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.

Uplifting Mali Update

The French, who have been fighting wayward Libyan rebels for some days now in Mali have requested assistance from the U.S. with air-refueling and C-17 airlifts. Incredibly, the Obama administration is demanding payment.

Until a few days ago, the Obama Administration was insisting that France reimburse us for all airlift and tanker missions flown in support of air ops over Mali.  At the time, the bill was somewhere between $17-19 million dollars.  Relative chump change, but the French were incensed.  Officials in Paris are quick to point out their folks are doing the fighting (and dying) over there.  All they’re asking from the U.S. is more airlift to get soldiers, beans and bullets into the war zone, and tanker support to sustain the air bridge to Mali.  We should also point out that other NATO allies (notably Great Britain, Canada and Denmark) are providing support to the French without charge.

I can see Obama leading from behind the Greeks, but the French? I mean, really. That’s half of one of Moochelle’s vacations.

Other People’s Money or Guns?

Who would have thought a year ago that Europe was the place to invest?

The market had hoped for a “Grand Bargain”. Instead, it got a small, ultimately insufficient fiscal deal. The best to be said of the agreement hammered out on New Year’s eve is that it beat the alternative. While investors still cheered, nobody should mistake this for an economic, fiscal, or financial positive. Ideally Washington would have crafted a deal coupling long-term tax and entitlement reform with short-term stimulus. Instead, we got the opposite. The US now faces significant fiscal drag on an already sluggish recovery.

The Financial Times, being based in London, obviously has an agenda here as it relates to investing in Europe. Yes, believe it or not, Americans are sitting on piles of cash and Europe, with its progressive stance is bleeding taxpayers to friendlier climes.

The FT goes on:

 … many smaller developed markets – Australia, Singapore, Hong Kong, Switzerland, Canada – came out of the financial crisis much better positioned than the larger, developed countries.

These are essentially socialist countries with the notable exception of Hong Kong which reverted back to Communist China. I submit the Europeans are looking at the pile of American cash with lust in one eye and the PIGS in the other. Portugal, Italy, Greece and Spain have all but collapsed, the EU and their currency not everyone wanted in the first place. The Germans must be running out of cash.

Washington has not offered investors an easy ride. Yet, investors still have better alternatives than a permanently high allocation to cash. Fundamentals are improving in much of the world, with even Europe looking somewhat less scary than a year ago.

It’s incredible. The Europeans are stating a case where they believe their markets are safer than ours. It’s unprecedented.

Mr. Obama has said he will use the Inaugural speech and the upcoming State of the Union address to push the debt ceiling higher. The push for a higher debt ceiling only makes this article more plausible, but he’s not going to be able to do that and grab guns at the same time.

Look for the gun-grabbers to fade away by Sunday now that the ranks of the NRA have swelled 250,000 in the last month. Executive Orders that violate the Constitution are of no effect, and Mr. Obama certainly doesn’t want the Supreme Court telling a Constitutional law lecturer so.

Newt Gingrich Administers Well-Deserved Smackdown to Piers Morgan

Isn’t it amazing how leftist media weasels suddenly discover religion when they want to rip a conservative? Newt was having none of that. Enjoy this delicious beat down of CNN’s Piers Morgan by the always brilliant former Speaker.

Mission Accomplished, Barry! America Cut Down to Size!

For nearly three years we have watched Barack Obama work to “remake” America, by which he means exact payback from what his lippy old lady called this “mean” country, one that needs to be taken down for its racist, imperialistic sins. His very revealing comment on American exceptionalism made clear that he does not share the view of our country that we bitter clingers have. His incessant back door end runs around the Constitution demonstrate his contempt for this sacred legacy from the Founders, as if we needed more evidence. Recall his characterization of the Constitution as a document of “negative rights.”Translation: this piece of paper written by evil dead white European men is standing between me and my grand vision of Venezuela North.

Congratulations, Barry. Your mission to take the United States down a peg or two is succeeding. From theWashington Times:

In a rare global summit where the U.S. leader is not the center of attention, President Obama leaves Wednesday evening for the Group of 20 summit in Cannes, France, with a diminished international presence and an economic-growth message being drowned out by the scramble to deal with Europe’s unresolved debt crisis.

French President Nicolas Sarkozy and German Chancellor Angela Merkel, not the American president, will be the focus at the meeting of the 20 leading rich and developing nations, and European leaders have been looking in recent days to Beijing, not Washington, as a source of capital.

China rising. America sinking. Mission accomplished! Plus, not only can our Dear Reader feel good about the diminution of this country into just another one in the list of when the UN roll is called. He’s in Cannes, where they hold that famous film festival. Cannes is a place used to narcissistic empty suits strutting around in their perfect wardrobes, reciting words written by others, and pretending to be things that they could never be in real life. Can you think of a better place for our Celebutard-in-Chief?

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