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How Black Accounts Work - A Cyprus Connection?
A central criticism of the decision to seize a portion of the bank accounts in Cyprus is that the "bite" hits small guys who have accounts with a balance of less than E100k. As I write, it appears that there will be some revisions to the deal that was announced over the weekend. Those changes will likely minimize or eliminate the hit on these "smaller" accounts.
It is a travesty (and a crime) if Cypriots who live and work in the country have a portion of their accounts clipped. The small guys were not part of the problem, so they should not have been part of the solution. This obvious conclusion begs the question, "Why did they do it in the first place?" There are two possible answers:
The folks who put the original plan together were a bunch of misinformed idiots. They did not consider the fairness aspect, nor did they consider the deposit rules on <E100k sized accounts. The plan was hatched and announced before the big Finance Ministers, politicians and the ECB had a chance to consider the broader Macro issues and the possibility of a deposit run in other EU countries.
Given how so many other aspects of the EU financial story have been mismanaged, there is some possibility that this is how it played out. The whole process was bungled; no one ever considered the contagion risks. It was a complete screw up from beginning to end.
I have a very hard time believing that this scenario is correct. I think all of the EU deciders were involved with the choice. There was consideration of the related risks, the decision was made to go forward in spite of those risks.
NOTE: It's my bet that the decision was communicated to key US officials. Bernanke, Jack Lew and Obama were all informed before it was public.
To me, the only possibility for including the sub E100k in the haircut was because many of the smaller accounts, were also hot money accounts from foreign depositors. The folks in the EU must have understood this when they pulled the plug. (That, or we go back to the "idiots" answer)
Note: I have never had a black account in a Cypriot Bank. I have no black accounts, period. Never had. I have no direct knowledge of how black accounts were managed in Cyprus. BUT, I do know how black accounts were/are managed in other hot money havens. I strongly suspect that what happens outside of Cyprus also happens within Cyprus.
Assume you're a crook of some sort. You have ill gotten gains. Extortion money? Dictator/Politician who stole money from the national treasury? Maybe a pirate, a drug lord or a kidnapper? An Oligarch perhaps? How about a simple jewel thief or bank robber? A tax cheat? Or even just some poor guy who is trying to hide some loot from a wife?
WHAT'S THE MOST IMPORTANT THING TO YOU?
Access to your money of course. What's the fun of having a few mil stashed away and not being able to enjoy what that money can bring? You want bling! $5,000 a night hotel suites, 1st class travel all the time, $1000 bottles of wine, $8g for shoes - you can't have enough of this stuff! And you must have some cash in your pocket. For you, a minimum of $5g in the wallet is necessary. You need to have access to $5g pretty much every day to keep up with all the fun.
How do you do all that? Simple! A credit card tied to a bank is all you need. It's no regular CC. This one is imbedded with a chip. It's better than "smart".
There is no credit involved; behind the CC is a special account. That account is like a checking account. When you hit the VISA for $50k for some bauble, the transaction clears, as there is cash money behind the card. To have the ability to spend serious money on a CC you need a balance of at least $100k in the account. In addition, many banks require that you maintain a minimum amount, say $50k.
How do YOU feed the CC clearing account? Simple! You have on line banking! When inserted into a special reader that you have, the chip produces a one-time code/password, (the code changes every 30 seconds, so log on quick!). The "bank" has a similar code reader device, and it "knows" what that password will be for those thirty seconds. With the account now opened, you can transfer more money to the transaction account. Party on!
Wives/girl friends can get a card too! Those don't have chips, so you can cut them off at will! Cash is a problem, but with a couple of cards, $4k can be had every twelve hours or so.
What does this cost you? To start with, you must have a couple mil in another account. Call that "key money". On each CC purchase you make, the bank takes an extra 1% right off the top. Call that a "service fee". You spend a million on a CC, it costs you $10g - who cares?
