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Could a “Cyprus-Like” Situation Happen in US? It Already Has

Posted by Larry Doyle on March 21, 2013 8:00 AM |

The banks in Cyprus remain closed until at least next Tuesday out of fear that once the doors open a massive run on the banks will ensue.

The situation in Cyprus is clearly evidence of a financial system that remains on life support and that drastic situations precipitate drastic actions.

Before we lose our heads, though, isn’t this why free markets develop and implement rules of law? Indeed — or so we thought.

With the outcome of the situation in Cyprus remaining very much in question, many people in America wonder if a similar situation might unfold here. I would maintain that it already has and may occur with greater frequency and impact in the future. How so? Let’s navigate.

As the depositors in Cyprus are now learning, the integrity of deposit insurance seems to have been worth little more than the paper on which it was written. But wouldn’t the integrity of deposit insurance hold up under challenge in a court of law?

“Did you say, law, LD, as in the rule of law?

On that note, let’s cross over to our own shores and pose that very same question regarding the practice of the rule of law to the following situations:

1. Foreclosure abuses in which mortgage servicers clearly violated the rule of law in protecting both homeowners and mortgage investors for the benefit of major banks. The token fine assessed for this injustice was a joke.

2. Violation of bankruptcy procedures in the auto bailouts. Ask the creditors how that worked for them?

3. Clear violation of the SIPA in the manner in which Madoff trustee Irving Picard has gone about collecting and dispensing recovered funds.

4. Clear violation of SEC rules — without proper restitution and adjudication — by those involved in the distribution of a wide array of structured products, including the $50+ billion of supposed cash-equivalent auction-rate securities that remain outstanding a full 5-plus years after that market meltdown. Tell the thousand of ARS investors about the rule of law.

What do all of these situations exemplify?

The degradation of the rule of law. Clear as day.

With these precedents having been set, might we see a grab of other funds by our government if and as necessary? Well, let’s keep an eye on our retirement accounts. To wit, I welcome providing the following links to stories highlighted a few years back but continue to generate regular  interest:

Blueprint for Government Takeover of IRAs, January 2010

Will Uncle Sam Takeover Your IRA? February 2010

Will Uncle Sam Takeover Your IRA? Part II, April 2012

Remain on guard and navigate accordingly.

Larry Doyle

Isn’t  it time or overtime to subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Peter Scannell

    The London Whale, Richard Fisher, and Cyprus

    With all due respect LD, we should be concentrating on the problem, rather inciting fear in “possible” ludicrous solutions.

    It is the utter arrogance of banksters that remains a problem.

    It is the purposely underfunded, docile, outmanned, outgunned, sometimes duped and sometimes duplicitous regulators that remain a problem.

    And then there is the Washington D.C. / Wall Street incest that can’t help siding against mom and pop to keep the invitations coming.

    Stanford didn’t work for the CIA, and nobody is going to raid mom and pop’s retirement plans any more than has already been allowed to occur!

    Keep it real LD, your better than that!

  • LD

    Peter,

    I think the homeowners, creditors, and investors all would have maintained as well that their interests would have been protected. They weren’t.

    Your points in regard to the bankers, regulators, and pols are all well taken but to think that Uncle Sam will not go to extraordinary lengths to protect interests not aligned with those deemed to “have enough money” already has already been proven.

  • LD

    A GREAT RECAP:

    Paul De Grauwe, a professor at the London School of Economics, told Tom Keene on “Bloomberg Surveillance” today that the euro area is at risk because “so many big mistakes have been made.”

    De Grauwe went on to say that the “ineptitude of policy makers” allowed Cyprus to “degenerate into systemic crisis” and that European leaders should not allow Russia to take over gas in Cypriot waters as it would allow Russia to “increase its near monopoly.”

    Audio available here:
    http://origin-www.bloomberg.com/news/2013-03-21/lse-s-de-grauwe-says-cyprus-may-end-in-russia-monopoly-audio-.html

    **MANDATORY CREDIT: BLOOMBERG SURVEILLANCE**

    De Grauwe On whether the European Union could fall apart right now:

    “Not necessarily the European Union, but the euro zone, yes, which is part of the European Union is in really deep trouble. So many big mistakes have been made, and now the fragility of this whole system has been exacerbated. And there is a prospect that Cyprus will get out, yes.”

    On how Cyprus has completely upset the geopolitics of the developed world:

    “Well, I guess the main reason is ineptitude of the policymakers. They allowed this crisis, which is a serious one, no doubt, to degenerate into a systemic crisis. But it is not the first time. We have seen the same thing with Greece, right? Greece is also not a very big country, a little bigger than Cyprus, and the same thing happened there. So in the case of Cyprus now, things could have been solved, but then European leaders insisted that deposit holders should also pay. Now, it sounds like a good idea in order to avoid that the German taxpayers have to pay. But if you do that you should tell the profit holders you are going to pay. Then, of course, you trigger possible reactions of panic elsewhere, and that has not been taken into account when decisions were made.”

    On what policy advice he would give the prime minister of Cyprus:

    “Well, he has to make up his mind because, I think at the moment, up till recently, he was pursuing objectives that could not be square. I mean, on the one hand, he wanted to maintain a business model that involves essentially Mafia money being deposited in Cyprus, and that was a source of revenues for the Cypriot economy. And at the same time, he wanted to make sure that the deposit holders, the smaller deposit holders could maintain their money. And he couldn’t really decide what to do.”

