stated that the depositer "haircut" should come after shareholders and bondholders are completely wiped out.  After all, as a group they are the more financially informed, and they alone stand to benefit from the capital they have put at risk. Without that stipulation, the argument is not a free-market argument at all.  Hmm...maybe that was implied.

As far as the Cyprus situation goes, we certainly don't know the whole story based on the reporting. Can we rule out that the ECB is pursuing its course of action because the ECB and other European banks are extremely vulnerable to default in the Cyprus banking system, i.e. the bondholders are being protected at the expense of depositors? If so, are free-market principles even relevant?  Or is this really just crony capitalism at work?

So the Cyprus legislature rejected the bailout deal that allowed the deposit seizure.  So now the EU doesn't get the Cyprus bailout deal but has still managed to undermine their banking system....awesome.

http://news.yahoo.com/cypriot-lawmakers ... nance.html

rocketdog wrote: Damn.  Scratch New Zealand off my list of potential retirement destinations. 

[align=center][/align]

D1984 wrote: Fair enough if the ostensibly insured depositors know beforehand that yes, they can lose money which seems to be what NZ is planning....I think what most of us are against is the ex-post-facto making-rules-up-as-we-go-along nature of Cyprus's planned deposit haircut. It's one thing to say "from X date forward deposits will not be insured (or that they will be insured but in the event of bank failure even insured depositors will take a 10% haircut)" it's quite another to say "This deposit is backed by the full faith and credit of the....oh, wait, no it's not...suckers!!" especially when there is seemingly quite enough "cushion" in the form of uninsured deposits (those above the 100K level)--and in bonds--that could be haircut before the insured deposits were touched.

Yes I agree. I was not clear. This kind of thing needs to be disclosed beforehand, not ex-post.

MachineGhost wrote:

rocketdog wrote: Damn.  Scratch New Zealand off my list of potential retirement destinations. 

[align=center][/align]

I take it that means you're from New Zealand?

I would also say that creditors should confiscate and liquidate the personal property of the bank's top executives and their families before any depositor funds are touched.
[/quote]

That's a market solution. Executives have limited liability. The bank is improperly classified as a person because of the government/delusion/matrix fantasy we all live in.

That's how it would work absent the coercion of government. Government is not here to help. It's here to protect the wealthy and well connected against the masses.

Kshartle wrote: I would also say that creditors should confiscate and liquidate the personal property of the bank's top executives and their families before any depositor funds are touched.

That's a market solution. Executives have limited liability. The bank is improperly classified as a person because of the government/delusion/matrix fantasy we all live in.

That's how it would work absent the coercion of government. Government is not here to help. It's here to protect the wealthy and well connected against the masses.

+1.  Maybe they could also take a cue from the Japanese and commit harakiri out of shame. 

That first sentence was supposed to be a quote I messed it up. My point is everyone knows that market solutions are the best deep down but for some reason (indoctrination) we are always seeking a government solution.

The depositors are creditors of the bank. They took the risk. They were getting a much higher interest rate than depositors in other banks. They rolled the dice with a vault that was empty and making risky bets. They got burned. Many trusted the welfare system in Cyprus (government deposit insurance) as protecting them from risk. They are learning a lesson that all should heed.

They deserve what they get but certainly I have no problem with them taking it out on banking execs. I am repulsed by violence but if everyone was held responsible for their actions bankers and depositors would not take unacceptable risks. Real insurance would be purchased instead of phony welfare insurance bogus promises made by mobsters promising to steal for depositors through taxes and inflation.

Kshartle wrote: The depositors are creditors of the bank. They took the risk.

Strictly speaking, it's hard to dispute that "depositors are creditors of the bank," but there's definitely a distinction in the way the become creditors when compared with bondholders.  Shareholders become owners of the bank when they knowingly buy bank shares.  Bondholders become creditors when they knowingly buy bonds issued by the bank.  It's explicit.  Most depositors probably don't realize they are becoming creditors of the bank when the place there cash with the bank for safe-keeping and to earn a modest (non-existent these days) return, especially when there's an explicit federal guarantee.  This Cyprus thing will have a silver lining if it helps savers around the world understand that (1) they are "creditors" as you highlight and (2) their deposits aren't as safe as the assume.

It still troubles me, though, that it's not clear in the proposed bailout deal that the banks' shareholders and bondholders were being wiped out before the deposits were going to be seized.

Article on Yahoo! Finance that asks (and answers) the question "Could This Happen To Us?"

http://finance.yahoo.com/news/financial ... 49109.html

cnh wrote:
It still troubles me, though, that it's not clear in the proposed bailout deal that the banks shareholders and bondholders were being wiped out before the deposits were going to be seized.

The market sets the prices of those assets. I don't know if shares/bond prices had already priced in the risk lately but anyone loaning money or owning shares in institutions that make these risky loans is playing with fire. They aren't anymore responsible then depositors though. Ok, maybe some big bank bondholders are using political clout to get a bailout and a haircut for depositors but they are playing with fire just like their own depositors! Everyone owns everyone else's bad debts. I think things are going to get crazy and this little Cyprus deal is an experiment to see how to unwind the insolvency of all the banks. These governments can never pay off all their debts without a massive amount of counterfitting.

rocketdog wrote: Article on Yahoo! Finance that asks (and answers) the question "Could This Happen To Us?"

http://finance.yahoo.com/news/financial ... 49109.html

The answer might be nuanced, but it basically says "yeah, it could happen here."  From the article: "Beyond that, let’s also consider what could happen if lots of banks needed to be bailed out. Could the government step in and tax deposits on everyone to pay for a portion [of] that bailout, as has been proposed in Cyprus?