Do you live in a City? Pretty much anywhere on the globe? When you walk around today and see all the tourists living it up and shopping like crazy - understand that "hot" cards are a significant portion of that activity. The problem with hot cards is that you don't want to use them in your home town. That draws attention, and YOU don't want that, right? So travel well!
AGAIN - I don't know what happened in Cyprus. However, if a significant number of the "smaller" accounts that are subject to the deposit theft are connected to CC clearing accounts of non-residents, then you have a possible explanation for the actions that were taken.
NOTE:
I AIN'T TAKING SIDES! I'm reporting some information that may or may not be relevant to the discussion on Cyprus. I'm not trying to justify the actions that the EU has taken. I'm trying to understand what motivated them to take such drastic and dangerous action.
That said, if you still need to shoot the messenger, please feel free to do so. BK
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Irrelevant, if they pay the tax & leverage the fiatski fractional reserve system for it to generate new loans for the local economy.
Yes, and plenty of foreigners are buying U.S. green cards for $500,000, through exactly the same kind of investment program that Cyprus offers.
http://www.npr.org/2013/01/25/169705833/cash-for-visas-foreign-investors...
So by Bruce's logic, U.S. banks are full of hot money too, and 'domestic accounts that aren't what they appear to be.'
Makes you wonder who he works for. How much does FinCen pay for friendly blogs?
That's unbelieveble! Even small accounts are hot money!
What about accounts in the whole Western world?
If those accounts are hot money the governments should take action and seize them, proceeds of a crime. They don't do that and they want 10% of booty so they become accomplices to a crime, do I have something wrong with that reasoning?
I AIN'T TAKING SIDES! I'm reporting some information that may or may not be relevant to the discussion on Cyprus.
You're not "reporting" anything. You're trying to regain your credibility and doing a piss poor job of it. I agree with these guys?:
fonzannoon: TOTAL.ABSOLUTE.BULLSHIT
fuu: Still spinning the hot Russian money tale I see.
kaiserhoff: When you're in a hole, Bruce, stop digging.
"To me, the only possibility for including the sub E100k in the haircut was because many of the smaller accounts, were also hot money accounts from foreign depositors."
IT DOESN'T FUCKING MATTER! What don't you get? Theft is theft. I assume you understand that police officers who steal money from drug dealers are prosecuted, right? The question of how the money in a Cypriot bank account got there is NOT GERMANE to this argument. I don't care if Sammy "The Bull" Gravano, Whitey Bulger and the estate of John Wayne Gacy all maintained sub-E100 accounts in Cyprus--the banks had no problem accepting the money as legitimate when it was deposited, and so taking ANY of it by force is THEFT, plain and simple...
Um, why? Someone opens and account and deposits money. Later, it is discovered that this person stole that money and was convicted for it. Those funds should be seized and returned to the victim(s). But the bank should not have to bend over backwards to ascertain where the funds came from, it's not their job. Now, if the person is obviously susupicious, that's one thing, but it's impossible to tell whether cash money comes from illegal activity or just a cash business, so policing things on the front-end is probably never going to work.
"Um, why? Someone opens and account and deposits money. Later, it is discovered that this person stole that money and was convicted for it. Those funds should be seized and returned to the victim(s)."
LOLOLOL!!! Umm...did the government of Cyprus announce this weekend that it had done an audit of all bank accounts in the country and that it would only be applying the new levy to those accounts that contained stolen or otherwise illegitimately gotten funds? I didn't think so....
Has anyone actually been found guilty of any crime here? From what I can see there is massive prop wash going around trying to convince everyone that this money was all HOT. I see no evidence, no court documents, no testimony by investigators, or anything really supporting the claim.
Just mouth pieces spewing and spinning.
Truthfully Bruce, for the purpose of analyzing what has happened, this exercise is a distraction.
There can be no justification found by somehow characterizing a class of depositors as evil boogeymen.
We all know by now who the villains are in this sorry fiasco called the Euro.
Those villains have once again clearly demonstrated their lack of regard for the proles. Unfortunately, they have also demonstrated a serious naïveté with regard to the theory of confidence and fractional reserve banking.