    “So I think what he should do now is to realize that the banks are broke, that some resolution is necessary, that deposit holders that have more than EUR100,000 deposits should pay because this was not ensured, and these are the Russians, right? And he should use – shoot for revenues that, if they are likely to come from gas and oil, to create future revenues and in such a way try to get a total package.”

    On how Russia fits into the equation:

    “At this moment, it is the main supplier of gas to western Europe and, clearly, if Russia can get a hold on the gas in Cyprus or in the sea around Cyprus, it would just increase its near monopoly the supply of gas. So certainly, Western Europe should make sure that it doesn’t happen, and western Europe and the euro zone have the financial clout to do so and should.”

    On whether he’d recommend that Angela Merkel should negotiate directly with Vladimir Putin and Dmitry Medvedev over the crisis in Cyprus:

    “Well, I’m not sure that would be a good strategy. I think she should just go ahead instead of being defensive. She should go out to Cyprus, together with the rest of the euro zone, and make a deal and say we are going to set up an investment fund with you and the future proceeds of that will be part of the total package. But we should certainly avoid that the Russians take a hold. I don’t think she has to go to Putin personally to do that.”

    On what he wants to see from the European elite to start turning around the Cyprus disaster:

    “Well, surely we should be willing to fund it out. I mean, of course, there have been stupidities in Cyprus, but refusing to help them out would make things even worse. So we should set aside our concerns that taxpayers in Germany and the other countries are not – do not like this. We should, at some moment, if we are in a union, right, you have to help each other out. If you don’t want to do that, you shouldn’t be in the union.”

    On whether we’re any closer to a shared sacrifice in Europe:

    “No, not at all. We are farther away than ever. So one of the other problems that we face in Europe is that each time, in a particular country, banks are in trouble, the sovereign, the governments of that country, are also in trouble. And so the whole idea was to have a banking union so that we could cut this right, between the sovereign and the banks. And initiatives were taken last year to do that, but now we see the first time that, with a banking crisis, still the others are not willing to share in the cost.”

    On whether we are in a currency war:

    “I think we are not yet in a real currency war. In the 1930s, you could say, yes, there was a real devaluation. Every country was devaluing and we all had to react. And I think we are quite far from this and I’m a little bit relaxed about this. Some countries, of course, are like the U.S., but there is also Japan now, more recently, has used a monetary weapon to bring down the currency. I’m not saying that there may not be a problem if everybody starts doing this. But up to now, I think the affect has been relatively limited.”

    On Ben Bernanke’s performance:

    “Well, I think he has done a good job. I mean certainly, if he had not done so, he had not taken the risk – because he took a risk in applying these unconventional measures and massive increase in liquidity – the U.S. economy would not be where it is now. It probably would be more like the United Kingdom or maybe even the euro zone countries. So in that sense, I would say, yes, he did a good job.”

  • LD

    Among the other options, nationalizing pension funds of semi-public companies could yield between 2 billion and 3 billion euros. Issuing bonds linked to future natural gas revenue is problematic because pumping any gas is years away.

    EU Gives Cyprus Bailout Ultimatum, Risks Euro Exit

  • Barry

    Well said, Larry, thanks.

  • Randy

    LD,

    Man, you’re right on the money with this one!

    God bless.

  • MP

    You forget the billions of dollars Uncle Ben is stealing from savers every year with his 0% interest rate policy.

    We have been robbed of 5%/year for at least 5 years now, much worse than the one time 10% haircut the Cyprus depositors would take.

    As Jeremy Grantham said on Charlie Rose, he is taking money from savers and retirees (who would actually spend the money) and giving it to investment bankers and speculators.

    “We are transferring wealth from the poor to the rich by keeping interest rates low.”

    • Obsvr-1

      100% agree !!

      You don’t see the press out talking about how QE is a process of stealing assets from savers. QE and artificially held low interest rates is more insidious than the Cyprus asset grab because it happens quietly, slowly and broadly across all savors no matter how much is in the account.

      How do you boil a frog ? Put him in a cool pot of water and turn up the heat slowly … its a nice bath, until its not … frog legs anyone ?

  • John Hendricks

    Something no one seems to be talking about is the question of where all the money the banks supposedly lost has gone.

    It didn’t disappear – it was simply relocated from one pocket to another pocket.

    Where exactly is this money sitting now?

    • Obsvr-1

      Where is all the money, In the bank accounts, or used to buy hard assets for the folks that designed the crisis.

      Take a look at the losses that GM would have suffered if they went through bankruptcy; the gov’t bails them out and ultimately exchanges the loans, preferred stock for common shares. Then the common shares are sold through the secondary market, spread broadly across many investors. GM never had to pay the funds back, the funds came back to the gov’t through new investors.

      Stockholders and taxpayers always suffer the loses, they are just distributed throughout a high volume sucker pool.

  • John Hendricks

    Without a real investigation, we will never know the answer to my question.

    With corporate entities, it would be childs play for the banks to relocate the money to other entities they control under the fiction of expense / contracts etc.

    Obviously, it would be simple to run it through as many entities as they needed to to hide the theft. It’s beyond outrageous for the people to be forced to pay into a scheme like this.

  • Obsvr-1
  • Obsvr-1

    Another worthwhile read: Americans better wake up, the ignorance is bliss philosophy has a fatal flaw when it comes to your wealth.

    Perhaps We Are All Cyprus Now

    http://www.thedailybell.com/28872/Perhaps-We-Are-All-Cyprus-Now






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