“There is no legal right to tax deposits in this country, and it would take a law change" (emphasis added).  Bingo!

Basically, this doesn't appear to be any different from the situation in Cyprus.  If banks aren't failing, then the FDIC is not really relevant.  And if the federal government changes the rules to "save" the banks (as they have demonstrably done), then the "insurance" may be meaningless as some have pointed out in this thread.

The more I think about it the less likely I think this scenario is in the US.  We have many more banks than Cyprus, with stricter banking laws, 50 different states with their own laws, a constitution that's difficult to change, and a much larger and stronger economy.  I'm not saying it's impossible, but it would really take a SHTF scenario of epic proportions (imho). 

I hope. 

Good observations.  You're probably right, although the way the government handled the GM and AIG bailouts doesn't instill confidence.

cnh wrote: Good observations.  You're probably right, although the way the government handled the GM and AIG bailouts doesn't instill confidence.

Its a common myth that the government bailed out GM.  It did not.  It was placed into receivership.  AIG on the other hand...

MachineGhost wrote:

cnh wrote: Good observations.  You're probably right, although the way the government handled the GM and AIG bailouts doesn't instill confidence.

Its a common myth that the government bailed out GM.  It did not.  It was placed into receivership.  AIG on the other hand...

On GM, I understand that, but based on what I've read, the "pain" associated with the receivership was not distributed among the various GM stakeholders (shareholders, bondholders, unions, etc) as one would normally expect.  Perhaps the reporting on it has not been accurate.

An interesting Reuters report on this situation: http://uk.reuters.com/article/2013/03/2 ... DW20130321.

Kshartle wrote: The market sets the prices of those assets. I don't know if shares/bond prices had already priced in the risk lately but anyone loaning money or owning shares in institutions that make these risky loans is playing with fire. They aren't anymore responsible then depositors though.

When you can't pay your debts, it's not a market-pricing thing. It's a bankrupt thing.

The general rule is quite easy : first, all creditors are paid on due time. If there's any money is left it can, then, be used to invest, to keep as a reserve to pay next year's debts and/or to give to shareholders. Then the market can price these information and people can choose to become creditors or co-owners of the bank at the price they think is fair. Ok.

But when paying creditors is not possible because money is lacking, things become a little different : the company HAS to pay creditors, it cannot do otherwise. If it has to, it must sell some of its assets to pay them back on du time. If selling some assets is not enough, here's the rule : first, creditors are paid what they can be paid (that's where the risk lies in for a creditor in a free market) and that can be 99% of the capital, or just 50%, or even 0 in the worse cases. To pay them as much money as possible, ALL the assets from the company were sold (including inventories, factories, financial assets, goodwill and other intangible assets, etc.). The company is now an empty shell and the stock holders have lost everything they had. Sure, they can try to sell their stocks to the "market" but I don't think they'll get a good price for literally nothing.

The problem here is that the deal is "you depositors will be taxed so that stock holders and bond holders keep all their money". It doesn't sound like a free market. At all.

k9 wrote:
The problem here is that the deal is "you depositors will be taxed so that stock holders and bond holders keep all their money". It doesn't sound like a free market. At all.

I agree, government solutions are always violent theft. They are always absent of moral reasoning. Imposing a tax (stealing from depositors) so the owners and big bondholders are better off is just another example of how chaotic any government-regulated industry is.

The depositors are creditors of the bank though and if the banks where they keep their money are completely unsound they shouldn't expect to go unscathed.

The point of a government or rulers of a society is to protect themselves and their friends. They are not superior humans. They are out for their best interests. Best that people learn that so we can get them out of interferring with the money supply and the economy.

rocketdog wrote:50 different states with their own laws

Does not have much impact on banks.  Almost all banks of significance are part of the federal reserve system, insured by the FDIC and chartered under federal bank laws.  Change the federal laws, it's done.

There are a lot of state chartered banks, but probably most of those have all agreed to or are required to be part of the federal reserve system and have taken on the FDIC insurance.  There are a few state banks of significance.  I think it was North Dakota which actually has a state run bank which was started expressly to provide banking services to the state gov't, and they do a remarkably good job.

AgAuMoney wrote:

rocketdog wrote:50 different states with their own laws

Does not have much impact on banks.  Almost all banks of significance are part of the federal reserve system, insured by the FDIC and chartered under federal bank laws.  Change the federal laws, it's done.

Don't forget member-owned credit unions.  I once belonged to a CU when I lived on the west coast.  They actually dropped their ties to the federal gov't while I was a member.  When I heard that I told the tellers "Bravo!"

Kshartle wrote:

k9 wrote:
The problem here is that the deal is "you depositors will be taxed so that stock holders and bond holders keep all their money". It doesn't sound like a free market. At all.

I agree, government solutions are always violent theft.

To be more precise, what happened in Cyprus was along the lines of "too big to fail".  The small depositors were taxed because the government was too terrified of what would happen if they annoyed the bondholders and the big Russian depositors.

There might not be any examples of the U.S. violating deposit insurance promises (yet), but there are plenty of examples of wealth transfers from U.S. taxpayers or unpunished violations of banking law because of the "too big to fail" problem, or similar.  That's what happened with HSBC, MF Global, the S&L scandal, and AIG.  I wouldn't count on any promises (like FDIC) unless your interests are inseparable from those of powerful banks and politicians.  Hopefully that's the case with T-bills, but Cyprus just showed us an amazingly easy way to go after us small fry.

Now here's a man who tells it like it is!

http://www.youtube.com/watch?feature=pl ... Hfmaar81jc

Lew Rockwell is brilliant.

Is it possible to make confiscation on a portfolio with ETFs?

Tks