They have also demonstrated their increasing lack of maneuverability as well as the shallow nature of the planning end of their ongoing clusterfucking operation.
And it has nothing to do with shooting messengers either.
I wish all the righteous critics would reveal their alternative. I only see three:
-- EU taxpayers cover the banks' losses 100%
-- Banks default, and depositors get a bigger haircut
-- EU just prints the cash to bail out the banks
What alternative are you proposing?
"-- Banks default, and depositors get a bigger haircut"
This one. Bondholders get hit first (up to 100% loss), then disburse remaining cash to the depositors on a proportional basis.
Want to see fundamental change to the system? Allow real banks (ie., not "Jimmy's Savings 'n Loan o're the Upper Appalacchia") to actually fail.
It should be noted, if depositors lose, say, 50% of their nominal, but the "amount of liquidity in the system" goes down 90%, guess what? They win big in real terms.
seize the bank pay off on deposit insurance limit as stated. quick bankruptcy and reopen with remainder of assets.
oh and were I King no one associated with upper management would ever be allowed to work in the financial sector again for the rest of their natural lives as well as freezing their accounts pending a thorough legal inquiry.
easy.
Deposit insurance has to be paid by the Cyprus government and guess what, they are broke. "Pay off deposit insurance limit as stated" is not going to happen, forget it, without a EU bail out.
""Pay off deposit insurance limit as stated" is not going to happen, forget it, without a EU bail out."
It depends on what currency they're being paid off in. If you decide you don't need euros to do this, then you don't need the EU to bail you out.
well yes of course the ECB should be required to cover the deposit insurance. in truth for all we know their banking system may well be able to cover all accounts 99,999.99 eu or less which may leave little for the common currency to bail.
bondholders,derivatives and shareholders dead as they should be when the bank fails. no excuses.
why are we constantly making losers into winners?
Funny how "bond holder haircut" never seems to make the list. But since that would fuck up the ponzi, we get all of these games instead.
Elsewhere on ZH it was noted that bonds issued by Cyprus banks only add up to about 2 billion euro, not nearly enough to fill the hole.
The EU is proposig a total of almost 16 billion in loans and deposit haircut (and usually with Europe, it's just kicking the can; they will be back for more and the loan part will never be repaid).
You are right, but it is not funny, it is typical.
Who are these bondholders who must be protected at all cost? A big percentage are the same kind of lame dummies that bought Abacus CDOs from Goldman Sachs.
They went hunting for yield in the periphery assuming disaster in finance is a fantasy.
I'm not a bond holder. I don't hold bond directly anyway, but when we fail to pay bondholders ( those we owe money to ) we have fucked up because no one else in their right mind would loan us anything. When bondholders get screwed we will all end up being screwed! The bottom line is when we don't pay our debts the system fails; maybe this is what you want to happen? Obama shafted the GM bondholders and got away with it, but even he/they didn't push that gravy train too hard.
Not quite, 30 year E-bonds have been paying @15%, go back and look at yield of the late 70's and 80's. By not defaulting on this usury corruption 5 years ago we set in motion a system which is still dearly paying, but then only promising 10 year @2% to turn the bondy over. No one is buying 30 year bonds any more, and not many 10's either. Instead we give money to the banks at 0%, so they can charge up to about 65% depending on just how desperate you are for money at any given time. So the crooks you are looking for conned Jimmy Carter and have now made a financial carrer out of lending money. They have the power of a dumbed down congress, citizens, and the rookie voters, to keep the wheels on the dry powder triain for literally ever, or until the end of their world, which ever comes first.
I gotta say also -- remember Iceland? They are heroes around here. They told the man to go to hell.
They stiffed a lot of depositors with 100% losses as I recall. Not through a "tax" or "theft" but just letting the banks fail. Icelanders said tough luck, we are not responsible, your fault for putting your money there, your deposit insurance does not exist. How is it that Icelanders are heroes, and the Cyprus plan is evil?
