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Caveat Depositor

Sprott Group's picture




 

Eric Sprott & Shree Kargutkar

“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 1

A deal has just been struck with Cyprus. However, it was not the deal that Cyprus saw other countries receive. This was not the deal received by Greece, Italy and Spain. There were no bailed out banks in the aftermath. There was no transfer of risk from over-levered banks to the taxpayers. The risk was pushed back onto the banks. Their equity was wiped out. Their bondholders were wiped out. Their uninsured depositors saw their accounts raided for additional liquidity. It wasn’t just that the rules of the game had changed, the game itself changed. By raiding the depositors’ accounts, a major central bank has gone where they would not previously have dared. The Rubicon has been crossed. Going forward, this is expected to be the “template” for dealing with risky, over-levered banks and the countries which support them.

For the first time since the crisis began, we are faced with a new paradigm, or a “template”, for how a major central bank will address weakness in the financial sector. While the old template involved “bailing out” through transfer of risk from the corporate sector to the taxpayer, the new template calls for “bailing in”, whereby the risk is contained within the affected institution at the expense of equity holders, bond holders and finally the depositor.

How does the new template affect you?

This “template” is already being applied to the “too big to bail” banks in other developed countries around the world. A statement in the joint paper published by the FDIC and the Bank of England in December 2012 reads:

“An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company into equity. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailedin creditors would become the owners of the resolved firm…. Such a resolution strategy would ensure market discipline and maintain financial stability without cost to taxpayers”.2

Note the lack of the phrase “uninsured depositors” in this context, which opens the doors for both insured and uninsured depositors to be affected. In a similar vein, Canada’s recently released budget addresses the same problem. Page 144 of Canada’s Economic Action Plan 2013 reads:

“The Government proposes to implement a – bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers.”3

Likewise, New Zealand’s Open Bank Resolution policy allows for a “bail in” of afflicted banks by wiping out the equity holders first, the bond holders second and finally forcing a haircut on the depositors.4

Over-levered banks are not a recent development. We are faced with a banking crisis, seemingly once every generation. In a majority of cases, the bad banks were allowed to fail and newer, stronger banks took their place. However, the recent modus operandi of the central banks and policy makers allowed over-levered banks to get even bigger, rewarded risk taking with bailouts and let the inherent problem of unsustainability fester.

CHART 1: BANKS ASSETS – COUNTRY GDP
maag-march-2013-chart-1.png 
Source: Capital IQ, CIA Factbook 

We carried out the exercise of taking the largest banks, or in other words, the “too big to fail” banks in the G7 countries and added up their assets in relation to the host country GDP. For the layperson, a typical bank’s assets are primarily composed of the loans they have originated while the liabilities are primarily composed of deposits they have accepted. With the exception of the US, all G7 countries have banking systems that have become larger and in some cases dwarfed their respective economies.

Governments around the world are finally beginning to realize the gravity of the risk that exists in their banking sectors. The EU has decided to build upon the new template of the “bail-in” regime. The US, UK and Canada have all followed suit. This puts the onus squarely upon the depositor. The depositor is a lender to the financial institution that he banks with. However, most depositors naively assume that their deposits are 100% safe in their banks and trust them to safeguard their savings. Under the new “template” all lenders (including depositors) to the bank can be forced to “bail in” their respective banks. Several G7 countries already have provisions that allow troubled banks to be bailed in using depositor accounts. We have been vocal about our concerns over the state of the global financial system for the better part of the decade. The Greek tragedy is now being played out in Cyprus with a new twist as depositors have been unwillingly turned into sacrificial lambs. Given the size of the banking sector in most G7 countries and the burgeoning government debts, the ability of the governments to bail out their banks is severely constrained, especially considering the political headwinds that exist today. For this reason, we strongly believe that real assets trump a fiat currency in a “savings” account. It is not our intention to be alarmist here, merely to say, “caveat depositor”.

