Banking Bubbles

We all have heard, by now, of the collapse of The Bank of Cyprus, Laiki and Hellenic Bank but what hasn’t been talked about much is: why. Why should people who deposit money in a bank for safekeeping wake up one day to find their life savings has vanished?

Most reports suggest these banks were heavily invested in Greek bonds. These are the same investments that took down MF Global.

…Cyprus has is a large concentration of assets in its two biggest banks, which had wrong-way bets in Greek debt.

Coincidentally, the closest recent U.S. corollary is with MF Global, the once-powerful broker that collapsed due to liquidity issues also caused by Greek debt investments. In that case, account holders took a hit.

As we learned yesterday on The Teri O’Brien Show, economics professor Gary Wolfram from Hillsdale College enlightened us on why these bank were heavily laden with Greek bonds- because as collateral,  they could command a higher percentage of bank financed loans. More loans means more profit for these banks.

It didn’t matter that these bonds were ‘junk’ status. Nor did it matter to the Cypriots that MF Global collapsed 2 years earlier because of these bonds. Strangely, these bonds were good enough for these banks to invest some 30% of their assets in.

From Wiki:

In late October 2011, MF Global experienced a spectacular meltdown of its financial condition, directly caused by improper transfers of over $891 million dollars from customer accounts to a MF broker-dealer account to cover losses created by trading losses.

And

According to a trustee liquidating the company after its collapse, the losses incurred by customers of MF Global stood at $1.6 billion because of the debacle as of April 2012. The vast majority of these funds have not been returned to customers.[4]Rolling Stone reported in April 2012 that the number stands at $1.6 billion, and that “nobody disputes the fact that MF Global officials dipped into customer accounts and took…customer money.”[5]

The CEO of MF Global at the time of the collapse was Jon Corzine former Senator and Governor of New Jersey, who interestingly, worked at Continental Illinois Bank in the 1970’s, just before its collapse in 1984.

Bubbles the Clown

Bubbles the Clown

The precedent was set long ago that depositors funds could be taken. And with the bankruptcy ruling in the GM bailout bondholders received a similar ‘haircut’. Usually during a bankruptcy, the bondholders are at the front of the line when the payouts finally start. This didn’t happen with GM. President Obama demanded the bondholders and the unions hash out the details:

On the March 30, 2009 deadline President Barack Obama declined to provide financial aid to General Motors, and requested that General Motors produce credible plans, saying that the company’s proposals had avoided tough decisions, and that Chapter 11 bankruptcy appeared the most promising way to reduce its debts, by allowing the courts to compel bondholders and trade unions into settlements.[24] GM Chairman and CEORick Wagoner was also forced to resign.[25] GM bondholders rejected the government’s first offer, but the unions agreed to the preferential terms.[26] A bondholder debt to equity counteroffer was ignored.[27]

General Motors is a far cry from the Cyprus banks, but as you can see, the risk/reward quotient of every investment or even deposit has been uprooted in favor of the well-connected. Even the GM dealerships were decided by who donated to Obama’s campaign. For the risk adverse even a bank deposit is vulnerable these days.

Unless, of course, you are well connected:

Cypriot newspaper Haravgi claims that current President Nicos Anastasiades’ family businesses transferred ‘dozens of millions’ from their Laiki Bank accounts to London just a week before the devastating depositor haircuts were unleashed upon his people.

Whew! That was a close shave. Kinda restores my faith in government. Makes me wonder why he didn’t send his money to France where the President wanted to put a 75% tax on “high earners”.

President Obama should appoint someone to oversee the banking sector. Someone he knows personally. Someone with experience in banking and was the Treasurer of Illinois. Someone like Alexi Giannoulias. I’m sure he’s not too busy since the failure of his Broadway Bank whose loans to Tony Rezko defaulted.

Rezko defaulted on loans made by Broadway, and, in 2006 Broadway was the first bank to foreclose on one of Rezko’s delinquent loans, forcing him to declare bankruptcy.[50] Broadway Bank also refused to cover nine bad checks written by Rezko for a total of $450,000 in early 2008[51]

And he’s Greek, too.

Kinda make ya wonder if a government bubble could ever happen.

Update:

It seems the Russian oligarchs didn’t get their ‘haircut’ after all.

I wouldn’t normally link to this site, but it seems to be sourced properly.

The Teri O'Brien Show

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