All these loans from the EU, IMF, and Russia will be held against Cyprus gas reserves, so the people of Cyprus, in order to hold on to 90+% of their deposits in failed local banks, are giving away their patrimony, their natural resources. They would actually be better off to do as Iceland, let the banks default, tell all foreigners to frog off, and repay only the locals out of future gas revenues. But a few Russian warships make that awkward.
"remember Iceland"
Yes, I recall that they told the bondholders to fuck off.
"How is it that Icelanders are heroes, and the Cyprus plan is evil?"
Because they told the bondholders to fuck off, ie., they didn't artificially disort/subsidize the risk side of the bond holding. Cyprus not only didn't do this, but they're also selling off state assets (likely at a substantial discount to fair market value) to "private entities". It's one of those "robbing Peter to pay Paul" scenarios, where Paul = the global elites, and Peter = everyone else.
There is no such thing as half baked capitalism. If an institution fails because it is mismanaged fine. Put it in in receivership or liquidation and let the chips fall where they may. Punish the foolish money.
But as we have seen time and time again, the Central planners insist on polluting the principle of creative destruction, market punishment or whatever you want to call it with moral hazard, moral hazard that is designed to benefit the privileged class and milk the little people.
Now they are also fucking around with a cherished illusion. The illusion that there is safety in your deposits. A necessary illusion to perpetuate the fractional reserve ponzi. An illusion which we now see will also be sacrificed when politically expedient.
"How is it that Icelanders are heroes, and the Cyprus plan is evil?"
Because Iceland faced the fact that the banks were BROKE, while the government of Cyprus is trying to AVOID facing the fact that the banks are broke...
Cyprus just took the con, out of confidence.
You are right ... the 'tell' that the fix was in happened when the deposits of the 'big' European banks were exempted from the confiscation
Now we are getting junked by Barroso's sauna gerbil.
Fractional Reserve Banking= We can take a fraction of your deposits any time we want.
Yep that's the light bulb that is starting to shine in many people's heads. The very idea that somehow fractional reserve banking can work. It also may remin people that when you open a bank account, you are gifting the money to the bank for them to loan out. Their duty is not safekeeping, it's lending.
I think Bruce just got tired of responding to comments.
Frankly, after reading Bruce's shameless and repeated apologies for this blatant theft and gross injustice yesterday in his "Two Views on Cyprus" here, Bruce can go to Hell with all of his bankster buddies for all I care. He has utterly discredited himself in my eyes as an honest or intelligent commentator, having gone to great lengths to justify the Cypriot bank confiscation (don't you even DARE give us any of that "devil's advocate" or "shoot the messenger" crap again), and no amount of half-hearted backpedaling after the fact is going to change a damn thing.
Bruce Krasting yesterday here unequivocally declared where his true sympathies and allegiance lie, and it is with the criminals and sociopaths, NOT with the average Joe. We might just as well read Paul Krugman's thoughts on ZH.
So fuck you Bruce.
Bruce you keep slinging around this nebulous and infinitely elastic term "hot money." But there is no due process or proof and the confiscation is not limited to those accounts.
In effect the Eurozone is saying that because there is illegal money in some Cyprus accounts the EU can confiscate from all accounts.
Because some American citizens boarding aircraft might be terrorists we can crotch grab all Americans.
Good comment. That's the problem if you analyze an issue without moral principles. Taxation is theft is the moral principle. Once you incorporate this principle into your life the threshold for the theft is no longer meaningful. It really clarifies issues. Counterfeiting is wrong because it steals the value of someone elses work stored in savings regardless of whether the FED does it or your local mob.
Just like if you believe in personal resposbility you can't support any aspect of the modern welfare state. Not just some that might benefit you now or in the future.
In reality we're all hypocrites to a degree, but self-awareness of how we think about issues and make decisions can help to avoid some of the pitfalls.