1 Import Export Stats – US Census Foreign trade: http://blogs.ft.com/brusselsblog/2013/03/the-ftreuters-dijsselbloem- interviewtranscript/
2 http://www.bankofengland.co.uk/publications/Documents/news/2012/nr156.pdf
3 http://www.budget.gc.ca/2013/doc/plan/budget2013-eng.pdf
4 http://www.centralbanking.com/central-banking/official-record/2257939/rbnzarticle-
says-open-bank-resolution-helps-keep-banks-in-line
 

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Thu, 04/04/2013 - 13:01 | 3408640 combatsnoopy
combatsnoopy's picture

On the other hand, watch the AUD/JPY (AUD/YEN) when Abe bought up US Treasuries.

Aussie is disappointing in gains, but it would've been a little stronger had Abe bought up California Munis instead of US government bonds.

AUD/JPY up 2.89 on the day.  Go Mrs. Wantanabe Go!

 

Will Bitcoin be America's hedge?  What about split Google shares? 

Somehow the USD GAINED on the AUD since Abe bought up US Treasuries (should've dropped the currency) when the AUD gained on the Yen. 

USD/JPY up 3.25

USD/AUD .0049

AUD/JPY up 2.96

AUD/JPY down .0070

JPY/AUD down .0003

JPY/USD down .0003

I'm looking for the triple arbitrage?  (prolly in bid/ask spread-who knows)

Time to program Excel to find the triple arbitrage.  Damm Abe didn't give me a warning that he was going to do this! 

Thu, 04/04/2013 - 13:24 | 3408768 Trampy
Trampy's picture

It's really very simple. Buy cheap, sell high, vice-versa. Put into .xls and you got it!

Thu, 04/04/2013 - 12:07 | 3408336 rlouis
rlouis's picture

Anyone know if, for example, BNP could clean out the liquid asests of a US subsidiary they acquired several years ago?

Thu, 04/04/2013 - 11:43 | 3408221 asteroids
asteroids's picture

Sounds to me like its time to move cash out of TBTF banks. But, where do you move your cash to? Also, if everyone does it, the TBTF banks implode, the depositors too slow or stupid will get wiped out.

Thu, 04/04/2013 - 12:13 | 3408379 NoWayJose
NoWayJose's picture

Don't worry - the FDIC will leverage up its $33 billion enough to cover at least $2 trillion in lost deposits.

Thu, 04/04/2013 - 12:49 | 3408565 combatsnoopy
combatsnoopy's picture
$32 billion a year into the Resolution Trust Fund. From the S&L Crisis.
How did that "save the economy"? Just about as well as TARP did.

Where do you think Wall Street gets this idea that they can get away with grand larsony of public funds, taxpayers, innocent bystandards and small European countries?

Americans are soooo stupid! 

Thu, 04/04/2013 - 11:39 | 3408199 Downtoolong
Downtoolong's picture

"Past experience is no guarantee of future outcomes"

Greatest understatement of all time.

Thu, 04/04/2013 - 11:16 | 3408091 Taterboy
Taterboy's picture

I don't care if my bank has no money. All I want to know is do they still give out the free calendars!

Thu, 04/04/2013 - 11:38 | 3408191 Downtoolong
Downtoolong's picture

I'm more interested in the free tote bag, so they can put my money in it and I can carry it out the door.

 

Thu, 04/04/2013 - 12:51 | 3408567 combatsnoopy
combatsnoopy's picture

that tote has a little hole in the bottom.

Thu, 04/04/2013 - 11:10 | 3408052 pbr streetgang
pbr streetgang's picture

will some body comment on the PM market carnage or is this a jerk off site ...it is owned by abc

Thu, 04/04/2013 - 13:12 | 3408701 Trampy
Trampy's picture

This is a VERY predictable seasonal. Story goes that rich Amerikans sell some of their hoard to send fiat to IRS.

Thu, 04/04/2013 - 11:32 | 3408171 donsluck
donsluck's picture

PMs are getting trashed because they provide liquidity. This is a financial crises and investors have to cover their futures positions margin calls with cash, some of it coming from the sale of PMs. This is the first sign of a crises, and will lead to a rise in PMs price when the selling stops overhelming the flight to safety buying.