Welcome to the age of the Broad Brush. Congratulations, your circle doesn't actually overlap any other circles on our Venn Diagram of Crooks, but YOU'RE PRESENT ON THE SAME PAGE, so you die too; who has time to bother with guilt or innocence? Thanks for playing!
I'm a little confused about the overloading of that term, myself. I thought hot money describes capital that is quickly crossing the globe looking for ROI, like newly-created 1s and 0s that the big shots get first crack at. Not 'hot' as in 'stolen', but I guess in a way, Bernanke bucks are stolen--watering down everyone's savings via inflation is a form of theft. It's at least not as confrontational as just seizing part of someone's bank account balance. Same thing, though, really.
Many more than one up vote appropriate for:
"Bernanke bucks are stolen--watering down everyone's savings via inflation is a form of theft. It's at least not as confrontational as just seizing part of someone's bank account balance. Same thing, though, really."
Listen to this garbage. What's the difference between Cyprus and TARP, Bruce?
Marginalizing the size of the gun, that's what.
Give me a break, you crooked bankers are all alike -- arguing about the prettiest horse in the Ikea meatballs.
"Oh, it's okay when the Federal Reserve does it."
This is a shoot the hostages situation and every banker suddenly develops blindness.
Horse-shit.
Or by a little store-front pizzeria in Brooklyn and bring in $50 million in sales every year.
If you are really being scrupulous in not 'taking sides' perhaps the subtlety of your approach has been lost upon most of us readers...
to quote you: I have a very hard time believing that
because of this: in laying out the (supposedly two)possible scenarios for what might have happened here, you have again purposely excluded the possibility that small holders of any description are now simply collateral damage' to persons of influence in the power pyramid ...everywhere.
It's just that simple, if you think about it. For a given period of time, it was marginally acceptable to kill civilian targets all across southern Asia and the ME, because some guys with box cutters supposedly worked the controls of planes they could not fly to take down three tall structures in a row...then it became completely normal to kill them and add domestic civilian targets to the tolerate list as well because ... we don't even know why anymore.
These guys are arrogant beyond all belief...it's not really necessary to get into black accounts for purposes of understanding the deal here...they've measured the lack of real reaction to the previous incremental steps to institute fraud as a component of state policy and are now ready to go to the next level. Essentially, they figure we don't even need to know why, anymore.
It's gonna be increasingly hard to not have a dog in this race Bruce; black account, white account, or on any account at all.
Yup, should be shooting them already and we're not and so until we do, they're gonna use us as their doormats.
You make a lot of assumptions about the average small Cypriot depositor to justify your position. It would be nice to see some facts.
I said I was making assumptions. But I do know how this is done elsewhere.
The facts on this will come out in a month or two. It's an up or down issue. Either I am right, or I'm wrong. I'll let you know either way.
bruce, do not let these stupid junkers with juvenile ideas confusing how the banking should work as opposed to how it works get on your nerves. i think you're doing a great job and it would be a shame if you let those uneducated detractors below run you out of posting on zh!
even though i posted this link http://tinyurl.com/cner4my at least a dozen times, the majority of commenters here is too lazy or simply unable to get their head around the fact that in the scam called fractional reserve central banking, a deposit account, unless it is a safekeeping account, is open to impairment that was instituted in cyprus if the bank is about to fail; the moral ground and fairness vs. unfairness advocated here is worth nothing. victimhood is the prerogative of those that do not exercise due diligence.
If it is not clear it is a crime. If it is clear it may be a crime.
I'm sure we'll see plenty of "facts" from MSM soon...just like the "facts" about IRAQs WMD, for example?
So tell us Bruce, what does a criminal with control over several thousand weapons of mass destruction and ther capacity to deliver them anywhere in the world do in this situation? The world has been here before, prepare. Cyprus is to Russia as the Bahamas are to the U.S.
Obama would go play golf.
Putin might chew off a grizzly bears testicles.
Putin would POSE with a picture of him chewing on an (anesthetized) grizzly bears testicles.
It is the image that is important, not how the image came to occur.
Is it still attched to the bear?