Thu, 04/04/2013 - 11:31 | 3408162 lostintheflood
lostintheflood's picture

PM market carnage

 

it's part of the set up for the big trade...set to happen on the 4th...

 

http://www.tfmetalsreport.com/forum/4460/setup-big-trade?page=41

Thu, 04/04/2013 - 11:06 | 3408019 pbr streetgang
pbr streetgang's picture

desparately seeking susan(whore of Babylon)rothchild the round up has begun

https://cdns.gigya.com/gs/i/shareBar/button/buttonCenterImgUp.png);"> https://cdns.gigya.com/gs/i/shareBar/button/buttonCenterImgUp.png);">
Email Martin J. Rothschild Martin J. Rothschild  

Syracuse, NY -- East Syracuse lawyer Martin J. Rothschild faces three years in state prison after he admitted Thursday morning to promoting a sexual performance by a child.

Rothschild appeared before Onondaga County Court Judge Anthony Aloi on the child pornography charge, which was revealed by an indictment unsealed in court.

Rothschild, who had not been charged with any crimes until this court appearance, decided to admit the charge as part of an agreement struck with prosecutors and the judge.

He will be sentenced to three years in prison, be forced to give up his longstanding personal injury law practice and register as a sex offender upon release, according to the agreement announced in court. He will face three years of post-release supervision.

Bail was set at $100,000 cash or bond until his sentencing this summer. Rothschild, wearing a dark suit, blue shirt and striped tie, was placed in handcuffs and escorted out of the courtroom by deputies.

The investigation of Rothschild became public in late February when federal and state authorities seized the personal computers from his East Syracuse law office and his Manlius home.

Thu, 04/04/2013 - 10:47 | 3407926 Lordflin
Lordflin's picture

The banks, having consumed everything within their reach, now must resort to feeding upon themselves...

Thu, 04/04/2013 - 12:29 | 3408440 Marco
Marco's picture

This was always the end game ... the financial system is a means to a cause. Once you own everything of real value (land for instance) then a large financial system becomes superfluous.

Banksters are flunkies, not the enemy.

Thu, 04/04/2013 - 15:11 | 3409345 KnightTakesKing
KnightTakesKing's picture

Banksters are flunkies, not the enemy.

So who then is the enemy? Whom are the owners?

Thu, 04/04/2013 - 13:29 | 3408777 Lordflin
Lordflin's picture

Whereas I don't disagree with your assessment of bankers (in the main) as flunkies... That makes them no less enemies... Moreover, those at the heart of your 'endgame' are themselves bankers...

Thu, 04/04/2013 - 14:30 | 3409124 Marco
Marco's picture

No, they are owners.

Thu, 04/04/2013 - 10:37 | 3407844 bank guy in Brussels
bank guy in Brussels's picture

In 43 years, 147 banking crises around the world, and even including ridiculous banana republics and tinpot dictatorships, it seems it is only in Cyprus that they actively stole depositor money.*

In some cases (as in Iceland) depositors did lose money on bigger, uninsured deposits because banks went bust and were liquidated ... but that seems quite different from actively stealing the depositor money to re-support the bad banks or to pay off some big creditors - like the European Central Bank - which yet continue to grab Cypriot funds.

Why did the EU-ECB-IMF steal the depositor money, when even internal troika memos said this could set off disastrous euro contagion?

Several theories are out there:

(1) It is a scheme to frighten depositors around the world into spending or investing their uninsured deposits. This is supported by the sudden near-simultaneous 'leaks' of possible deposit confiscations in New Zealand, Canada, Switzerland, the US and UK.

(2) It is a desperate last-ditch scheme to prop up the petro-dollar, i.e., the US dollar as reserve currency, which is at death's door as the BRICS and half the world join bi-lateral trade agreements by-passing the dollar. As IMF chief Lagarde (worked for big American law firm) and Angela Merkel (husband works for US Pentagon companies) are both American agents, they pushed this scheme onto the EU, not caring about damage to Europe. France was so angry at this they sent police to raid Lagarde's apartment.

(3) The EU 'project' of a grand united Europe is collapsing, so the final EU 'Hail Mary' play is to catastrophically destroy the EU banking system by creating pan-European bank runs, such a huge 'crisis' they hope this will finally lead to the 'United States of Europe' against all popular wishes.

(4) The Germans, Dutch and other North Europeans are so anally-obsessive about limiting their own taxpayer losses they idiotically blind themselves to the destruction of Europe they are causing.

(5) It is a test of how much theft people will submit to, like the theft of billions of customer funds in the US in the MF Global, Peregrine Financial and Sentinel cases ... with all legal avenues blocked, and America's owners of 300 million guns remaining passive.

(6) It is part of the general ramping toward global cataclysm, World War III, etc.

---

* « In 147 banking crises since 1970 tracked by the IMF, no depositors, irrespective of the amounts held and the banks with whom the deposits were placed, suffered losses. The Cyprus measures derogates from the general principal of protecting depositors. »

http://www.prudentbear.com/2013/04/the-cyprus-file.html#.UVrW3PMhESU

Thu, 04/04/2013 - 14:00 | 3408944 DosZap
DosZap's picture

Note the lack of the phrase “uninsured depositors” in this context, which opens the doors for both insured and uninsured depositors to be affected.

Cypress just opened Pandoras box, and what will come of it, will NOT be what the PTB were anticipating.I refuse to LOAN my lifes earnings to any Bank that cannot/will not guarantee the RO my $$$.

Like Will Rogers said; "I am more concerned with the RETURN of my money, than the RETURN on my money".Way ahead of his time.

Thu, 04/04/2013 - 11:39 | 3408202 ConfederateH
ConfederateH's picture

(7) It is an escalation in the war against financial privacy and tax competition.  Why haven't we heard more from the UK government about this?  London, Frankfurt and Luxemburg will benefit as hot money flees Malta, Andorra, etc.   The coffers of tax collectors across the EU will be a little fuller as the tax-paying sheep are sheered.  Even Switzerland looks vulnerable with its G-SIFI duo of UBS and CS.

Thu, 04/04/2013 - 12:47 | 3408550 Withdrawn Sanction
Withdrawn Sanction's picture

The coffers of tax collectors across the EU will be a little fuller as the tax-paying sheep are sheered.

In the short-run, that's probably true.  In the longer run, such actions undermine confidence, willingness to invest, and velocity.  All combine to throw the countries involved (and perhaps the world) into a recession or depression.  Good luck harvesting taxes under those conditions. 

It looks like just plain blindness on the part of politicians.  They saw a pot of money, thought they could steal it, and they'd deal w/any consequences later.  Later is here and it's later than they think.

Thu, 04/04/2013 - 11:33 | 3408175 Shaten
Shaten's picture

Well from everything i have been able to read the euro-zone finance ministers, known as the Eurogroup only said there needed to be a bank levy on deposits which then would be included in the bondholders haircut.

It appears cyprus was the goverment to suggest accounts below 100.000 euros in order to protect the Russians.

Also Cyprus already has some deposit taxes in place and a Communist based goverment that has less concern for private property than goverments of other nations.

 

Thu, 04/04/2013 - 11:28 | 3408147 donsluck
donsluck's picture

You can't have it both ways. You can't oppose bail-outs AND bail-ins. The un-insured depositors can be wiped out and no contract is broken. They are finally getting it right. This is how a healthy banking system operates. This is how forced ZIRP ends. One needs to be compensated for risk.

Thu, 04/04/2013 - 15:05 | 3409312 KnightTakesKing
KnightTakesKing's picture

Iceland is an example where you don't have to support bail-out OR bail-in. Let the banks be liquidated and let the chips fall where they may. If enough depositors get screwed they might decide to take up arms and hang a few banksters.

Thu, 04/04/2013 - 11:47 | 3408248 duo
duo's picture

there is no such thing as depositors, only "investors" from now on.

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